Imbalance: lack of proportion or relation between corresponding things

Recessions are broadly defined as a significant decline in economic activity, lasting more than a few months. Often, they are a result of imbalances that emerge in the economy. As an example, let’s assume that the auto industry was producing twice as many cars as they could sell. Building plants, hiring workers, and setting up too many dealerships. Other manufacturers that sell to the auto industry followed suit.

Next, let’s imagine in our example that the demand for new cars declines, exacerbating the problem of over-production. Auto companies begin lay-offs, perhaps close plants, and the businesses that support them begin the same process. This hypothetical imbalance in the auto industry will eventually move back toward equilibrium. Market forces can both create and fix imbalances.

The National Bureau of Economic Research (NBER) has not yet confirmed a recession resulting from COVID-19; however, data suggests the US will enter a recession this year due to the speed at which the economy came to a halt. It is an understatement to say there are imbalances in the economy. 

Importantly, recessions can lead to creative destruction. Think back to 2001 when the Apple iPod quickly revolutionized the way people listen to music, replacing the Sony Walkman and CD players. A research paper by MIT (1) suggests that over the long term, creative destruction accounts for over 50 percent of productivity growth. The engine of the American economy has always been small businesses, start-ups, and innovation. We don’t think this engine will change. Unfortunately, some businesses will be greatly challenged and not be able to continue on. Many will persevere and some new businesses will form, redefining our future.

Notes from the week:

• Economic data from the Philly Fed State Coincident Indexes for March showed that the economies of 34 states contracted, 12 expanded, and four were stable

  • This was not surprising given the halting of the US economy

• On Monday, oil prices were negative for the first time in history; suppliers were essentially paying buyers to take delivery of oil

  • A current imbalance in the economy due to excess supply and lack of storage/ demand

• The Chinese economy was the first to be halted by COVID-19 and also appears to be the first advancing from the economic slowdown

  • Data from China has been mixed, satellite smog level reports support data showing an increase in manufacturing (2)

• As of Friday mid-day, the US stock market (S&P 500) has advanced +28% off the lows set late March however remains -17% off all-time highs set in February

• US interest rates are hovering near all-time lows with the 10-year Treasury bond yielding 0.60%

As each week passes, we gain more information about what has been an unusual cause for a recession. While the occurrence of a recession is getting clearer, the severity and length may not become evident for several weeks.

V20115637