How is the U.S. economy doing? Here are 7 key signs to watch during coronavirus crisis

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If the U.S. economy resembled any object, it’d likely be a broken traffic light.

That’s because the overall financial and economic system is flashing between recession red signals and yellow warning signs as it works through the coronavirus crisis, which choked the longest economic expansion on record. States nationwide enacted stay-at-home orders forcing businesses, restaurants, offices and retailers to close, eroding consumption and putting what’s perhaps 1 in 4 U.S. workers on unemployment benefits.

“It’s a domino effect: The longer this goes on, the cracks get a bit bigger,” says Samantha Azzarello, global market strategist at J.P. Morgan Asset Management. “The policy response to COVID-19 is what caused the actual recession. It was a policy choice to shut down the economy. We’re getting hit all at once now.”

Here’s what’s happening in the U.S. economy right now — and how the coronavirus crisis is making or breaking it, based on these important measures.

1. Unemployment is back to Depression-era levels

Hiring in the U.S. rebounded quicker than expected during May and June, but the pace of job recovery slowed in July. The job market still has a long way to go, with employers only recovering about two-fifths of the positions they cut during the height of the pandemic.

Employers in March and April cut a whopping 22.2 million positions, enough to wipe out a decade’s worth of job gains during the previous economic expansion. Even with 9.3 million gained across May, June and July, the job market still has a hole of about 12.9 million positions, compared with before the coronavirus crisis.

Losses for the most part have been broad-based, with significant cuts coming first in retail, food services and tourism, then spreading to broader industries such as health care and state and local governments. So far, employers have picked up hiring again in those sectors, though it’s nowhere near pre-pandemic levels.

“If we thought the worst we’d ever see with economic data would be during the financial crisis and Great Recession, the virus proved us wrong,” says Mark Hamrick, Bankrate’s senior economic analyst.

That reality naturally led to a dramatic surge in unemployment. After holding at half-century lows since 2018, the unemployment rate also skyrocketed to levels not seen since the Great Depression. Joblessness rose to 14.7 percent in April, the largest month-to-month increase on record. Unemployment was also likely 5 percentage points higher, based on the way that the Bureau of Labor Statistics calculates joblessness, officials wrote in a complementary document with the report.

The unemployment rate is now about 10.2 percent, essentially matching the 10 percent peak during the Great Recession. Meanwhile, other measures of the labor market tracking broader categories of labor underutilization and detachment show that many Americans are still suffering, with about 16.3 million individuals still unemployed and even more underutilized.

About 8.4 million individuals are working part-time jobs for economic reasons. Meanwhile, the jobless rate that tracks all persons marginally attached to the labor force, plus those who are working part-time jobs but would rather be working full time, is about 16.5 percent, near record highs.

New applications for unemployment benefits in the millions for 20 straight weeks

The job market’s cratering has put many Americans in a precarious spot. About one-tenth of the U.S. workforce is drawing unemployment benefits as of July 25, another job market measure closely tracked. And four months into the crisis, Americans are still applying for unemployment benefits in the millions.

New applications for jobless benefits first surged to 3.3 million the week of March 14, far surpassing the previous record rise of 695,000 in October 1982. It would also soon eclipse that high, rising to a record 6.9 million Americans by the week that ended on March 28. Those new claims have since leveled off, though remain high above their historic average.

About 1.1 million Americans applied for unemployment benefits the week that ended on August 1, down from 1.4 million a week earlier. Economists say that number is likely underestimating the problem, with gig-economy workers and the self-employed applying for another form of benefits granted through the CARES Act known as the Pandemic Unemployment Assistance program.

“Make no mistake about it, the unemployment situation is dire and likely to continue that way until the economy is opened back up,” Hamrick says. “Even then, significant challenges will remain.”

2. U.S. economy contracts the most on record in the second quarter of 2020

When the engines of the U.S. economy came to a grinding halt, it was only a given that gross domestic product — the mother of all economic data and the broadest scorecard of the U.S. economy — would show record declines.

And that’s exactly what came to fruition. The U.S. economy shrank by 32.9 percent in the second three months of 2020. That’s the worst quarter in history, according to data dating back to the 1940s.

But that measure might not be the best way of looking at the economy’s performance. GDP’s headline number is reported using an annualized rate of change, meaning it shows how the U.S. economy would look if every quarter were like the second three months of 2020. Technically speaking, the U.S. economy shrank by 9.5 percent in April, May and June.

“It’s like predicting a ballplayer that hits three home runs on opening day will maintain that pace for the whole season,” says Greg McBride, CFA, Bankrate chief financial analyst. Though, the 9.5 percent contraction was “still epically bad,” he says.

It comes after the economy contracted by 5 percent in the first three months of 2020, also at an annualized rate, which at the time was the worst performance since the fourth quarter of 2008. It also foreshadowed the second quarter’s steep decline because shutdowns to stop the spread of the coronavirus weren’t enacted until mid-March, toward the end of the quarter.

3. Consumer spending rebounds, but still below pre-pandemic levels

A faster-than-expected rebound in hiring, matched with massive amounts of economic stimulus from Congress, have aided consumers’ wallets — so much that consumer spending picked up at a faster pace than was expected.

But with the extra $600 in weekly unemployment benefits having expired on July 31 and a resurgence of coronavirus cases across the U.S. that’s prompting a rollback of some state reopenings, the pace of that rebound is now put into question.

Consumer spending rose 8.5 percent in May and then 5.6 percent in June, according to the most recent release from the Department of Commerce. While those were both record gains, it was still 4.8 percent below pre-pandemic levels from a year ago and not enough to offset the massive plunges in the two prior months. Consumption dropped 12.9 percent in April, nearly doubling the 6.7 percent decline in March, according to the Department of Commerce’s report.

Meanwhile, receipts at restaurants and retailers are in a better recovery position. The value of purchases increased 7.5 percent in June, after an upwardly revised record 18.2 percent surge in May, according to a separate Department of Commerce report, driven by nationwide reopenings. Total sales is just about $2.9 billion below its pre-pandemic level in February 2020 of $527.27 billion and is up 1.1 percent from a year ago.

But with a number of states taking steps to partially reverse their reopenings, such as Florida and Texas suspending drinking at bars, the pace of that recovery could end up being similarly threatened.

A nationwide Bankrate survey from May highlighted that problem. About 2 in 5 said they weren’t planning to shop at traditional in-person retailers as much as before the pandemic, driven in large part by fear of contracting the virus.

4. Consumer confidence takes another hit, suggesting a long road ahead for spending

All of this is taking a toll on consumer confidence, what many economists attribute as a leading indicator of where consumer spending is heading. If Americans aren’t confident about the direction of the economy, they might hold back on making purchases for even longer. And it comes with consequences for firms.

“As the financial downturn persists, more businesses, meaning employers, are at risk of becoming insolvent, states and localities face massive budget deficits and consumers lacking a vaccine are less likely to venture out into public even if they have money in the bank to spend,” according to Hamrick.

After falling in April to its lowest level since 2013, consumer confidence swiftly picked up in May and June, with the index rising to 78.1, according to the University of Michigan’s widely-watched survey of consumers. It’s since, however, fallen, with the index sliding to 72.5 in July.

Confidence fell for the same reasons it rose in May and June: federal stimulus. What once gave Americans renewed optimism in the direction of the economy caused consumers apprehension when it expired.

“The federal relief programs have prevented more substantial declines in consumer finances, partially shielding consumers from the unprecedented surge in job losses, reduced work hours, and salary cuts,” said Richard Curtin, director of the Michigan poll, in a statement. “The lapse of the special jobless benefits will directly hurt the most vulnerable and spread even further by missed rent, mortgage, and other debt payments.”

A separate consumer poll from the Conference Board showed that confidence also slumped in July, decreasing to 92.6 from a revised 98.3.

5. Fed injects trillions to help smooth financial conditions

But the coronavirus caused a two-front crisis — one tied to a plunge in sales and a surge in unemployment, and the other exacerbated by a tightening in financial conditions. It was so serious that it prompted the Federal Reserve to slash interest rates all the way to zero at two emergency meetings within 13 days of each other.

“The outbreak has disrupted economic activity in many countries and prompted significant movements in financial markets,” Fed Chairman Jerome Powell told reporters at a press conference following the Fed’s first emergency cut, a 50-basis-point reduction.

The Fed since March has moved farther and faster than any other previous U.S. central bank, instituting an unprecedented, unlimited bond-buying program, pumping trillions in the market for short-term repurchase agreements, creating 11 emergency lending facilities designed to get credit flowing across the economy and pledging to do more to support the financial system.

It matters for two reasons: When credit markets are dysfunctional, it pushes up interest rates for consumers and firms. That defeats the purpose of slashing rates to zero. And when stocks decline sharply and swiftly, it threatens solvency among firms.

“If financial markets were still stressed, that’s what would blow those dominos down even faster,” Azzarello says. “I think of financial markets and the real economy like two pieces dancing together.”

Treasury yields across the curve have plunged to their lowest levels ever, with shorter-term Treasury bills even trading in negative territory intraday since the pandemic rained fire on the financial system. Meanwhile, various indicators tracking volatility and stress among major markets, credit spreads and interest rates — from the St. Louis Fed Financial Stress Index to the Chicago Board of Options Exchange’s Volatility Index (VIX) — showed that financial conditions tightened in mid-March by the most since the financial crisis.

By most measures, however, the volatility appears to have subsided, largely thanks to the Fed’s interventions.

”The financial plumbing and all of the pipes seem to be working,” Azzarello says. “We have to fix one thing at a time, and the Fed did help. Now we just have to put people back to work on the real side of the economy.”

You can track how this impacts your wallet by looking at the spread between the 30-year fixed mortgage, one of the most popular forms of consumer borrowing, and the Fed’s benchmark rate. The spread surged in March and April to levels not seen since the 2008 global financial crisis, when credit tightened and lending slowed, and is now shrinking across May, June and July.

When it comes to the coronavirus pandemic, experts say that rates rose partially because lenders were overwhelmed by refinancing applications at a time when investors across the financial system were flocking to cash.

“That was a clear indication that conditions were tight,” Azzarello says. “It’s not good enough for the Fed to do something and it not to flow through.”

6. As fears over a second wave loom, watch coronavirus case counts and hospitalization rates

Given that the coronavirus is the root of these problems, it might not come as a surprise that you should watch case counts across the U.S. and world, as well as hospitalization rates.

The contagion has spread to more than 19.1 million people around the globe as of August 7 with nearly a quarter of those cases in the U.S., according to a tracker from Johns Hopkins University. Hospitalization rates, meanwhile, rose in the first few weeks of July, but have since started falling again, though they’re still elevated for more at-risk groups, such as individuals older than age 65, according to data from the Centers for Disease Control.

Coronavirus cases first started resurging in Texas, Florida, Georgia and Arizona. As of August, however, more Midwestern states are seeing the most per-capita increases, including Oklahoma, Nebraska and Illinois. Cases are falling in Florida and Arizona, while flattening in Texas and Georgia.

Experts far-and-wide have warned that the path forward is still wrought with unknowns, mostly because many epidemiologists have warned of a possible second wave. If that did indeed happen, leading to another round of nationwide shutdowns, it would spell even more trouble for the U.S. economy.

7. Other factors to watch: Inflation slows, housing starts plummet and manufacturing weakens

Virtually all corners of the economy have been hit hard during the pandemic, with some of the nastiest declines in real estate and manufacturing.

U.S. housing starts jumped 17.3 percent in June, but still remain below pre-pandemic levels and down 4 percent from a year ago, according to the Commerce Department’s most recent release. Manufacturing activity, which was already hurting amid ongoing U.S.-China trade tensions in 2019, posted similar steep declines that have failed to recover fully. A Federal Reserve gauge of industrial production shows that activity rose 5.4 percent and 1.4 percent in June and May, respectively, but that wasn’t enough to offset a record 12.7 percent plunge in April, the steepest decline on record.

Inflation has been the biggest wild card of all. With massive amounts of stimulus coming out of both sides of Washington — Congress and the Federal Reserve — some experts have warned that price pressures could build in a few years. U.S. central bankers, however, indicated in records of their June gathering that disinflationary pressure is a bigger concern. The overall effect of the outbreak was seen as putting downward pressure on prices, exacerbated by weaker growth and slower spending.

The personal consumption expenditures (PCE) index — the Fed’s preferred way of measuring inflation — rose 0.8 percent percent from a year ago, the weakest pace in four years. The Fed has an inflation target of 2 percent, which was challenged even during the decade-plus-long expansion. Another key measure of U.S. inflation, the core consumer-price index (CPI) that excludes volatile food and energy categories, fell by the most on record in April to 0.9 percent.

“We know all of the numbers are going to be bad,” Azzarello says. “Now we’re talking about how bad really they’re going to be.”

What this means for you

The National Bureau of Economic Research officially declared that the U.S. economy is in a recession — one of the quickest and easiest calls that the private group of research economists has ever made — and the downturn has already proven to be the worst in anyone’s lifetime, according to Powell.

Tracking these indicators is an important way of determining where in the trenches the U.S. economy may lie, as well as how close to a recovery the broader system might be.

Even then, no one knows for sure just how long the pain will last. Long story short, it’s going to take a few years. Fed officials are expecting elevated unemployment through 2022, according to forecasts updated in June. The Congressional Budget Office, meanwhile, is projecting the economy to return to its pre-pandemic size sometime in 2022.

Given that no one can see the future, it’s important to remain focused on recession-proofing your finances. That includes prioritizing savings and building up an emergency cushion of cash in the event that you unexpectedly lose your income. Paying down debt and eliminating some discretionary items from your budget can help free up some breathing room in your wallet to put more funds toward those goals.

“Just a few months ago, we couldn’t have guessed how this would happen, but we now know how we got here,” Hamrick says. “We just don’t know what the path forward will look like exactly.”

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