This Looks Like A Depression, Not A Recession
Note: For the last few weeks economists have begun using the ‘D’ word – depression – to describe what could be happening in the United States and the world. A depression is a recession with mass unemployment that lasts for years. We will not know whether this is a deep recession or a depression until years into the future, but it is evident with the last two weeks’ unemployment figures that we are going to see levels of unemployment that the US has not seen since the 1930s. The key unknown questions are how long the COVID-19 pandemic shuts down or slows the economy and how quickly the economy can recover from the global economic collapse.
Initial jobless claims surged by another 6.6 million last week according to the Labor Department on Thursday, April 2. That brings the two-week total to nearly 10 million due to the coronavirus economic collapse. This is higher than was predicted by economists surveyed by Dow Jones who had expected 3.1 million claims in this week’s report. This comes one week after 3.3 million filings (the initial number for last week was revised higher by 24,000 by the Labor Department) in the first wave of unemployment. The rapid increase in unemployment has never occurred so quickly. Nothing compares to it in the history of the United States.
The two highest week for claims for unemployment were 695,000 in 1982 and 665,000 in March 2008 during the Great Recession.“ Sadly, this probably still underestimates the actual numbers because of the overload in the systems and not every call getting through,” said Liz Ann Sonders, chief investment strategist at Charles Schwab told CNBC. “Even if we’re accurately calculating the numbers, we still likely have worse to come.” Seema Shah, chief strategist at Principal Global Investors agreed, saying, “Not only was the number worse than expected but with lockdowns becoming stricter and being extended, we should anticipate further surges in jobless claims over the coming weeks.”
While a depression or a deep recession will be devastating, it is also an opportunity for a radical transformation of the economy, health care, and other policies. In our weekly newsletter, Margaret Flowers and I are writing a series on what we are calling The Decade of Transformation. We have covered remaking healthcare and bulding an economy for the people so far in the series. You can prepare for the Decade of Transformation by taking our eight-class online course How Social Transformation Occurs. – KZ
Until we have a vaccine, we are barreling towards economic catastrophe
Just weeks after the stock market crashed in 1929, President Herbert Hoover assured the country that things were already “back to normal,” Liaquat Ahamed writes in Lords of Finance, his Pulitzer Prize-winning history of the financial catastrophe. Five months later, in March 1930, Hoover said the worst would be over “during the next 60 days.” When that period ended, he said, “We have passed the worst.” Eventually, Ahamed writes, “when the facts refused to obey Hoover’s forecasts, he started to make them up.” Government agencies were pressed to issue false data. Officials resigned rather than do so, including the chief of the Bureau of Labor Statistics.
And we all know how that turned out: The Great Depression.
Today, President Donald Trump is accused of minimizing the coronavirus as it has bored down on the United States, initially barring most foreigners who had visited China from entering the U.S., but then losing a full month before taking further measures. The virus would not spread in the U.S., he said February 26, “especially with the fact that we’re going down, not up. We’re going very substantially down, not up.” Even today, the White House has failed to organize a nationwide mobilization that would arrest the virus and persuade traders, CEOs, and ordinary Americans that the crisis is in hand. As a result, Covid-19, on its current trajectory, threatens the U.S. with a profound economic downturn.
Covid-19 arrived amid the longest expansion in modern American history. The economy had grown for more than 11 years and added jobs for 113 straight months. Stock markets were hitting repeated highs. But the economy at large was slowing — it grew by 2.3% in 2019, down from 2.9% the prior year, the slowest in three years, and far below the 3.1% projected by the White House. For 2020, the Federal Open Market Committee forecast just 2% growth in 2020, and economists surveyed by Bankrate estimated a 35% chance of recession by the November election. Red lights of a laggard or even a bad year were blinking: Businesses were not investing in the future — private investment growth had plunged to 1.8% from 5.1% in 2018. Even consumer spending, the singular engine of growth, was just 1.8% in the fourth quarter, down from 3.2% in the prior three-month period.
But left barely spoken is the explicit economic threat: a depression-like downturn rivaling the 1930s — prolonged double-digit joblessness, an unprecedented economic contraction, and widespread bankruptcy.
It was the same globally. Economic growth hit a six-year low last year in Germany, Europe’s engine, falling to 0.6%, its slowest since 2013. Japan’s economy shrank by 6.3% and the country already appeared to be headed for its first recession since 2015. The global economy as a whole rose by just 2.4% last year, its lowest rate since the 2009 financial crash. An expectant mood grew of something that would finally push the U.S. and the world into an economic contraction, though no one could say what it would be.
Today, a rising level of alarm over the coronavirus has led 30 states to shut down large parts of their economies and the rest to issue varying stay-at-home advisories. Against the financial toll, the Fed has struck, marshaling far greater firepower than it did in the Great Recession. Congress, too, has approved triple the relief it spent attacking the 2009 financial crash, and is now talking about another, even pricier package. In all, the government has so far thrown some $6 trillion at Covid-19, most of it at the economic fallout.
In part, the reason for the government’s distress is a widely accepted estimate that up to 240,000 Americans could lose their lives even with current measures against the virus. But left barely spoken is the explicit economic threat: a depression-like downturn rivaling the 1930s — prolonged double-digit joblessness, an unprecedented economic contraction, and widespread bankruptcy.
The reason for the grim economic outlook is, oddly enough, the government’s very concentration of its financial cannons on the economy. When the government shows it has a convincing regime in place to restrain the virus — massive, population-wide testing, and a way to trace and quarantine those with whom victims have been in contact — the markets will gain confidence, and a floor will be created underneath the economic collapse. Until then, we are looking at the current freefall.
To shore up the economy, the virus needs to be brought under visible control. But there is no sign that is where the U.S. is headed.
In a rare peek at official thinking, James Bullard, president of the St. Louis Fed, told Bloomberg last week that the jobless rate could climb to 30% next quarter and that the economy could contract by 50%. That was not counting for the impact of hundreds of billions of dollars thrown at companies by Congress as support to hold on to their workers. But even so, private estimates after the legislation are similar — Goldman Sachs forecasts a 34% economic contraction and 13.2% unemployment in the second quarter, and Deutsche Bank 33% and 12%.
Although no one placed the forecasts in historical context, if we reach anywhere near those numbers, it will be far worse than the Great Recession, and nearly the magnitude of the Great Depression.
The Great Depression can be traced back to a stock market bubble that began to form in early 1928. The market almost doubled, far overshooting the pace of corporate profits and triggering a mania. The market peaked on September 3, 1929. But large stock traders had already been selling out of their positions — a third of 826 stocks on the New York Stock Exchange were already down 20% or more from their highs. Then the slide began. In late October, it turned into a rout: In four days culminating on October 29, the Dow fell almost 25%.
Even though no one at the time thought the real economy should or would be damaged, it was. From 1929 through 1933, U.S. production fell by a third, some 7,000 U.S. banks failed, and 5 million men lost their jobs. The jobless rate did not go below double digits for the entirety of the 1930s. It was the same in Europe — 4.5 million citizens were without work in Germany and 2 million in Britain. Like many human-made devastations, the Depression was exacerbated by a natural disaster — the Dust Bowl, a terrible, multiyear drought in the South and Midwest that threw tens of thousands of people out of their homes and forced them onto the road.
Much is made of the unusual nature of this downturn caused by a pandemic — that in effect, it’s an induced coma. The implication is that if and when the shutdown orders are lifted, business will revert to normal. But that’s not necessarily true. The airline industry is an example: Since the arrival of the virus, flights have continued on a limited basis, but planes are flying nearly empty. Even though people can fly, they aren’t doing so.
Combined, the pre-virus condition of the economy, and Covid-19 on top of it, add up to a malaise that won’t vanish by lifting shutdown orders. “It’s not clear that businesses would stay open if the shutdowns were lifted. No one is going to go out because they will worry about the disease,” says Jay Shambaugh, a fellow at the Brookings Institution and former chief economist for the Council of Economic Advisers in the Obama administration.
The absolutist way of stopping the virus in its tracks, and thus allowing the economy to be opened up in two or so months, would be a total shutdown of the American economy.
To shore up the economy, the virus needs to be brought under visible control. “The faster the virus stops, the quicker and stronger the recovery will be,” Kristalina Georgieva, managing director of the International Monetary Fund, said in a statement last week. But there is no sign that is where the U.S. is headed: We have no idea how many Americans are afflicted with Covid-19, no prospect of finding out soon, and no cure in sight. Because the actual scale of the U.S. outbreak isn’t clear, economists can only give solid near-term forecasts.
The absolutist way of stopping the virus in its tracks, and thus allowing the economy to be opened up in two or so months, would be a total shutdown of the American economy. In a CNN interview last week, Bill Gates suggested such a 50-state solution. And already, there are examples of what a full shelter-in-place order can achieve: China, which placed the virus epicenter of Wuhan under lockdown and initiated similar restrictions on a number of other places, on Monday reported a bounce in March manufacturing numbers after a plunge in February. In addition, in the United States, a San Francisco-based medical tech firm has reported a drop in fevers in states where strict state-at-home orders are in effect.
Given that the U.S. is a democracy and not a dictatorship, such a shutdown would require a gigantic Zoom conference call involving the governors of all 50 states, along with Trump, in an appeal for collective action. The most palpable relatively recent analogy would be 1990 when Iraq invaded Kuwait and threatened global order, and President George H.W. Bush assembled a coalition of 39 countries and 500,000 troops to turn it back. In the current case, Trump would want the entire nation to lockdown until a regime of testing, tracing, quarantining was in place.
But to get there, Trump would have to act against type — in his three years in power, Trump has bristled at collective action, and preferred to issue decisions by tweet. As long as he continues to be unable to rally group action among the governors, the outbreak is likely to be prolonged, along with the magnified economic impact on jobs and production.
A key worry today is the tendency of pandemics and the economic reverberations from them to repeatedly return. During the Spanish Flu, the second wave was, in fact, deadlier than the first, a mutation that killed 195,000 Americans just in the month of October 1918, 28% of the total of 675,000 American deaths. In the case of the coronavirus, a second wave has already struck Singapore, Hong Kong, and Taiwan, all of which got through the initial outbreak with few cases by imposing stringent control measures learned in the 2002 SARS virus, but in mid-March were hit by a new spike of Covid-19.
Private economists worry that, after the coronavirus dissipates, the U.S. and other countries will let down their guard and end up in the same place as those three countries. Glenn Hubbard, a professor at Columbia and former economic adviser to President George W. Bush, told the New York Times that if the virus wipes out entire industries such as restaurants or airlines, it could beget a “doom loop” in the economy as a whole — waves of such failures.
Another fear is that, if the U.S. and the rest of the world fail to contain the virus over the next year, they risk the closure of borders becoming the new normal. In a recent piece in Foreign Affairs, Branko Milanovic, an economist at the City University of New York, describes a new global order characterized by such economic aloneness. It would be “a different world — deglobalization,” Milanovic said in an interview. In what he calls self-sufficient “natural economies,” countries would try to take care of all their needs themselves, and do business as little as possible with other countries. Milanovic foresees the potential for this future to cascade catastrophically: Economies would shrink, living standards would drop, and social glues could consequently break down, leading to the risk that those left jobless turn violent against people who are better off.
Until there is a vaccine, any expert who says they can predict an outcome is misinformed or lying. The only conclusion that is certain is that the virus and its fallout will not pass any time soon.
As with a number of the potential social changes triggered by Covid-19, globalization was already under threat, challenged by the growing nationalism of the last three or four years. “[The virus] is an accelerant,” Milanovic said.
Some economists think the unprecedented government largesse, including a $2.2 trillion cash infusion signed by Trump on March 27, will be sufficient to compensate for the hit to the economy as long as the virus levels out in a couple of months. Karen Dynan, an economist at Harvard and a Treasury Department official in the Obama administration, said the relief is a significant fraction of annual U.S. GDP of $22 trillion, and that the entire economy is not down. “It’s a matter of getting the money to the right people,” she said.
But there is plenty of reason to plan for things not playing out this way. Andrew Sheng, the Hong Kong-based chief adviser to the China Banking Regulatory Commission, said he expects it to take a full two years of repeated lockdowns of economies around the world before a vaccine is distributed and the virus is under control. Over that period, Sheng said it would take a Marshall Plan-scale stimulus to forestall a global depression — something that, given the fractured statesmanship of the period, seems improbable.
The problem is more grave than the worst downturns of the past, Sheng said. “This time round, we are facing an unprecedented health, economic, financial, social, and geopolitical crisis at the same time,” he said. “Worse, no one is emotionally prepared for the rapid escalation and devastation.” Until there is a vaccine, any expert who says they can predict an outcome is misinformed or lying. The only conclusion that is certain is that the virus and its fallout will not pass any time soon.
Steve LeVine is Editor at Large at Medium with interests in ferreting out the whys for the turbulence all around us. Ex-Axios, ex-Quartz, ex-WSJ, ex-NYT, ex-FT.