This Time is (Somewhat) Different: Reflections on the Current Recession
by: Kris Bledowski, Council Director & Senior Economist, MAPI
The current recovery from the unprecedented Covid-related plunge in economic activity proceeds unevenly. Production and employment are gradually recovering but remain far below the pre-recession peaks. In the second quarter of 2020 wages plunged about 12 percentage points compared to the previous quarter and recovered only about five percentage points the following one. But what does the lens of economic history show us about today’s trials?
Times are hard, particularly for those in the service sector. Workers in transportation, retail, construction, and the financial sectors have faced deeper layoffs and steeper downward wage adjustments than the economy average. In a historical perspective, this downturn has hit harder than the Great Recession of 2008-2009. Nevertheless, in a comparison with the Great Depression of the 1930s, the present doldrums appear rather benign.
Amid wholesale job destruction and bankruptcies across the entire economy, U.S. manufacturers are weathering the storm somewhat better than a decade ago. During the Great Recession of 2008-2009, real industrial output shed about a quarter of its value. This is comparable to the 20+ percentage points’ decline in 2020. What is different is the pace of the slide. Whereas it took six quarters for manufacturing activity to reach its low point in the second quarter of 2009, it took less than three quarters for output to plumb comparable depths in 2020.
By contrast, this recession runs deeper than in 2008-2009 when examined across all sectors of the economy. Services have suffered particularly badly in 2020. During the Great Recession the GDP dropped barely four percentage points. Over just two quarters in 2020 the economy shrank more than ten percentage points.
Why is manufacturing hurting less now than a decade ago? A few explanations come to mind. First, inventories cushion both demand and supply disruptions. Inventories are unique to manufacturing because, unlike services, consumption of goods can be deferred over time. Manufacturers can pre-source materials and stock finished goods. Second, industrial companies shored up their balance sheets by flexing working capital, which includes inventories. Also, many tapped precautionary credit lines early. Manufacturers tend to be more asset-rich than service-producing enterprises. This translates into easier access to collateralized borrowing. Finally, industrial companies tend to be larger and perhaps better resourced, which allows them flexibility to adjust production to changing demand.
How does the current recession stack up to the Great Depression nearly a hundred years before? In the 1920s and 1930s, the deflationary stance of the Federal Reserve made things worse, not better.
This time around, fiscal support alone stretched into multiple trillions of dollars. The Fed flooded the markets with liquidity, easing credit choke points.
21st century workers enjoy vast safety nets that protect their income and health in times of crisis. Add backstops to bankruptcies and evictions thrown in by governments in a hurry, and you have less human suffering than the bread lines and homelessness of the 1930s.
Trade intensity now far exceeds the levels of a century ago. International commerce cushions cyclical variation and diversifies supplies of goods and services.
Finally, the world today boasts a multitude of multilateral institutions whose job it is to attenuate hardship across borders. The likes of the World Bank, the International Monetary Fund, and even the informal G20 all stand ready to coordinate support in a severe crisis.
So, while times are hard indeed, we can be thankful because we live in a better prepared world than a hundred years ago.