Beacon Economics: Don’t Count Out a V-Shaped Recovery

Los Angeles-based Beacon Economics is still bullish on a swift recovery once stay-at-home orders at lifted. While a recession is imminent and the second quarter will see a severe drop in GDP, Beacon Economics expects a sharp V-shaped recovery. The firm has taken a mid-line stance since the onset of the crisis.

In late March, it wasn’t sure the pandemic would ultimately result in a recession—at least by the traditional definition of two consecutive quarters of economic contraction. While the firm has adjusted its outlook slightly, the current forecast is largely unchanged. It expects negative 30% GDP growth in the second quarter before a rebound of 25% followed by 4% in the third and fourth quarters.

“Certainly second quarter data was going to be negative, I wasn’t sure if it was going to meet the definition of a recession,” Christopher Thornberg, founding partner at Beacon Economics, tells GlobeSt.com. “Quarter one came in more negative than we anticipated, largely because of our miss on healthcare. I thought that healthcare spending would go up, and it didn’t because not as many people ended up in the hospital and other procedures were put off for hospitals to save capacity for waves of coronavirus victims that never showed up. Beyond that, we had it pretty close.”

Healthcare spending was lower than expected in the first quarter as hospitals braced for swarms of COVID-19 patients, however, the rush didn’t strike until April. As a result, healthcare spending could contribute to second quarter growth, and it will certainly bounce back the fastest in a recession. “Healthcare is the only industry that is non cyclical,” says Thornberg. “That means all of the spending that didn’t happen in the first quarter will almost assuredly happen in quarter one and quarter two, and that brings me back to a broad idea that this is a sharp down followed by an equally sharp up. This will be called a recession, but the underlying fact that this is going to be sharp and short, doesn’t change a bit.”

The GDP loss in the second quarter could range anywhere from negative 20% to 40%, according to some estimates, and Beacon Economics agrees that these are possibilities; however, Thornberg says these numbers are not as dire as they sound because they are in annualized terms. “Traditionally, we do everything in annualized rates because the numbers are small enough quarter-to-quarter that people will have a hard time getting a sense of the impact,” he says. “When you annualize the number, generally, you give people a better scope. When something truly dramatic like this happens, those numbers just look outrageous.”

In reality, the quarter-over-quarter change will be closer to 10%, he says. That would mean that 90% of the economy is still functioning and contributing to economic growth. “That is important because that is going to create income and that income is going to go into spending and savings, and that savings is going help bounce the economy when public mandates are removed,” says Thornberg. “We certainly saw that in March with the savings rate numbers. The savings rate increased from went from 7.4% to 13.1%, which is an enormous surge.”

While he is predicting a V-shaped recovery, many equally respectable outlets are predicting a U- or even L-shaped recovery. Thornberg doesn’t buy it. “Hysteria is the new normal when we have these conversations,” he says. “Last year, people were saying we were about to have a recession because interest rates were rising and we were about to have a trade war with China. None of that happened.”