The KBW Restoration Index: Quantifying the Economic Recovery in Real Time
- By Fred Cannon, KBW Global Director of Research
Unprecedented Uncertainty
The COVID-19 pandemic has created one of the more uncertain time periods in modern history. The amount of times the term “unprecedented” has been used in the past six months is….unprecedented. With this unprecedented situation caused by the pandemic comes a large amount of economic uncertainty. Historically, economists and investors have relied heavily on traditional measures of economic activity including GDP and the unemployment rate, but these gauges are often delayed and don’t provide a real-time view of the economy. In normal times, the delay is negligible, but in a rapidly changing economic environment this delay can distort reality.
Source: KBW Research
Quantifying the Recovery
In search of a need to quantify and track the economic recovery in real time, Keefe, Bruyette & Woods (KBW) developed the KBW Restoration Index – an index composed of 13 high-frequency economic indicators. These indicators include those with longer histories (initial jobless claims, MBA mortgage applications, and steel production) along with newly developed gauges tracking mobility, dining reservations, and airport traffic, among others. KBW set each of the 13 indicators to 100 as of the end of February 2020, the official end of the longest economic cycle in U.S. history, and update the Index each week.
Data as of 9/10/2020 | Source: KBW Research
Where Have We Been and Where Are We Now?
As of the second Friday in September (9/11), the level of the index was 76.4. Put another way, the 13 real-time economic indicators in aggregate are running 23.6% below pre-COVID levels of economic activity. The trough of economic activity occurred when the Index hit 50.4 for the week ending April 17, just as stimulus checks were being dispersed. The recovery had a strong “bump off of the bottom” from late April through mid-June, but once COVID-19 cases began spiking again in late June, mostly across the South and West United States, the economic recovery flat-lined through the end of June and for most of July. As daily new cases began to decelerate, the Index showed signs of life in the beginning of August and has shown steady improvement since that time.
Data as of 9/10/2020 | Source: KBW Research
Where Are We Going?
After case numbers started to improve in early August, there was a mild delay from this deceleration and the adjustment of public habits. However, in recent weeks real-time indicators tracking mobility and dining have surged, as people become more comfortable interacting with each other. Before recently, the last peak in mobility data occurred in late June just as cases began inflecting. We view the current improvement in the Index as a decline in virus-related anxiety, which in the short term is a positive signal for the recovery. However, should new cases begin accelerating again as some in the medical community warn, we would expect to see a July-like flat-lining of the recovery. Overall, we expect the economy to continue its modest recovery from this point with a potentially bumpy ending to 2020.
Click here to download the latest KBW Restoration Index report.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.