Kaplan sees recovery later this year, disinflationary forces in place

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The economic recovery, which should occur in the last half of the year, depends on people following guidelines and wearing masks, according to Federal Reserve Bank of Dallas President Robert Kaplan.

Although the second quarter will feature “significant” contraction, with GDP "down by as much as 35% and maybe as high as 40%" on an annualized basis, he said, "my guess is we’ve already reached the peak of unemployment.”

But the second half will feature expansion. “We will grow in third and fourth quarter and I think we will end the year at around 8% or higher," he added. "Most countries are following a similar pattern, as they may be a little ahead of us.”

In the near term — over the next couple of years — he expects disinflationary forces to predominate. “Inflation will be pretty muted, overall,” Kaplan said. “The question will be, as we get closer toward full employment, what then are the inflationary forces we will see?"

As states reopen, if people follow the health safety rules and socially distance, it will help recovery, he said. “Do people wear masks? Do we have testing available? If we do all those things well, then people will start flying again and going out. If we have lax procedures, we will grow slower,” said Kaplan, who is a voter on the Federal Open Market Committee this year. “Good healthcare procedures and growth of economy will come together.”

Federal Reserve Bank of Dallas President Robert Kaplan urged people to continue using face masks and following health and safety guidelines.

Separately, Morgan Stanley's research team still expects a V-shaped recovery. "We have greater confidence in our call for a V-shaped recovery, given recent upside surprises in growth data and policy action," the group said in a statement dated Sunday. "The global economy bottomed in April and the recovery will gather further momentum, making this a short recession. Global output levels will reach pre-COVID-19 levels by 4Q20."

Empire State Manufacturing
Business activity “steadied” in New York State in June, recovering from record lows in April and May, according to the Empire State Manufacturing Survey, released Monday by the Federal Reserve Bank of New York.

The general business conditions index rose to negative 0.2 in June from negative 48.5 in May.

Economists surveyed by IFR Markets expected the index would be negative 27.5.

The new orders index improved to negative 0.6 from negative 42.4, while the shipments index rebounded to positive 3.3 from negative 39.0, and unfilled orders improved to to negative 12.5 from negative 20.3, the Fed said.

The delivery time index rose to positive 1.3 from negative 4.1, while the inventories index narrowed to negative 0.6 from negative 3.4 in the prior survey. The prices paid index rose to 16.9 from 4.1, while the prices received index climbed to negative 0.6 from negative 7.4. The number of employees index improved to negative 3.5 from negative 6.1, while the average employee workweek index narrowed to negative 12.0 from negative 21.6, the Fed reported.

Looking six months into the future, the general business conditions index showed respondents are quite optimistic, as it grew to 56.5 from 29.1 last month. The new orders index rose to 52.9 from 35.0, while the shipments index increased to 53.1 from 33.3, and unfilled orders rose to 1.9 from zero the Fed said. The delivery time index gained to positive 0.6 from negative 4.7, while the inventories index fell to negative 5.6 from positive 0.7.

The prices paid index gained to 25.6 from 20.3, while the prices received index rose to 7.5 from 2.0. The number of employees index rose to 19.0 from 10.4, while the average employee workweek index slipped to 5.0 from 8.1, the Fed reported. The capital expenditures index increased to positive 3.1 from negative 8.1. The technology spending index rose to positive 6.3 from negative 8.1.

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