The Great Recession was the greatest significant macroeconomic shock to the US economy in generations prior to 2020. Millions of people have lost their jobs and houses. At its peak, one out of every ten workers looking for work was unable to find one. The economy shrank more than it had since the Great Depression on an annual basis. Following the formal end of the Great Recession in the summer of 2009, a gradual and steady recovery ensued, but because it was delayed and the depth of the recession was so great, it took years to remove slack in labor markets. However, because the recovery was slow and steady, many pre-recession peaks were eclipsed, and real wage growth ultimately began to accumulate for employees across the distribution. In fact, the business cycle (including recession and recovery) that began in December 2007 was one of the best in many decades for real wage growth, with the bulk of it occurring in the recovery’s last years. We examine the Great Recession’s historical context and the recovery’s several phases, as well as how different types of workers were affected in each phase. We also address fiscal and monetary policy responses to the Great Recession, as well as lessons learned for the future.
Have we recovered from the Great Recession of 2008?
When the decade-long expansion in US housing market activity peaked in 2006, the Great Moderation came to an end, and residential development began to decline. Losses on mortgage-related financial assets began to burden global financial markets in 2007, and the US economy entered a recession in December 2007. Several prominent financial firms were in financial difficulties that year, and several financial markets were undergoing substantial upheaval. The Federal Reserve responded by providing liquidity and support through a variety of measures aimed at improving the functioning of financial markets and institutions and, as a result, limiting the damage to the US economy. 1 Nonetheless, the economic downturn deteriorated in the fall of 2008, eventually becoming severe and long enough to be dubbed “the Great Recession.” While the US economy reached bottom in the middle of 2009, the recovery in the years that followed was exceptionally slow in certain ways. In response to the severity of the downturn and the slow pace of recovery that followed, the Federal Reserve provided unprecedented monetary accommodation. Furthermore, the financial crisis prompted a slew of important banking and financial regulation reforms, as well as congressional legislation that had a substantial impact on the Federal Reserve.
Rise and Fall of the Housing Market
Following a long period of expansion in US house building, home prices, and housing loans, the recession and crisis struck. This boom began in the 1990s and accelerated in the mid-2000s, continuing unabated through the 2001 recession. Between 1998 and 2006, average home prices in the United States more than doubled, the largest increase in US history, with even bigger advances in other locations. During this time, home ownership increased from 64 percent in 1994 to 69 percent in 2005, while residential investment increased from around 4.5 percent of US GDP to nearly 6.5 percent. Employment in housing-related sectors contributed for almost 40% of net private sector job creation between 2001 and 2005.
The development of the housing market was accompanied by an increase in household mortgage borrowing in the United States. Household debt in the United States increased from 61 percent of GDP in 1998 to 97 percent in 2006. The rise in home mortgage debt appears to have been fueled by a number of causes. The Federal Open Market Committee (FOMC) maintained a low federal funds rate after the 2001 recession, and some observers believe that by keeping interest rates low for a “long period” and only gradually increasing them after 2004, the Federal Reserve contributed to the expansion of housing market activity (Taylor 2007). Other researchers, on the other hand, believe that such variables can only explain for a small part of the rise in housing activity (Bernanke 2010). Furthermore, historically low interest rates may have been influenced by significant savings accumulations in some developing market economies, which acted to keep interest rates low globally (Bernanke 2005). Others attribute the surge in borrowing to the expansion of the mortgage-backed securities market. Borrowers who were deemed a bad credit risk in the past, maybe due to a poor credit history or an unwillingness to make a big down payment, found it difficult to get mortgages. However, during the early and mid-2000s, lenders offered high-risk, or “subprime,” mortgages, which were bundled into securities. As a result, there was a significant increase in access to housing financing, which helped to drive the ensuing surge in demand that drove up home prices across the country.
Effects on the Financial Sector
The extent to which home prices might eventually fall became a significant question for the pricing of mortgage-related securities after they peaked in early 2007, according to the Federal Housing Finance Agency House Price Index, because large declines in home prices were viewed as likely to lead to an increase in mortgage defaults and higher losses to holders of such securities. Large, nationwide drops in home prices were uncommon in US historical data, but the run-up in home prices was unique in terms of magnitude and extent. Between the first quarter of 2007 and the second quarter of 2011, property values declined by more than a fifth on average across the country. As financial market participants faced significant uncertainty regarding the frequency of losses on mortgage-related assets, this drop in home values contributed to the financial crisis of 2007-08. Money market investors became concerned of subprime mortgage exposures in August 2007, putting pressure on certain financial markets, particularly the market for asset-backed commercial paper (Covitz, Liang, and Suarez 2009). The investment bank Bear Stearns was bought by JPMorgan Chase with the help of the Federal Reserve in the spring of 2008. Lehman Brothers declared bankruptcy in September, and the Federal Reserve aided AIG, a significant insurance and financial services firm, the next day. The Federal Reserve, the Treasury, and the Federal Deposit Insurance Corporation were all approached by Citigroup and Bank of America for assistance.
The Federal Reserve’s assistance to specific financial firms was hardly the only instance of central bank credit expansion in reaction to the crisis. The Federal Reserve also launched a slew of new lending programs to help a variety of financial institutions and markets. A credit facility for “primary dealers,” the broker-dealers that act as counterparties to the Fed’s open market operations, as well as lending programs for money market mutual funds and the commercial paper market, were among them. The Term Asset-Backed Securities Loan Facility (TALF), which was launched in collaboration with the US Department of Treasury, was aimed to relieve credit conditions for families and enterprises by offering credit to US holders of high-quality asset-backed securities.
To avoid an increase in bank reserves that would drive the federal funds rate below its objective as banks attempted to lend out their excess reserves, the Federal Reserve initially funded the expansion of Federal Reserve credit by selling Treasury securities. The Federal Reserve, on the other hand, got the right to pay banks interest on their excess reserves in October 2008. This encouraged banks to keep their reserves rather than lending them out, reducing the need for the Federal Reserve to offset its increased lending with asset reductions.2
Effects on the Broader Economy
The housing industry was at the forefront of not only the financial crisis, but also the broader economic downturn. Residential construction jobs peaked in 2006, as did residential investment. The total economy peaked in December 2007, the start of the recession, according to the National Bureau of Economic Research. The drop in general economic activity was slow at first, but it accelerated in the fall of 2008 when financial market stress reached a peak. The US GDP plummeted by 4.3 percent from peak to trough, making this the greatest recession since World War II. It was also the most time-consuming, spanning eighteen months. From less than 5% to 10%, the jobless rate has more than doubled.
The FOMC cut its federal funds rate objective from 4.5 percent at the end of 2007 to 2 percent at the start of September 2008 in response to worsening economic conditions. The FOMC hastened its interest rate decreases as the financial crisis and economic contraction worsened in the fall of 2008, bringing the rate to its effective floor a target range of 0 to 25 basis points by the end of the year. The Federal Reserve also launched the first of several large-scale asset purchase (LSAP) programs in November 2008, purchasing mortgage-backed assets and longer-term Treasury securities. These purchases were made with the goal of lowering long-term interest rates and improving financial conditions in general, hence boosting economic activity (Bernanke 2012).
Although the recession ended in June 2009, the economy remained poor. Economic growth was relatively mild in the first four years of the recovery, averaging around 2%, and unemployment, particularly long-term unemployment, remained at historically high levels. In the face of this sustained weakness, the Federal Reserve kept the federal funds rate goal at an unusually low level and looked for new measures to provide extra monetary accommodation. Additional LSAP programs, often known as quantitative easing, or QE, were among them. In its public pronouncements, the FOMC began conveying its goals for future policy settings more fully, including the situations in which very low interest rates were likely to be appropriate. For example, the committee stated in December 2012 that exceptionally low interest rates would likely remain appropriate at least as long as the unemployment rate remained above a threshold of 6.5 percent and inflation remained no more than a half percentage point above the committee’s longer-run goal of 2 percent. This “forward guidance” technique was meant to persuade the public that interest rates would remain low at least until specific economic conditions were met, exerting downward pressure on longer-term rates.
Effects on Financial Regulation
When the financial market upheaval calmed, the focus naturally shifted to financial sector changes, including supervision and regulation, in order to avoid such events in the future. To lessen the risk of financial difficulty, a number of solutions have been proposed or implemented. The amount of needed capital for traditional banks has increased significantly, with bigger increases for so-called “systemically essential” institutions (Bank for International Settlements 2011a;2011b). For the first time, liquidity criteria will legally limit the amount of maturity transformation that banks can perform (Bank for International Settlements 2013). As conditions worsen, regular stress testing will help both banks and regulators recognize risks and will require banks to spend earnings to create capital rather than pay dividends (Board of Governors 2011).
New provisions for the treatment of large financial institutions were included in the Dodd-Frank Act of 2010. The Financial Stability Oversight Council, for example, has the authority to classify unconventional credit intermediaries as “Systemically Important Financial Institutions” (SIFIs), putting them under Federal Reserve supervision. The act also established the Orderly Liquidation Authority (OLA), which authorizes the Federal Deposit Insurance Corporation to wind down specific institutions if their failure would pose a significant risk to the financial system. Another section of the legislation mandates that large financial institutions develop “living wills,” which are detailed plans outlining how the institution could be resolved under US bankruptcy law without endangering the financial system or requiring government assistance.
The financial crisis of 2008 and the accompanying recession, like the Great Depression of the 1930s and the Great Inflation of the 1970s, are important areas of research for economists and policymakers. While it may be years before the causes and ramifications of these events are fully known, the attempt to unravel them provides a valuable opportunity for the Federal Reserve and other agencies to acquire lessons that can be used to shape future policy.
How did they get back on their feet after the Great Recession?
The Great Recession lasted from December 2007 to June 2009, making it the longest downturn since World War II. The Great Recession was particularly painful in various ways, despite its short duration. From its peak in 2007Q4 to its bottom in 2009Q2, real gross domestic product (GDP) plummeted 4.3 percent, the greatest drop in the postwar era (based on data as of October 2013). The unemployment rate grew from 5% in December 2007 to 9.5 percent in June 2009, before peaking at 10% in October 2009.
The financial repercussions of the Great Recession were also disproportionate: home prices plummeted 30% on average from their peak in mid-2006 to mid-2009, while the S&P 500 index dropped 57% from its peak in October 2007 to its trough in March 2009. The net worth of US individuals and charity organizations dropped from around $69 trillion in 2007 to around $55 trillion in 2009.
As the financial crisis and recession worsened, worldwide policies aimed at reviving economic growth were enacted. Like many other countries, the United States enacted economic stimulus measures that included a variety of government expenditures and tax cuts. The Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009 were two of these projects.
The Federal Reserve’s response to the financial crisis varied over time and included a variety of unconventional approaches. Initially, the Federal Reserve used “conventional” policy actions by lowering the federal funds rate from 5.25 percent in September 2007 to a range of 0-0.25 percent in December 2008, with the majority of the drop taking place between January and March 2008 and September and December 2008. The significant drop in those periods represented a significant downgrading in the economic outlook, as well as increasing downside risks to output and inflation (including the risk of deflation).
By December 2008, the federal funds rate had reached its effective lower bound, and the FOMC had begun to utilize its policy statement to provide future guidance for the rate. The phrasing mentioned keeping the rate at historically low levels “for some time” and later “for an extended period” (Board of Governors 2008). (Board of Governors 2009a). The goal of this guidance was to provide monetary stimulus through lowering the term structure of interest rates, raising inflation expectations (or lowering the likelihood of deflation), and lowering real interest rates. With the sluggish and shaky recovery from the Great Recession, the forward guidance was tightened by adding more explicit conditionality on specific economic variables such as inflation “low rates of resource utilization, stable inflation expectations, and tame inflation trends” (Board of Governors 2009b). Following that, in August 2011, the explicit calendar guidance of “At least through mid-2013, the federal funds rate will remain at exceptionally low levels,” followed by economic-threshold-based guidance for raising the funds rate from its zero lower bound, with the thresholds based on the unemployment rate and inflationary conditions (Board of Governors 2012). This forward guidance is an extension of the Federal Reserve’s conventional approach of influencing the funds rate’s current and future direction.
The Fed pursued two more types of policy in addition to forward guidance “During the Great Recession, unorthodox” policy initiatives were taken. Credit easing programs, as explored in more detail in “Federal Reserve Credit Programs During the Meltdown,” were one set of unorthodox policies that aimed to facilitate credit flows and lower credit costs.
The large scale asset purchase (LSAP) programs were another set of non-traditional policies. The asset purchases were done with the federal funds rate near zero to help lower longer-term public and private borrowing rates. The Federal Reserve said in November 2008 that it would buy US agency mortgage-backed securities (MBS) and debt issued by housing-related US government agencies (Fannie Mae, Freddie Mac, and the Federal Home Loan banks). 1 The asset selection was made in part to lower the cost and increase the availability of finance for home purchases. These purchases aided the housing market, which was at the heart of the crisis and recession, as well as improving broader financial conditions. The Fed initially planned to acquire up to $500 billion in agency MBS and $100 billion in agency debt, with the program being expanded in March 2009 and finished in 2010. The FOMC also announced a $300 billion program to buy longer-term Treasury securities in March 2009, which was completed in October 2009, just after the Great Recession ended, according to the National Bureau of Economic Research. The Federal Reserve purchased approximately $1.75 trillion of longer-term assets under these programs and their expansions (commonly known as QE1), with the size of the Federal Reserve’s balance sheet increasing by slightly less because some securities on the balance sheet were maturing at the same time.
However, real GDP is only a little over 4.5 percent above its previous peak as of this writing in 2013, and the unemployment rate remains at 7.3 percent. With the federal funds rate at zero and the current recovery slow and sluggish, the Federal Reserve’s monetary policy plan has evolved in an attempt to stimulate the economy and meet its statutory mandate. The Fed has continued to change its communication policies and implement more LSAP programs since the end of the Great Recession, including a $600 billion Treasuries-only purchase program in 2010-11 (often known as QE2) and an outcome-based purchase program that began in September 2012. (in addition, there was a maturity extension program in 2011-12 where the Fed sold shorter-maturity Treasury securities and purchased longer-term Treasuries). Furthermore, the increasing attention on financial stability and regulatory reform, the economic consequences of the European sovereign debt crisis, and the restricted prospects for global growth in 2013 and 2014 reflect how the Great Recession’s fallout is still being felt today.
Has the Great Depression been totally recovered?
However, most people did not fully recover until the late 1930s or early 1940s. By 1939, the United States was deemed to have fully recovered from the Great Depression.
Is the economy back on track after Covid?
Economic growth has outperformed consensus predictions made at the start of the pandemic when the economy touched bottom in the second quarter of 2020. As a result, real GDP topped its pre-pandemic level in the second quarter of 2021. With the ongoing effects of the fiscal stimulus passed by Congress in 2020 and 2021, pent-up demand from consumers for face-to-face services, and labor market and asset price strength, real GDP appears on track to rise at a rapid pace of around 6% in 2021. To be sure, the Delta variation puts that projection in jeopardy. Consumer purchasing and general economic activity were impressively robust even in the early phases of the epidemic, when people had significantly less information and mitigating tools.
The CBO’s upward revisions to its predictions reflect the surprise strength of the economy and the improvement in expectations (shown in figure 1). The amount of GDP in the third quarter of 2020 was 4.8 percent higher than the CBO’s prediction at the start of the quarter. Furthermore, since July 2020, the CBO has revised up estimated GDP for 2023 by roughly 7%, resulting in a projected GDP level for the end of 2023 that is now 2% higher than the pre-pandemic forecast. Nonetheless, the cumulative deficit in real production compared to pre-pandemic projections is anticipated to be around $400 billion in 2012 dollars by 2023. (CBO 2020a, 2021c). It’s worth noting that the CBO’s predictions show a soft landing, with real GDP only growing modestly by late 2022. It’s possible that the slowdown may be more abrupt and unpleasant than those estimates suggest.
Fact 2: The sharp decline in employment in spring 2020, which was largely concentrated in the services sector, has only partially reversed.
Figure 2 depicts the percent change in overall employment from the peak month preceding recent economic downturns to the month when employment returned to its previous business cycle high. Across the job market, employment is still 5.3 million lower than it was in February 2020, and nearly 9 million lower than it was before the outbreak.
Employment reductions in the leisure and hospitality sector accounted for nearly 40% of the total 22 million jobs lost from February to April 2020. In contrast, since then, a partial rebound in that industry has supported employment growth. Monthly employment increased by more than 700,000 on average from February to July of this year. However, in August, the pace slowed substantially. The pandemic’s comeback certainly slowed the rebound in the leisure and hospitality industry, which had no net job gains in August. Employment in that sector is still down 1.7 million jobs since February 2020.
In comparison to past recessions, the COVID-19 recession has been particularly harsh for the services sector. Consider the average outcomes of the four recessions from 1981 to 2019, 18 months after they began: employment in the service sector was 1% lower than it had been before the recession, while employment in the goods sector was 10% lower. In comparison, employment in the service sector was still 4% lower in August 2021 than it was in February 2020, while employment in the products sector was 3% lower.
Fact 3: Millions of workers are no longer eligible for Unemployment Insurance.
In certain areas, enhanced UI will expire in the summer of 2021, whereas in others, it will end in the first week of September 2021. That set of regulations dramatically boosted eligibility for workers who were not eligible for regular UI (Pandemic Unemployment Assistance), increased the amount of weeks a worker may receive UI (Pandemic Emergency Unemployment Compensation), and raised the generosity of benefits (Federal Pandemic Unemployment Compensation ). Only 30% of workers were eligible for unemployment compensation prior to the CARES Act, which established PUA, PEUC, and FPUC.
Weekly ongoing UI claims for standard UI benefits and Extended Benefits, which automatically extends weeks of eligibility based on a state’s economic situation, as well as claims for emergency programs: PUA and PEUC, are superimposed on the total number of unemployed workers in Figure 3.
It’s worth noting that the unemployment rate greatly underestimates the number of people who lost their jobs as a result of the pandemic. A person must be actively looking for employment to be classified as legally jobless; yet, millions of people have essentially exited the labor force since March 2020 and were eligible for the extended UI benefits. There was a gap of more than 5.5 million workers in the job market who were unemployed but not receiving UI after the emergency programs expired. We expect the difference to narrow just little by the end of the year.
Fact 4: The number of job openings and the number of workers quitting their jobs is higher now than in the past 20 years.
Despite the fact that job vacancies are at their greatest level since the end of 2000 (the most recent statistics available), many factors are limiting employment growth. One factor is that the number of people quitting their jobs each month has reached an all-time high. Because workers are more inclined to switch occupations in a strong labor market, the quit rate often changes with the job opening rate, as seen in Figure 4. Furthermore, the mix of labor demand is shifting in the current context, and workers may be taking time off from temporary positions taken during the pandemic. Record job openings, sluggish job matching, and low labor force participation have all combined to put downward wage pressure on workers, especially those in the service industry, younger workers, and those with less formal education.
Aside from the low rate of job matching, the lack of improvement in the labor force participation rate, which is the percentage of the population that works or is actively looking for employment, is also concerning. Between February and April of last year, when roughly 8 million people exited the workforce, this figure plummeted from 63 percent to 60 percent. By June 2020, the participation rate had regained almost halfway, but has remained stubbornly low since then.
Fact 5: Even with recent jumps in inflation, lower income workers are seeing increases in real wages.
Wage inflation has been excellent news, especially for low-wage workers and those in certain industries. Wages in the bottom quartile of the wage distribution are risen 7.0 percent from pre-pandemic levels, or 4.6 percent annually, as illustrated in figure 5. That rate of growth is comparable to what that group saw in 2019, when the job market was thought to be relatively tight. Wage growth has been particularly substantial in several industries. For example, average hourly earnings in the leisure and hospitality sector have increased nearly twice as fast as the total private industry average over the last 12 months. Retail commerce, transportation and warehousing, and financial operations are all enjoying considerable increases in hourly earnings.
Workers’ purchasing power is not increasing as quickly as nominal salaries due to recent increases in the rate of inflation. From March to June 2021, actual wages fell as a result of recent price hikes. These decreases somewhat offset increases in real wages for wage earners in the bottom quartile early in the epidemic, when inflation was low and nominal wages were rising. Real wages for that group accelerated considerably in July and August. Overall, real earnings for the poorest quartile increased by 2.4 percent, or 1.6 percent per year, from February 2020 to August 2021. This is significantly lower than the 2.4 percent annual rate of real pay growth seen in the bottom quartile in 2019. Furthermore, in contrast to a 0.8 percent increase in 2019, actual salaries for individuals in the top quartile are essentially unchanged.
Fact 6: Post-pandemic, income after government taxes and transfers, as well as household saving, have been above their recent trends.
In 2020 and thus far in 2021, disposable personal income (DPI, or total aftertax income) was larger than it would have been if DPI had merely grown at its five-year trend rate. Since the beginning of the epidemic, DPI has been higher than trend by a total of $1.4 trillion.
Household savings have risen as a result of huge increases in DPI and constrained services spending during the pandemic. From March 2020 through April this year, the rate of saving was larger than it had been in the previous four decades in every month; in some months, it was nearly double the record postWorld War II peak. In total, households had $2.5 trillion more in savings than they would have had DPI and spending risen at trend rates in the five years before to the pandemic. Furthermore, property and stock market prices have risen dramatically, resulting in significant gains in household wealth. Those funds will be used to fund the unmet demand for foregone spending. Households will eventually see increased savings and wealth as financial resources to sustain long-term, reasonably consistent consumer expenditure.
Fact 7: Fiscal support led to a reduction in poverty in 2020.
Poverty climbed from 10.5 percent to 11.4 percent between 2019 and 2020, according to the Official Poverty Measure (OPM). The percentage of the US population living in poverty, as assessed by the Supplemental Poverty Measure (SPM), decreased from 12 percent to 9 percent in 2020 after accounting for the massive economic support offered to households (figure 7). While SPM-measured poverty is normally lower than OPM for children, SPM-measured poverty was lower than OPM for the first time in 2020.
The increase of unemployment compensation and checks to households were the two policies that had the most substantial effects in comparison to previous years since they were the most different from previous policy. SPM poverty would have grown to 12.7 percent instead of declining to 9.1 percent if Congress had not enacted relief for families.
Another factor contributing to the reduction in poverty was the relatively significant salary growth seen by those at the bottom of the income distribution who stayed working (see fact 5). Those salary increases followed robust wage growth in 2018 and 2019, when the tight labor market favored lower-paid workers.
In 2021, ongoing fiscal supportparticularly full refundability and increases in the child tax credit, as well as increases in the maximum benefit of the Supplemental Nutrition Assistance Program (SNAP)along with continued labor market recovery should help to pull households out of poverty. Making permanent some of the actions undertaken to combat the COVID-19 recession will allow for sustained progress in lowering post-tax-and-transfer poverty as assessed by the SPM.
Fact 8: To date, 36 states have made progress in catching up on delinquent rent and mortgage payments.
In the spring of 2020, politicians put in place numerous relief programs to assist Americans struggling to make mortgage and rent payments in the midst of a significant contraction in labor income. These initiatives began with foreclosure and eviction moratoria and eventually expanded to include financial assistance.
Delinquent mortgage borrowers who had a federally backed mortgage, which includes mortgages backed by the Federal Housing Administration, Veterans Administration, Fannie Mae, and Freddie Mac, and were experiencing economic hardships as a result of the pandemic, were automatically eligible for forbearance through September 30, 2021. Mortgage servicers, who are normally compelled to make payments to investors regardless of whether borrowers are late, have received assistance from the government. According to the Federal Reserve Bank of New York, forbearance plans disproportionately benefited low-income borrowers, particularly those with FHA-insured loans and those who lived in low-income areas (Haughwout, Lee, Scally, and van der Klaauw 2021). In addition, the American Rescue Plan, enacted by Congress, offered over $10 billion to homeowners who were behind on their mortgage and utility payments.
Although some states have extended such safeguards, the federal eviction moratorium expired in August 2021. The federal government has set aside $46.5 billion to assist renters in making back payments as well as landlords who are owed such amounts. Even with recent US Department of the Treasury (2021) recommendations to speed delivery, state and local grantees had only provided $5.1 billion of the first $25 billion allotted for emergency rental assistance through July 2021, according to news reports (Siegel 2021). More than 60% of households receiving aid in the first quarter of 2021 had household incomes that were less than 30% of normal incomes in their geographic area.
Nonetheless, stronger fiscal support and a partial labor market recovery have contributed to a reduction in the number of persons who are behind on their payments. From each state’s high to the most recent data spanning July and August, Figure 8 indicates how much progress has been made in catching up on rent or mortgage payments. Between December 2020 and March 2021, three-quarters of states experienced their greatest rate of missed rent or mortgage payments. Since peaking, the percentage of residents reporting missed rent or mortgage payments has decreased by statistically significant levels in 36 states.
Fact 9: The strength in durable goods spending and weakness in spending on consumer services stands in sharp contrast to previous recoveries.
Together, social alienation and strong government support for households resulted in a boom in durable goods spending while households cut back on services spendinga marked deviation from typical recession behavior. Overall real spending on goods fell 13% from February to April 2020, as shown in figure 9a, but quickly recovered and had surpassed its pre-pandemic level by June. Vehicles, household furniture, and leisure equipment were among the items purchased in 2021; after accounting for inflation, purchases of those durable goods had averaged 25% greater than pre-pandemic spending. During the pandemic, however, spending on servicesmany of which were face-to-face transactions like live entertainment and dining at restaurantsfell sharply. In the spring of 2020, real services spending fell by more than 20%, and it has yet to rebound to pre-pandemic levels.
These trends differ from those seen in previous recessions. During most previous recessions, spending on durable goods remained depressed for an extended period, as in the case of the Great Recession, when goods expenditures were 7% below their pre-recession peak 18 months after the recovery began. Furthermore, as shown in Figure 9b, expenditure on services momentarily plateaued in the first year of recovery in each of the previous three recessions before resuming increase. However, in none of these previous recessions did services fall below their pre-recession levels for an extended length of time, highlighting the COVID-19 recession’s distinctiveness.
As individuals resume routine activities, demand has shifted back toward services in recent months. From March to July, goods purchases fell slightly, while service spending surged by 3%; in particular, expenditure on live entertainment, hotels, and public transportation increased by 35% in those four months.
Fact 10: Retail inventories are unsustainably low.
Much of the consumer demand for goods has been fulfilled by inventory drawdowns through August 2021. The retail inventory-to-sales ratio increased at the start of the epidemic, when spending plunged, as seen in figure 10. However, the ratio has dropped dramatically since then. This is especially true in the car industry, where chip shortages have hampered manufacturing. Production has been insufficient to meet demand even outside of that sector. Orders that haven’t been filled and delivery times that haven’t been met are on the rise across the manufacturing industry. Disruptions in global supply chains have been a persistent stumbling block, particularly backlogs at ports, which have driven up shipping costs to historic highs.
On the one hand, manufacturing capacity utilization has nearly restored to pre-pandemic levels. On the other hand, historical patterns and recent manufacturer surveys imply that once demand returns, manufacturers will expand utilization well beyond that level to replenish stockpiles.
In addition to inventory investments, survey data suggests that capacity and productivity investments are on the rise. Since the second quarter of 2020, private investment in equipment and structures has partially recovered, but has not yet restored to pre-pandemic levels. Investment in business equipment had recovered as a share of potential output as of the first quarter of 2021, although more investment is needed to make up for lost investment during the epidemic. Investment in residential structures has more than compensated for a resurgence in structure investment; in fact, residential structure investment as a percentage of output has returned to levels not seen since 2007. Nonresidential structural investment, on the other hand, continues to fall as a percentage of potential output.
Fact 11: There were more new business applications and fewer bankruptcies in 2020 and 2021 than in 2018 and 2019.
Newly formed firms appear to be a significant source of the goods and services that families require. Figure 11a depicts new business applications from enterprises classified by the Census Bureau as having a high proclivity to hire people. Since the agency began tracking the series in 2004, we have seen the highest amount of applications since the summer of 2020. In the aftermath of the pandemic, applications may have indicated new commercial prospects. The increase in total new applications is concentrated in online retail, which accounts for a third of all new applications, and service sector companies, which saw some of the worst job losses early last year (Haltiwanger 2021).
Due in part to financial support like the Paycheck Protection Program, which granted forgiven loans to small and medium-sized enterprises, fewer businesses have collapsed in the last year and a half than had been expected. In Figure 11b, the total number of commercial bankruptcies during the last four years is compared. In total, there were 17% fewer bankruptcies in 2020 than in 2019, and 2021 is on course to have the fewest commercial bankruptcy filings since at least 2012. (when the data became available). In particular, Chapter 7 and Chapter 13 filings, which reflect asset liquidation and sole proprietorships, respectively, were 16 percent and 45 percent lower in 2020 than in 2019. In contrast, Chapter 11 filings, which have generally reflected large-firm reorganizations, increased by 29% in 2020. That increase is also likely due to laws passed in February 2020 and then expanded through the CARES Act, which let smaller businesses to restructure under Chapter 11 and thus stay in operation.
When did the United States get out of the Great Recession?
The Dow Jones Industrial Average (DJIA), which had lost more than half of its value since its peak in August 2007, began to recover in March 2009 and broke its 2007 high four years later in March 2013. The situation was less pleasant for employees and households. Unemployment peaked at 10% in October 2009, then fell back to 5% in 2015, over eight years after the crisis began. It wasn’t until 2016 that real median household income surpassed pre-recession levels.
Is there going to be a recession in 2021?
Unfortunately, a worldwide economic recession in 2021 appears to be a foregone conclusion. The coronavirus has already wreaked havoc on businesses and economies around the world, and experts predict that the devastation will only get worse. Fortunately, there are methods to prepare for a downturn in the economy: live within your means.
Who is responsible for the 2008 Great Recession?
The Lenders are the main perpetrators. The mortgage originators and lenders bear the brunt of the blame. That’s because they’re the ones that started the difficulties in the first place. After all, it was the lenders who made loans to persons with bad credit and a high chance of default. 7 This is why it happened.
What caused the recession of 1981?
The early 1980s recession was a severe economic downturn that hit most of the world between the beginning of 1980 and the beginning of 1983. It is largely regarded as the worst economic downturn since World War II. The 1979 energy crisis, which was mostly caused by the Iranian Revolution, which disrupted global oil supplies and caused dramatic increases in oil prices in 1979 and early 1980, was a major factor in the recession. The sharp increase in oil prices pushed already high inflation rates in several major advanced countries to new double-digit highs, prompting countries like the United States, Canada, West Germany, Italy, the United Kingdom, and Japan to tighten their monetary policies by raising interest rates to keep inflation under control. These G7 countries all experienced “double-dip” recessions, with small periods of economic contraction in 1980, followed by a brief period of expansion, and then a steeper, lengthier period of economic contraction beginning in 1981 and concluding in the final half of 1982 or early 1983. The majority of these countries experienced stagflation, which is defined as a condition in which interest rates and unemployment rates are both high.
While some countries had economic downturns in 1980 and/or 1981, the world’s broadest and sharpest decrease in economic activity, as well as the highest increase in unemployment, occurred in 1982, which the World Bank dubbed the “global recession of 1982.”
Even after big economies like the United States and Japan emerged from the recession relatively quickly, several countries remained in recession until 1983, and high unemployment afflicted most OECD countries until at least 1985. Long-term consequences of the early 1980s recession included the Latin American debt crisis, long-term slowdowns in the Caribbean and Sub-Saharan African countries, the US savings and loans crisis, and the widespread adoption of neoliberal economic policies throughout the 1990s.
How long did the economy take to recover after the financial crisis of 2008?
Only in the calendar year 2009 did the Great Recession meet the IMF’s criteria for being a worldwide recession. According to the IMF, a decrease in yearly real world GDP per capita is required. Despite the fact that all G20 countries, accounting for 85 percent of global GDP, utilize quarterly GDP data to define recessions, the International Monetary Fund (IMF) has chosen not to declare or quantify global recessions based on quarterly GDP data in the absence of a complete data set. The seasonally adjusted PPPweighted real GDP for the G20zone, on the other hand, is a good predictor of global GDP, and it was measured to have declined directly quarter on quarter over the three quarters from Q3 2008 to Q1 2009, which more properly marks when the global recession began.
The recession began in December 2007 and ended in June 2009, according to the National Bureau of Economic Research (the official judge of US recessions). It lasted eighteen months.
Is another Great Depression on the horizon?
ITR Economics has predicted that a second Great Depression will emerge in the 2030s for many years. The path to the Great Depression will be significant in and of itself, with numerous opportunities and changes presented. As we all want to optimize earnings and enterprise value, business leaders must begin planning for such changes today.
What trends are influencing this prediction? What should businesses do to prepare for the 2020s? Is there anything that could cause this forecast to change? Check out our resources to discover more about the global impact of this economic catastrophe.