October 2020 Economic Review

A K-Shaped Economic Recovery

At the onset of the pandemic, many economists predicted an economic recovery in the shape of a V or a U where a steep contraction would be followed by a rapid economic rebound. However, what is unfolding looks more like a K. The upper arm of the K refers to businesses that are thriving, such as the ones tied to technology or that supply basic necessities, and those individuals of greater means and educational attainment that continue to prosper. The lower part of the K refers to businesses that are tied to industries negatively affected by the health crisis such as retail and tourism, including many small businesses, and the lower-wage workers that generally have fewer credentials.

Positively, the U.S. economy continues to see encouraging signs of recovery overall. For instance, consumer spending grew by 1% in August after increasing by 1.5% in July, while the housing market is particularly vibrant as mortgage rates have reached ultra-low levels. Conversely, job recovery is not as strong as one would have hoped. In March and April, the initial effects of the pandemic and lockdowns cost 22.2 million jobs, and the economy shrank by 31.4% in the second quarter. Luckily, many jobs have come back, but the unemployment rate remains stubbornly high (7.9% for September, down from 8.4% in August).

Going forward, the path and speed of economic recovery remain unpredictable as it depends on the spread of the virus, the efficacy of treatments provided, and the arrival of vaccines for the general public. Further, the gridlock over additional fiscal stimulus measures along with the upcoming presidential election continues to add uncertainty and contribute to market volatility. Fed Chair Jerome Powell recently warned that a lack of additional support for businesses and households disrupted by the pandemic would lead to a weak recovery and hold back wage growth.

Monetary policy is expected to remain highly accommodative for the next few years with the Fed indicating it is “not out of ammo” and will continue to do whatever it can to support the economy as much as possible.

Treasury Yields
Maturity 10/5/20 9/3/20 Change
3-Month 0.088% 0.099% -0.012%
6-Month 0.101% 0.112% -0.010%
1-Year 0.122% 0.112% 0.010%
2-Year 0.145% 0.127% 0.018%
3-Year 0.189% 0.144% 0.045%
5-Year 0.335% 0.248% 0.087%
10-Year 0.782% 0.635% 0.147%
30-Year 1.589% 1.362% 0.228%

Agency Yields
Maturity 10/5/20 9/3/20 Change
3-Month 0.100% 0.109% -0.009%
6-Month 0.118% 0.135% -0.017%
1-Year 0.121% 0.139% -0.018%
2-Year 0.185% 0.169% 0.016%
3-Year 0.241% 0.218% 0.023%
5-Year 0.454% 0.400% 0.054%
Commercial Paper Yields (A-1/P-1)
Maturity 10/5/20 9/3/20 Change
1-Month 0.110% 0.130% -0.020%
3-Month 0.160% 0.150% 0.010%
6-Month 0.190% 0.200% -0.010%
9-Month 0.230% 0.220% 0.010%
Current Economic Releases
Data Period Value
GDP QoQ Q2 ’20 -31.40%
U.S. Unemployment Sept ’20 7.90%
ISM Manufacturing Sept ’20 55.40
PPI YoY Aug ’20 -1.50%
CPI YoY Aug ’20 1.30%
Fed Funds Target October 15, 2020 0.00% – 0.25%

Source: Bloomberg
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