August 2020 Volume 2

COVER STORIES

There are two takeaways from this table: 1. The 16-month median duration of business cycle rise following the low for the 12 precedents is no different than the overall sample. In plain English: we should not expect the next business cycle rising trend to be especially long or especially short based on history. 2. These 12 precedents suggest we should expect a robust rate-of-change rising trend coming off the low of this cycle, as 9 of the 10 strongest rising trends in the broader set of 32 business cycles fall within our sample of a dozen precedents! Historic Magnitude of Stimulus and Impact on the Consumer’s Balance Sheet There are two additional factors at play that make us more confident that the eventual recovery in the US industrial sector will be robust on a rate-of-change basis: the scale of monetary stimulus that will be in play and the scale of the fiscal stimulus that will be in play. On the monetary side, a chart of the US Money Supply (M2 Deflated) readily illustrates the historic easing in monetary policy conducted by the Federal Reserve. Specifically, the June 2020 Money Supply was up 23.4% from June 2019, more than doubling the 10.8% that was the pre-pandemic record rate of expansion, set during the Great Recession.

These are remarkable figures during an economic downturn. Further, while the fact that consumers saved a lot of their income in April and May is not ideal from a present stimulus perspective, it is great news for the recovery trend. Put simply, saving today means spending tomorrow. Or, to be more accurate, our research shows that savings rates tend to have about a two-year lead time to movements in US Industrial Production:

The takeaway here is be prepared for a busy year in 2022. We anticipate 2021 will be the bridge/recovery year between the sharp recession of 2020 and a busy 2022.

The magnitude of the fiscal response is also significant. Back in late May, the San Francisco Federal Reserve reported that the magnitude of the discretionary stimulus in response to COVID-19 had, at 11.2% of Gross Domestic Product (GDP), already exceeded the Great Recession figure of 7.5%. Subsequent stimulus measures have since added to and will continue to add to the figure. The magnitude of the fiscal stimulus has been so massive that monthly US Personal Disposable Income in April was up a record 14.0% from 12 months earlier as consumers cashed their stimulus checks. At 8.2%, the May growth rate (latest available data) was only 0.1 percentage point below the pre-pandemic record growth rate:

FIA MAGAZINE | AUGUST 2020 5