In a recent webinar hosted by First American’s Professional Services Division, RBC Economist Gerard Cassidy forecasts that the worst of the economic downturn is behind us, and we are now on a road to recovery. After showing a collapse in Q2, we can expect the economy to snap back strongly in Q3 and show gradual recovery in 2021. Read more about his 7 key observations for the U.S. economy below.
1) Dramatic Decline in GDP
The percent change in real GDP for Q2 declined more than 30% from Q1. The impact to the U.S. economy has been devastating in Q2, but the economic outlook published by the NY Federal Reserve, the Weekly Economic Index, shows steady improvement in the U.S. economy as measured by the NY Federal Index.
2) Low Interest Rates
We have never seen interest rates this low, and it is believed Chairman Powell is expecting to keep the low end of the interest curve, known as the Fed Funds Rate, at these levels through the end of 2022. If inflation does not come back, the low end of the interest curve should stay between 50-100 basis points.
3) Unemployment Slowly Rebounding
The employment picture is starting to improve – with strong employment numbers in May and June. But the unemployment rate is still very high relative to history. As the economy recovers, hopefully the rate will continue to go down, but it will likely not reach pre-pandemic levels until 2022.
4) Real Estate Indicators
Residential - The housing market has shown strong resiliency amidst the downturn, due mainly to the millennial generation continuing to purchase single family homes.
Commercial - The Architectural Billings Index, a leading indicator for non-residential construction, fell quite substantially earlier in 2020. We would expect a slow down or decline in commercial real estate construction after many of the projects that were underway prior to COVID run their course.
5) LIBOR Index vs. Secured Overnight Financing Rate
The Secured Overnight Financing Rate (SOFR) is expected to be implemented by the end of 2021 to replace LIBOR. And while banks are working quickly to update their systems to handle the new methodologies, some think, in part due to the impacts of COVID, there could be further delay.
6) M&A Activity
In all sectors, M&A activity was down for the first half of the year. Activity was very healthy in the last couple of years but has dropped dramatically due to COVID. There are early signs that it is starting to pick up, but likely not until 2021.
7) Infrastructure Spending
Although a bipartisan infrastructure bill has been in the works for some time, it is likely not going to be a top priority for the elected officials in Washington to pass a highway bill with the new challenges they’re confronting related to the COVID virus.
You can watch a recording of the full presentation here.