October 24, 2020

Here’s why this recession has been different from any other


Shoppers wearing protective masks browse clothing at a store at Westfield San Francisco Centre in San Francisco, California, U.S.

Michael Short | Bloomberg | Getty Images

Near-record stock market levels, a booming almost bubbling housing market and robust retail spending doesn’t sound like much of a recession. But this is no ordinary recession.

The Covid-19 pandemic era is setting new standards for what an economic downturn looks like.

Significantly, unemployment remains high, with the current 10.2% level still above anything the U.S. has seen since the Great Depression. Daily life has been disrupted to an unprecedented degree as restaurants remain limited, stores have to control crowd size, and the concerts and festivals so much a part of summer life have disappeared.

But one wouldn’t know it just be looking at all the other data.

Retail sales rose 1.2% in July and an even more robust 1.9% excluding autos, as the metric has showed a literal V-shaped recovery since the collapse of March and April; ditto for existing home sales. Productivity hit its highest level in 11 years in the second quarter, and the Atlanta Federal Reserve is tracking third-quarter GDP growth of 26.2%, an estimate that rose 5.7 percentage points over just the past week.

What was that again about a recession?

“I don’t think we’re in a recession,” said Jim Paulsen, chief investment strategist at the Leuthold Group. “Given the data that’s coming in, I think we’re going to backdate that the recession ended already. That’s pretty clear.”

If Paulsen is correct, it could mark the fastest end to a recession in U.S. history. The National Bureau of Economic Research, considered the official arbiter of recessions, said the current one began in February. GDP declined 5% in the first quarter and 32.9% in Q2 as calculated on an annualized basis, meeting the rule of thumb for consecutive quarters of negative growth.

If that then is the case, there are a few other things that will stand out about the Covid-19 recession: How swiftly it came, that it was essentially government induced, and how quickly and aggressively policymakers responded.

“The biggest way it’s going to be different is that I can’t think of any other recession that essentially is going from a depression-like environment to a wartime boom in the matter of two quarters,” Paulsen said. “Policy officials reacted immediately in massive form and still are. They wouldn’t have done that in a normal recession, but they did that here because we had a recession form instantly, which has never happened before.”

Indeed, within weeks Congress passed a $2.3 trillion rescue funding bill and the Federal Reserve slashed short-term rates to near zero while enacting close to a dozen lending and liquidity programs.

As a result, the technical end to the recession may have passed already. But that doesn’t mean conditions still won’t feel like the nation is stuck in a downturn, much like it did even after the Great Recession officially ended in mid-2009.

The ‘real recession’ is still out there

In fact, the real recession may be yet to come, said Steve Blitz, chief U.S. economist at TS Lombard.

“It’s not a recession yet, and by that I mean the concept of recession as opposed to the definition,” Blitz said. “We’ve seen the two negative quarters that the NBER uses to define a recession. But the real recession has yet to emerge.”

That will come, he said, when the long-term repercussions of the current situation are felt.

The monetary and fiscal help so far has addressed short-term economic concerns: Sending checks to displaced workers, cutting rates, lending money to businesses and generally goosing the stock market and helping provide support for areas of the economy that need it. Stocks have roared back the March 23 lows, even as the savings rate catapulted 33.5% in April, well above any previous records.

But there are areas that are beyond policy, such as the hollowing out of major cities like New York, Chicago and Los Angeles that have seen massive outflows of people heading for safer and more prosperous ground.

The service economy also is suffering damage that could take years to mend. Recent data from Yelp suggests that 60% of eating and drinking establishments won’t make it. Movie theaters, airlines and other businesses also face major structural changes.

“What will create the recession going forward is the recognition that after everything reopens, life is not the same, that there are strong shifts in demand that are going to appear relatively permanent,” Blitz said. “That’s going to have its impact on finance and it’s going to have its impact on hiring and it’s going to have its impact on wages over a much broader segment of the population.”

Where the damage hits hardest

Indeed, Iva Bruni is a 40-year-old restaurant worker who moved three weeks ago from Hawaii to Woodbridge, New Jersey, about 28 miles from New York City. Since relocating, finding work has been difficult, compounded by her exhausting her unemployment benefits in Hawaii and not being a resident of New Jersey long enough to get benefits.

So she feels vexed when she sees the recent drop in jobless claims as indicative of a healing labor market.

“It’s kind of distorted,” Bruni said. “Literally what’s happening to me is happening to a lot of people. They have simply exhausted their benefits. For those not eligible to get anything, we just disappear into thin air.”

Being in the restaurant business is especially tough now. Bruni sees openings around her new town, but primarily in fast-food franchises and not the sit-down establishments where she worked in Hawaii.

As her job situation has faltered, she’s been running down her savings and now is worried about contributing so she and her boyfriend, who is employed, can pay the rent.

“This is my future,” she said. “I have been very frugal and saved a little bit of money on the side. Honestly, my savings was not supposed to be for the Covid crisis. I know the savings is going to come to an end, so I have two choices: accept any job even if it’s $11 an hour or $15 an hour, or my savings is going to go. So many of us will be forced to simply survive, so they will take any job that there is.”

That situation, where those at the lower end of the income spectrum suffer far worse than those at the top, makes this recession in fact look a lot like the last one.

And that means policymakers, who remain locked in partisan conflict, still have more work left to do.

Though the economy may have escaped technical recession, plenty of dangers await if action doesn’t come, said Mark Zandi, chief economist at Moody’s Analytics. Zandi estimates the recession that started in February actually ended in April, but another one could be on the horizon.

“I think we’re in an expansion. The question is how durable is the expansion. Can we make it through to the other side of the pandemic without backsliding into a downturn?” he said. “The elephant is kind of stuck in the mind and is very vulnerable to falling back into the mud.”



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