The US officially ended its V-shaped recovery and has entered a slower 'healing phase,' Bank of America says

The US economy officially ended its V-shaped transition and entered its third and final phase of recovery, Bank of America economists said Friday.

  • High-frequency economic data suggests the rapid bounce ended in June and gave way to a "healing phase" as reopenings boosted spending and hiring activity, the team led by Michelle Meyer wrote in a note.
  • The third recovery phase will be "one of slower growth, likely in fits and starts," and will be "defined by the path of the virus," they added.
  • Household spending is key to forecasting whether the nation's recent spike in virus cases will stifle its economic bounce-back, the bank said.
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The US economy has officially moved into its third and final phase of recovery after its second-quarter collapse and V-shaped turnaround, Bank of America economists said Friday.

State reopenings and a hefty mix of fiscal and monetary stimulus led the nation out of its virus-induced slump. Economic data released in recent weeks showcased healthy improvements in retail spending, hiring, and manufacturing through the end of spring.

Instead of waiting on quarterly GDP figures to time the economy's bounce, the bank's economists used high-frequency data to pinpoint the turning point. The firm found that the nation has already entered a slower "healing phase" after completing its bounce in June.

"The healing phase will feel very different. It will be one of slower growth, likely in fits and starts, and will be defined by the path of the virus," the team led by economist Michelle Meyer wrote in a note to clients.

To be sure, the nation's battle against the coronavirus is far from over. New cases increased by nearly 60,000 on Thursday, reaching their sixth single-day record in 10 days. Texas, California, and Florida have already reinstated some lockdown measures to curb the virus' rapid spread. Some economists fear such reversals could plunge the economy into a second downturn, and Bank of America sees households as the key metric for gauging such risks.

Roughly two-thirds of the second quarter's downturn was driven by a halt in consumer spending, and nearly all of the economists' forecasted third-quarter bounce is tied to such activity. Households will flash the first warning signs for a stalled rebound, the team wrote, and additional fiscal stimulus will be critical to maintaining consumer confidence.

Congress and the Fed will introduce new relief measures to stabilize the third phase of recovery, yet neither body will implement stimulus of the same size as in their respective first rounds, Bank of America said. Legislators will most likely pass another spending bill before the end of the month that will push the national deficit to $4.3 trillion for the year, the team added.

The Fed has already committed to keeping rates near zero, with policymakers seeing the low levels lasting through 2022. Bank of America expects short-term yield cap targets to be implemented for the first time since World War II to support low borrowing costs through the lengthy recovery.

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