In 2020, policymakers around the world made the unprecedented decision to shut down the economy. These orders crashed economies and pushed economic activity down by 40% or more, levels of contraction seen during the Great Depression of the 1930s.
The unprecedented nature of the contraction makes it difficult to predict the path of the recovery. To overcome this challenge, Moody’s Analytics and CNN Business partnered to create a Back-to-Normal Index.
This indicator includes 37 national and seven state-level indicators. The index ranges from zero, representing no economic activity, to 100%, representing the economy returning to its pre-pandemic level in March.
The Back-to-Normal Index fell as low as 57.4% in April 2020. It recently hit 90%.
Back-to-Normal Index Has Risen to 90%
Source: CNN.com.
Back-To-Normal Index’s Last 10% Could Be Challenging
While this reading is potentially bullish, the recovery has been uneven. The majority of states have seen the unemployment rate drop below 5%, but it remains above 8% in California and New York, two of the most populous states.
That disparity shows that the remaining push to normalcy will rely on states that have lagged in the recovery getting back to normal.
In addition to requiring large states to recover, the economy needs small businesses to get back to normal.
At small businesses, the number of hours worked is still about 18% below the March 2020 level. This indicator has been relatively stable for the past eight months. This likely means that many small businesses have permanently closed. Recovery will depend on new businesses opening.
New business opening depends on confidence that the recovery is sustainable — there are questions about that. We will see the answer to those concerns in the coming months.
As anyone who has tried to lose weight by dieting or run the 26.2 miles in a marathon knows, the last 10% can be the most challenging. This is likely to be equally true for the economy, and that means investors need to turn skeptical and make preparations for a downturn.
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Michael Carr is a Chartered Market Technician for Banyan Hill Publishing and the Editor of One Trade, Peak Velocity Trader and Precision Profits. He teaches technical analysis and quantitative technical analysis at the New York Institute of Finance. Mr. Carr is also the former editor of the CMT Association newsletter, Technically Speaking.
Follow him on Twitter @MichaelCarrGuru.