The COVID-19 Recession Explained
Part IV: Yes, Now is the Perfect Time to Talk Economic Recovery in America
Note: This post is one part of my series, Yes, Now is the Perfect Time to Talk Economic Recovery in America, which provides an in-depth look at the current economic crisis and how the United States will climb out of it. Click the link or scroll to the bottom to check out the other posts in the series.
Economies expand and recede, boom and bust, climb and crater. This is no secret. In the midst of the greatest economic collapse in modern American history, the current downturn feels different. In some respects, it is unquestionably unique.
Its impetus, a “once-in-a-century” pandemic, has killed many and altered life for everyone else. Contextualized, this recession is truly unprecedented for its catalyst and day-to-day conditions, yet it has some familiar markers.
According to the National Bureau of Economic Research (NBER), a “recession” is more holistic than specific. Traditionally, it had been defined by two consecutive quarters of inflation-adjusted negative growth. However, this current recession has changed the game and softened the NBER’s stance. A recession now includes any drastic shock that imperils growth.
Seen below, the swift and seismic increase in the unemployment rate clearly merited a new interpretation. Without waiting months, the NBER declared that the American economy was in dire shape.
Now, the NBER considers an array of indicators related to “depth, diffusion, and duration”. It considers real gross domestic product (rGDP) and real gross domestic income (rGDI) as the two best indicators to declare a recession. In essence, it looks to net production and earned income as barometers to how much Americans are spending, consuming, working, and making.
What may seem like a perfect storm, is actually more common than one might think. Since the end of the Civil War in 1865, America has experienced 32 recessions. Extrapolating the last 50 years, the United States has seen 8 such occurrences. The rate and cadence of recessions is fairly consistent. The United States undergoes a recession, on average, every 5–6 years. With this understanding, the last decade of consistent growth was rather anomalous.
The next question is: what about magnitude? After all, not all recessions are created equal. The current economic situation seems much more critical. While true, America has previously faced economic crises sending it seemingly to the brink.
The Great Depression saw a banking panic where a stock market crash created the worst economic conditions in American history. Similarly, only a decade ago, the Great Recession spurred a furious crash and sparked a global economic meltdown.
These downturns are not to be minimized. Individually, they were just as severe as believed. It is however important to understand that America, in a way, has been here before.
The COVID-19 Recession is unique in that it bottomed out quickly. In almost all preceding recessions, their downturns were more of a slow burn. Usually, the trough of a business cycle is unknown for quite some time. Wide scale lockdowns and stay-at-home orders closed large sectors of the economy. Once eased, the economy showed improvement. For instance, GDP started to rebound after only 2 quarters.
Similarly, according to the Department of Labor, unemployment claims hit their highest rates about a month into the pandemic. Afterwards, they dropped significantly.
Normally during a recession, economic experts take many months before agreeing a downturn even exists. Recessions can take many quarters to bottom out.
Predicting the start and end of recessions remains an imperfect science.
Many scholars point to the Treasury yield curve as a leading indicator of a recession. When inverted, the yield curve denotes a period where short-maturity interest rates exceed long-maturity interest rates. This inversion can indicate that market investors anticipate a downturn and a subsequent pivot in monetary policy. Investors speculate that interest rates will soon drop to spur demand. Therefore, the atmosphere becomes more favorable to realize value now as opposed to later.
Likewise, many economic forecasters judge a “long recession” as one which lasts more than a year. Expert economists have not typically been particularly accurate in predicting which recessions would last more than a year. For instance, many were bullish on a speedy recovery to the Great Recession which did not happen. Forecasters often rely on a series of metrics such as consumer confidence, stock market performance, and the unemployment rate. These statistics can be misleading.
Recessions are notoriously difficult to foresee and gauge. They are always clearer in hindsight.
As Chair of the Federal Reserve Jerome Powell notes, “The COVID-19 recession was unusual in that it was not triggered by a buildup of financial or economic imbalances. Instead, the pandemic shock was essentially a case of a natural disaster hitting a healthy economy.”
Internationally, this sentiment is aligned. Christine Lagarde, the President of the European Central Bank, underscores that “the triggering factor for the crisis was not the banks, was not finance, was not the bursting of huge stock market bubbles, it was not the bad behavior of some policymakers somewhere in the region. It was actually this teeny-tiny little virus that went around from one country to another in almost instant time.”
While this point may seem trivial, it’s important. This universal consensus has shaped America’s action. The response, even if uncertain, is not stuck in “what is happening?” or “how bad could it get?”, which usually occurs.
Instead, from a monetary policy perspective, the Federal Reserve proceeded with a decent grasp on the magnitude of the crisis. First, it lowered the federal funds rate, the rate banks charge each other for overnight loans, to near zero. This incentivized banks to keep lending instead of freezing activity. Second, it stabilized key financial markets through the purchase of Treasury securities and mortgage-backed securities.
While the overall economic situation remains in crisis, especially in terms of unemployment and shuttered business, it has likely averted irreparable disaster. The Federal Reserve’s initial actions stabilized the economy, but much of the bounce back will hinge on a series of large-scale relief packages. Congress, the Trump Administration, and Biden Administration have all chosen the same path out of this economic crisis: spend like never before.
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