2020: Are We Headed Towards A New Recession?

Newspaper featuring article about recession and COVID-19

“How far off is the next one?” is the question on everyone’s mind. As many know, the unexpected coronavirus outbreak is causing severe economic disruptions and is, quite frankly, raising the risk of a recession. “The coronavirus could herald a sea change of how Americans spend, save, and invest their money,” says Martha C. White of NBC News, “changes that could reverberate for decades.”  

For starters, it’s important to know what a recession is. A recession is a period in the business cycle when economic activities are in a general decline. The decline is usually caused by increased unemployment, falling income and consumer spending, rising business failures, and falling stock markets. As scary as it is, recessions do happen in a normal economy, just not that often. The last recession we saw was back in December 2007 to June 2009, an 18 month stretch being the longest since the Great Depression in the 1930s.  

It’s completely unreal how many of us are living this in 2020. The start of a new year and a new decade, only to bring a global pandemic and severe economic disruptions. While we can’t say we’ve hit a global recession yet, Bloomberg economists said there is a 100% chance of recession in 12 months.  What we can say is a shock to the economy from both the supply and demand sides has certainly occurred. America looks incredibly different from just two months ago. Economists determine recessions by trends they see that have caused other recessions in the past. Here’s a few recent ones:

Trends Leading to a Recession

1. Supply and Demand 

You would think that a global pandemic sounds a lot like a supply problem, like China closing many factories to stop the spread. Simply put, products just aren’t being made as quickly and efficiently, causing back orders for many essential items. But that’s not all. A demand shock has hit the economy, on top of all of the supply obstruction.  

Demand shocks unfortunately have a ripple effect through the economy. For example, when major sales like purchasing cars or big appliances see a decline, companies stop manufacturing and lay off workers. Any laid off workers reduce their spending, causing consumer spending to drop all around and small and large businesses start closing their doors.  

Next thing you know, you’re in a recession.

2. Unemployment Continues to Climb

Another trend we’ve seen is the increase of unemployment. Normally, an increase in weekly filings for unemployment benefits is one of the indicators economists look to first for signs the U.S. is on the cusp of a recession. As of recently, they surged at such a rapid pace that they offered little advance notice that the economy was hurtling toward and into a downturn. Again, a ripple effect. Because of the recent outbreak of COVID-19 and the social distancing orders, many businesses have not been able to operate the way they normally would on a normal day. They have been ordered to shut their doors, or limit their hours and what they can do. We aren’t just talking about small business restaurants or coffee shops, we’re also talking about big time corporations like Walt Disney World and Universal closing their doors too. This has led to a decline in sales, which means laying off employees, which means another person waiting hours for their unemployment application to be accepted online. Take a look at every scenario you can and you will see a ripple effect one way or another.  

According to a research conducted by Claudia Sahm, a former Federal Reserve staff economist who’s now with the Washington Center on Equitable Growth, her Sahm Rule Recession Indicator, states historically, when the unemployment rate over the past three months rises at least 0.5 percentage points above the average over the past 12 months, a recession is imminent.  

We have far surpassed that since the outbreak of COVID-19.

Interest Rates Have Been Low 

Many would think they have the best solution to the crisis COVID-19 has brought: say major central banks should just cut short-term interest rates. With low interest rates, all major purchases all of a sudden seem more attractive and this for sure has created a new wave of demand to largely offset the problems induced by Covid-19. Problem solved! 

Ah, if only life were that easy.  

The problem is that interest rates were already very low in most countries before coronavirus hit. Unfortunately, there is not a lot of extra rate-cutting that can be done without major risks.  

What the Feds are Doing to Prevent a Recession 

These guys have a lot of rules. However, America has a front row seat in real time as Fed leaders consider whether to abandon some of their usual rules and how closely they ought to collaborate with the executive and legislative branches.   

However, the Federal Reserve has already taken dramatic steps to soften the economic hit. For example, the central bank lowered the benchmark interest rate to near zero in March and has said it will buy unlimited amounts of Treasury bonds and mortgage-backed securities to keep markets functioning and borrowing costs low. Also, President Donald Trump in March signed the largest relief package in U.S. history, which provides approximately $2 trillion in support. The law includes direct payments for many Americans and financial help for small businesses, and though many Americans have already received their relief money, for some it was not soon enough.  

The Fed are real-life magicians. The Fed has a power no other entity in the world possesses: the capacity to create dollars out of thin air. With that being said, it is beginning to use it to try to prevent the coronavirus crisis from also becoming a financial crisis. The problem is, can they keep up with this crisis? At this point, the government is just trying not to fall behind.  

For now, all we can do is wait and follow orders, with hopes of seeing a light at the end of this extremely long tunnel.