Charlie Hall’s Green Industry Forecast Predicts a Marathon, Not a Sprint, to Recovery
August 2, 2020 
Real gross domestic product (GDP) in the first quarter of 2020 fell 5% at a seasonally adjusted annual rate, essentially marking the start of a sharp recession as a result of a halt in economic activity in order to contain the spread of COVID-19. The latest data shows consumer spending rebounded 8.2% after falling 12.6% in April, but personal income fell 4.2% after rising 10.8% in March due to stimulus checks. Durable goods orders rebounded 15.8% after an 18.1% decline in May, driven by slight increases in transportation and autos, the hardest hit areas.
Economic data further supports forecasts of a significant second-quarter plunge (a 35% to 50% drop is projected) followed by a bounce (of maybe +25%), with much slower growth thereafter (discussed below). Several economists have been in the media of late projecting how fast we will recover from the Great Shutdown, and many of them point to the latest jobs report as evidence that we can get back to normal if we simply put policy measures in place to get people back to work quickly.
I believe, however, that the economic recovery from this recession will likely be much slower than many want to believe. As more economic data became available throughout spring, I found myself changing my own projections about the shape of the recovery almost weekly. I no longer expect the recovery to resemble anything like a V-shape or a U-shape, nor do I expect it necessarily to be an L-shaped or hockey stick recovery like we saw after the Great Recession. Instead, it will likely be characterized by the initial sharp drop we have already experienced, followed by a sharp bounce back to a higher-but-not-back-to-normal level, and a slightly upward-sloping recovery after that, with the steepness of that slope dependent on demand factors, supply chain effects, and policy influences.
There is obviously a lot of uncertainty surrounding this forecast. The drop could be steeper or not as steep. The rebound could be faster or slower. GDP could be far below trend by late 2021 or it may be above trend. However, the general pattern (sharp decline, partial upswing, then gradual recovery) seems the most likely result, with the uncertainty revolving around the length of the gradual recovery stage.
The rise in COVID-19 cases in several states has renewed fears of a second wave, but it’s important to note that this is still part of the initial pandemic. For the most part, states have paused their re-openings rather than locking down again. That may change. However, there is likely to be an increase in self-imposed isolation regardless of state directives. That means a more gradual pace of economic improvement and perhaps a further decline in GDP in the quarters ahead. Extending support for the unemployed and increasing aid for state and local governments will be key policy decisions facing Congress in the near future.
Housing Data Encouraging, Consumer Confidence Slightly Down for Now
Housing data remain positive, so that is good news for the green industry. New home sales rose 16.6% in May to a 676,000-unit annualized pace. While the increase was a bit more than expected, the prior month’s data were revised lower, leaving the trend over the past three months close to the initial estimates. Builders are upbeat, however, with most reporting strong prospective buyer traffic. Existing home sales tumbled 9.7% in May, but existing homes are tallied when the transaction is completed at closing and those data-lag purchase contracts, or pending sales of new homes, by one-to-two months. Keep in mind that the May data also reflect the March and April period, when the economy was largely shut down.
Consumer confidence has held up reasonably well considering the U.S. continues to combat a global pandemic. Confidence measured by the Conference Board was down just 46 points in May from its February pre-COVID peak, and at 86.6, confidence is only as low as it was in 2014. For some context, confidence slid a total of 86.6 points back in the 2008 recession to a record low 25.3. In the 2001 recession, confidence fell a similar 81.1 points over 31 long months and had some false-pops along the way down. The sharp down-turn in March and April confidence was consistent with large swaths of the economy temporarily closed and consumers being confined to their homes. In May, many stay-at-home orders began to be lifted, and confidence likely brightened, preventing a further drop. We expect confidence rose a bit in June as states re-opening plans got underway. But there remains risk of further declines in coming months, particularly amid increasing positive case counts.
COVID-19 Threat is the Main Obstruction to Consumer Spending
While I was disappointed in the initial drop in green industry sales this spring, I was pleased with some of the anecdotal information I’ve been hearing from firms across the industry. If the trends of the general retail sector are any sort of proxy for the lawn and garden retail sector (they usually are), then we should feel pretty good, since they reported a record 17.7% increase in sales in May. Any monthly increase larger than 6.7% would have been a record, so this outturn cleared that bar with room to spare. It was also more than double the consensus expectation for an 8.4% increase. You could throw some cold water on this by pointing out that after back-to-back record declines, the low base effects from COVID-19 set us up for an easy percentage gain. That may be true, but consider this: in the month of May, general retailers saw more than half of the lost spending return. After being down more than 20%, retail sales are now off only about 8% since February.
In summary, the primary barrier to economic activity at the moment is depressed consumer spending due to the threat of COVID-19 itself as opposed to any state or local government restrictions on economic activity, inadequate income among consumers, or a lack of liquidity for business firms. Traditional macroeconomic tools (e.g., stimulating aggregate demand or providing liquidity to businesses) may have diminished short-run impacts in an environment where consumer spending is fundamentally constrained by health concerns. Hence, the only path to full economic recovery in the long run may be to restore consumer confidence by addressing the virus itself.
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