The last recession, from 2007 to 2009, was brutal because of twin crashes in both the financial and housing markets. The S&P 500 plunged 56% from top to bottom, and home values fell 27%. The daunting loss of wealth took years to recover and left prolonged scars on the U.S. economy.
The Federal Reserve wasn’t about to let that happen again as the coronavirus pandemic began to explode in March, causing widespread business shutdowns and surging unemployment. Through a set of massive monetary stimulus programs, the Fed promptly reversed a stock-market slide that turned out to be the shortest bear market in recorded history. The Fed has also pushed borrowing rates to record lows, which is now fueling a boom in housing.
These twin bubbles are detached from what’s happening in the real economy, where unemployed has nearly tripled, from 5.8 million workers in February to 16.3 million now. Most broad measures of economic activity show that the coronavirus recession bottomed out in May, with gradual progress since then. But we’ve only recovered about one-third of the jobs and output we’ve lost, and there’s no sign of a quick improvement any time soon. A return to normal only seems possible once there’s a widely available coronavirus vaccine, maybe within 9 or 12 months.
The Fed’s aggressive action is a political lifeline to President Trump, who would have a far worse mess to explain to voters if the Fed weren’t administering emergency CPR. As is, millions of Americans benefiting from the twin bubbles stoked by the Federal Reserve might feel okay. The S&P 500 set a record high this week, with the index now up 52% from its bear-market low on March 23. Many analysts say it makes no sense for stocks to be on a tear while the real economy is on its knees, but if you sold stocks today for a 51% gain that would be real money in your bank account. Those gains are largely due to the Fed goosing asset prices, but that doesn’t make the money less real.
Homeowners are benefitting, too. Historically low mortgage rates pushed existing home sales to the highest level in 14 years this week. Sales of new homes are soaring, too, and the increased demand is pushing home values up.
This might seem unfair. The Fed’s actions are benefiting shareholders and homeowners, who arguably need help least. But it’s the usual trickle-down wait for families not lucky enough to own stocks or real estate. But for all its might, the Fed has limited power to reach into the economy and target aid beyond financial markets. That’s Congress’s job. And this economy would be dreadfully worse if the stock-market was down 30% or 40% and homeowners were losing equity rather than gaining it.
This week’s Trump-o-meter reads WEAK, the third-lowest rating, which is an improving over the FAILING and SAD readings of the last several weeks.
Trump still faces an uphill path to reelection, on account of his dismissive response to the coronavirus, which has kept the economy from entering the quick, V-shaped recovery he’s hoping for. Democratic nominee Joe Biden leads Trump by 7.4 percentage points nationally, a larger edge than Hillary Clinton had over Trump at the same point in 2016. Biden’s Democrats held a solid virtual convention this week, and Biden easily disproved Trump’s claim that he’s senile. Trump will now fill the airwaves with his own four-day nominating convention, though he could be upstaged by the mounting uproar at the postal service, the strange new indictment of his 2016 campaign manager Steve Bannon or some other brewing scandal.
With 10 weeks until the election, the economy shows halting progress, suggesting it may not be much better by the time voters cast their ballots. The Oxford Economics weekly economy tracker improved slightly this week, but initial unemployment claims once again shot past the startling 1 million level. In a new Yahoo Finance-Harris poll, 51% of respondents said they expect the economy to worsen within the next three months, while only 31% expect it to improve. Trump obviously hopes otherwise, and he will likely claim exaggerated progress as the election hits the home stretch. After all, look at that record stock market.
Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. Confidential tip line: firstname.lastname@example.org. Encrypted communication available. Click here to get Rick’s stories by email.