- The White House has been pushing a V-shaped recovery narrative that is not reflected in current data.
- One big sticking point is the rescue package being negotiated in Congress. Lack of new funding could further stunt activity.
- "Dreams of a V-shaped recovery are long gone," said Beth Ann Bovino, U.S. chief economist for S&P Global.
As the White House has continued to push a narrative of a sharp recovery after a history-making recession, the economic data in large part has not been cooperating.
Jobs numbers of late are showing progress but pointing to at best a gradual recovery. The sharp uptick in coronavirus cases appears to be have ebbed but not by enough to generate confidence to get activities anywhere close to normal again.
And perhaps most importantly, a persistent inability of Congress and the White House to agree on more rescue funding threatens to push those still reeling from virus-related impacts further down the ladder.
"Dreams of a V-shaped recovery are long gone," Beth Ann Bovino, U.S. chief economist at S&P Global, said in a note. "The economic cycle feels more like we are riding a wave fueled by COVID-19 with only quarantines, federal stimulus, and advances from the medical community keeping our personal health and economic recovery afloat."
Bovino estimated a 30%-35% chance of a "wipeout" that could see "this fragile recovery falling back into recession."
That runs counter to the message from President Donald Trump's economic team.
National Economic Council Director Larry Kudlow has touted the potential of a V-shaped recovery no fewer than four times over the past month, either on CNBC or elsewhere. As recently as last week, he told CNN the "V-shaped recovery is in place."
Economists generally do see a sharp snapback in activity for the third quarter after Q2's stunning 32.9% drop in GDP as measured if the current pace kept up for four quarters.
Still, the ability to keep up a gain that could exceed 20% for the July through September period is being called into question.
"With virus fears on the rise, jobs being lost and incomes squeezed, the second phase of the recovery will be more challenging," wrote James Knightley, chief international economist at ING. "In the absence of a timely and substantial fiscal package we should be braced for the threat of weaker employment and spending numbers, which will provide a major test for financial market optimism on the 'V' shaped recovery."
To be sure, some of the high-frequency data has been looking better.
Jefferies tracks a variety of these markers, such as retail foot traffic, public transportation use and employee hours at small businesses, and found that activity has resumed to 60.5% of the normal pace as measured by 2019 data points, which is the highest level of the pandemic recovery.
Markets also continue to look through the present circumstances and are pricing in a return to strength in the U.S. economy.
"The resurgence in COVID-19 infections and the upturn in unemployment claims raises the question of our call for a V-shaped economic recovery. While the deterioration in progress against the pandemic is saddening, we remain convinced the recovery will not be materially altered," wrote Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.
"We never thought the V-shaped recovery would be characterized by straight lines and a lack of hiccups given the vast unknowns and forecasting complexity surrounding the virus. Rather, our outlook is based simply on the realities of math and the direction of travel," Shalett said.
Federal Reserve Chairman Jerome Powell last week said the recovery is largely dependent on the virus.
However, economists also think that the political calculus and how that translates into more rescue funding also will be critical.
"Given our crazy politics, which are particularly crazy given the election, there is a nonzero probability they fall short," Mark Zandi, chief economist at Moody's Analytics, said regarding the relief negotiations. "Depending on how short will determine whether the economy will gain some traction or slide into a depression."