- A recession is a period of falling economic performance that lasts several months and affects the entire economy.
- Businesses, investors, and government officials monitor a variety of economic indicators that can help anticipate or confirm the onset of recessions, but the National Bureau of Economic Research (NBER) is the one who officially declares them.
- To explain how and why recessions happen, a variety of economic theories have been created.
What happens when the economy is in a slump?
- A recession is a period of economic contraction during which businesses experience lower demand and lose money.
- Companies begin laying off people in order to decrease costs and halt losses, resulting in rising unemployment rates.
- Re-employing individuals in new positions is a time-consuming and flexible process that faces certain specific problems due to the nature of labor markets and recessionary situations.
What is the impact of a recession on the typical person?
When manufacturing slows, demand for products and services falls, financing tightens, and the economy enters a recession. People have a poorer standard of life as a result of job insecurity and investment losses.
What happens when the economy is in a slump?
Understanding the Recovery of the Economy Following a recession, the economy adjusts and recovers some of the gains that were lost during the downturn. When growth accelerates and GDP begins to move toward a new peak, the economy shifts to a real expansion.
Is a downturn beneficial to the economy?
- The economy slows, unemployment rises, and businesses fail during these periods of recession.
- A recession, on the other hand, may have advantages, such as weeding out underperforming businesses and lowering asset sale prices.
- Inappropriate government policies can minimize or eliminate many of the benefits of the recession.
In a downturn, who benefits?
Question from the audience: Identify and explain economic variables that may be positively affected by the economic slowdown.
A recession is a time in which the economy grows at a negative rate. It’s a time of rising unemployment, lower salaries, and increased government debt. It usually results in financial costs.
- Companies that provide low-cost entertainment. Bookmakers and publicans are thought to do well during a recession because individuals want to ‘drink their sorrows away’ with little bets and becoming intoxicated. (However, research suggest that life expectancy increases during recessions, contradicting this old wives tale.) Demand for online-streaming and online entertainment is projected to increase during the 2020 Coronavirus recession.
- Companies that are suffering with bankruptcies and income loss. Pawnbrokers and companies that sell pay day loans, for example people in need of money turn to loan sharks.
- Companies that sell substandard goods. (items whose demand increases as income decreases) e.g. value goods, second-hand retailers, etc. Some businesses, such as supermarkets, will be unaffected by the recession. People will reduce their spending on luxuries, but not on food.
- Longer-term efficiency gains Some economists suggest that a recession can help the economy become more productive in the long run. A recession is a shock, and inefficient businesses may go out of business, but it also allows for the emergence of new businesses. It’s what Joseph Schumpeter dubbed “creative destruction” the idea that when some enterprises fail, new inventive businesses can emerge and develop.
- It’s worth noting that in a downturn, solid, efficient businesses can be put out of business due to cash difficulties and a temporary decline in revenue. It is not true that all businesses that close down are inefficient. Furthermore, the loss of enterprises entails the loss of experience and knowledge.
- Falling asset values can make purchasing a home more affordable. For first-time purchasers, this is a good option. It has the potential to aid in the reduction of wealth disparities.
- It is possible that one’s life expectancy will increase. According to studies from the Great Depression, life expectancy increased in areas where unemployment increased. This may seem counterintuitive, but the idea is that unemployed people will spend less money on alcohol and drugs, resulting in improved health. They may do fewer car trips and hence have a lower risk of being involved in fatal car accidents. NPR
The rate of inflation tends to reduce during a recession. Because unemployment rises, wage inflation is moderated. Firms also respond to decreased demand by lowering prices.
Those on fixed incomes or who have cash savings may profit from the decrease in inflation. It may also aid in the reduction of long-term inflationary pressures. For example, the 1980/81 recession helped to bring inflation down from 1970s highs.
After the Lawson boom and double-digit inflation, the 1991 Recession struck.
Efficiency increase?
It has been suggested that a recession encourages businesses to become more efficient or go out of business. A recession might hasten the ‘creative destruction’ process. Where inefficient businesses fail, efficient businesses thrive.
Covid Recession 2020
The Covid-19 outbreak was to blame for the deep recession of 2020. Some industries were particularly hard hit by the recession (leisure, travel, tourism, bingo halls). However, several businesses benefited greatly from the Covid-recession. We shifted to online delivery when consumers stopped going to the high street and shopping malls. Online behemoths like Amazon saw a big boost in sales. For example, Amazon’s market capitalisation increased by $570 billion in the first seven months of 2020, owing to strong sales growth (Forbes).
Profitability hasn’t kept pace with Amazon’s growth in sales. Because necessities like toilet paper have a low profit margin, profit growth has been restrained. Amazon has taken the uncommon step of reducing demand at times. They also experienced additional costs as a result of Covid, such as paying for overtime and dealing with Covid outbreaks in their warehouses. However, due to increased demand for online streaming, Amazon saw fast development in its cloud computing networks. These are the more profitable areas of the business.
Apple, Google, and Facebook all had significant revenue and profit growth during an era when companies with a strong online presence benefited.
The current recession is unique in that there are more huge winners and losers than ever before. It all depends on how the virus’s dynamics affect the business as well as aggregate demand.
How do you get through a downturn?
But, according to Tara Sinclair, an economics professor at George Washington University and a senior fellow at Indeed’s Hiring Lab, one of the finest investments you can make to recession-proof your life is obtaining an education. Those with a bachelor’s degree or higher have a substantially lower unemployment rate than those with a high school diploma or less during recessions.
“Education is always being emphasized by economists,” Sinclair argues. “Even if you can’t build up a financial cushion, focusing on ensuring that you have some training and abilities that are broadly applicable is quite important.”
How long do most recessions last?
A recession is a long-term economic downturn that affects a large number of people. A depression is a longer-term, more severe slump. Since 1854, there have been 33 recessions. 1 Recessions have lasted an average of 11 months since 1945.
What causes a downturn?
A lack of company and consumer confidence causes economic recessions. Demand falls when confidence falls. A recession occurs when continuous economic expansion reaches its peak, reverses, and becomes continuous economic contraction.
What does a recession look like?
There have been five such periods of negative economic growth since 1980, all of which were classified as recessions. The worldwide recession that followed the 2008 financial crisis and the Great Depression of the 1930s are two well-known examples of recession and depression. A depression is a severe and long-term economic downturn.
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 drastically underestimates the number of people who lost their jobs as a result of the outbreak. 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.