What Happened to the Recession?

In multiple ways, this is the most difficult time we have ever seen to make a forecast. “Unprecedented” actions by government – locking down the economy, printing, borrowing, and spending trillions of extra dollars – artificially boosted economic activity. Like giving morphine to an accident victim, printing and borrowing masked the pain of lockdown injuries. As these artificial actions wear off, we expect a recession to appear.

And in the fourth quarter, retail sales, industrial production and other data suggested that the economy was hitting a wall.

Then…January happened. Nonfarm payrolls, retail sales, and manufacturing production all surged.

But we think these reports overstated economic activity. The US had unusually warm January weather. In addition, seasonal adjustment factors played a key role in making the economy look better than usual, as well.

In January, the national average temperature in the “Lower 48” states was 35.2 degrees, the fourth highest for any January in the past thirty years. New home foundations could be dug, fewer plants closed due to weather, and more people could comfortably be out and about.

Normal seasonal adjustment factors also played a role. Before seasonal adjustments, nonfarm payrolls fell 2.5 million in January. After adjusting, they were reported up 517,000 for the month. Before adjusting, retail sales fell 16.2%, but after the government applied normal seasonal factors, sales were reported up 3.0%, the largest gain for any month in almost two years.