Professor Campbell Harvey on what the economic recovery may look like

Campbell Harvey, Professor of Finance at Duke University, joined Yahoo Finance's Jen Rogers, Myles Udland, and Rick Newman to discuss the state of the U.S. economy and what a recovery may look like.

Video Transcript

MYLES UDLAND: All right, welcome back to Yahoo Finance Presents-- Recessionomics. We are joined now by Duke University professor Campbell Harvey. He is with the Fuqua School of Business.

And Professor Harvey, we've talked a number of times over the last couple of years, mostly about the shape of the yield curve and your workforce going back several decades on yield curve inversions ahead of recessions. Now, the yield curve inverted last summer. I don't think that the yield curve was predicting a pandemic. But I guess maybe just lay out for us the shape the economy was in as we headed into this pandemic and how unique this last couple of months have been in terms of the economic fallout, the speed with which we've seen this fallout make its way through various sectors.


CAMPBELL HARVEY: Yeah, sure. So June 30, 2019, the yield curve was fully inverted. And I made the code red call for a recession. The yield curve historically, since the '60s, seven out of seven, no false signals.

I wasn't alone in making that call. 50% of CFOs thought a recession would happen in 2020. But you're exactly correct. Obviously, the yield curve didn't predict a pandemic, a systemic risk event. That was the trigger to put us into recession.

Often you go into recession, don't even know it until many months or quarters afterwards. We went into recession very quickly. And the date of the business cycle peak is February 2020. And the real question is how long is this going to last?

RICK NEWMAN: Prof. Campbell, Rick Newman here. So I've been soliciting reader questions or audience questions on this, and they've heard these a lot of these comparisons to the Great Depression, the worst job numbers since the Great Depression. So people naturally are wondering is this a depression, even though we're not seeing the stuff we think we're familiar with from the Great Depression, millions losing their homes, camps in Central Park or wherever? Is there a chance we're headed for a depression? And does it even matter what you call it?

CAMPBELL HARVEY: Yeah, so this is kind of similar, in my opinion, to your previous conversation where you were talking about the jobless recovery in the global financial crisis recession. Look, in the Depression, when you lost your job, you just had no idea when you would find another job. It was very uncertain.

In the global financial crisis, the same thing-- we actually officially ended the Great Recession in September 2009. But unemployment continued to go up and didn't peak until 2010 and didn't get back to where it started in 2007 until May of 2016. That's nine years. So people just didn't know. There was uncertainty.

This recession is different. We know exactly when it started, we know exactly the cause, and the solution is biological. The cause was biological. And there's reasonable expectations that we can have a solution, a biological solution, by the fall or the first quarter of '21. And indeed, that's what financial markets are pricing in.

JEN ROGERS: So Prof. Harvey, just to follow up there, because we've had a lot of viewer questions about this-- do we need a vaccine to get out of the recession? Are you saying, though, that we would need a vaccine to make sure we don't go into a Depression? I mean, is that what's gonna keep us from falling into further declines?

CAMPBELL HARVEY: No, and for multiple reasons, but the two main mitigating forces are a pharmacological solution that reduces the fatality rate-- that's number one, and number two is a vaccine, if effective, that's, quote unquote, "all clear," so we're done. And again, this is a different type of economic episode, where we've got clarity.

So maybe we can debate whether it's gonna be 12 months, nine months, 18 months. We can debate that, but even if you take the longest horizon of 18 months, with the vaccine, that's all clear. OK, so that is way different.

And yes, we've seen horrific economic numbers that we've never seen before. And I call this, actually, the Great Compression, where you get all this bad news very quickly. But we will come out of this also very quickly. So we'll see good news that's historically unprecedented also. And I believe that will start-- the growth will start in the fourth quarter of 2020.

RICK NEWMAN: So Prof. Harvey, are you-- I mean, would you tell people they can-- you know, people who have been furloughed or have lost their jobs, or if you're working in the restaurant industry, they should feel fairly hopeful of a faster end to this recession than we've seen before?

CAMPBELL HARVEY: So again, think about the contrast with the Great Recession. You work at Lehman Brothers. You lose your job. You're not going back, and indeed, incredibly difficult to get placed in that sector because other firms are in trouble.

And why is Lehman Brothers bankrupt? They were offside. They did a poor job of risk management. They were operating like a hedge fund, like many other financial institutions.

So contrast that with today. So we have many high-quality firms, profitable. They weren't offside. They were doing a good job.

And people get furloughed. The key word is furloughed. You're told, we need to furlough you for a couple of months. Maybe you come back earlier. Maybe it's gonna be longer.

But people expect to go back to a high-quality firm. That is another dimension of the difference in uncertainty. So you're not scrambling, necessarily, to find some other type of employment. It's not like the Great Depression, where it's a lost decade. There is tangible light at the end of the tunnel, because that light is biological.

JEN ROGERS: The Great Compression. I like it. Prof. Campbell Harvey of Duke, thanks so much for joining us, and have a great weekend.