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4 Reasons This Downturn Could Be Worse Than the Great Depression

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4 Reasons This Downturn Could Be Worse Than the Great DepressionIt’s Not Just About the Stock Market. Other Economic Measures are Both Telling and Unprecedented.

For many people, the stock market is the economy’s scoreboard. When it goes down things must be bad and when it goes up things must be good. Unfortunately, the stock market was exploding into a bubble before coronavirus showed up largely due to corporate stock buybacks, investor over-confidence, and to put it bluntly—greed.

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It’s Not the Best Economic Indicator

The stock market continues to swing wildly, diving down one day and rocketing up the next. The fact of the matter is the stock market is at best the canary in the coal mine. It can tell you something’s wrong, but it can’t tell you why.

A comparison to the 2008 global financial crisis makes the case. According to Paul Kaplan, the Director of Morningstar Research:

The 2008 global financial crisis was a financial crisis which caused an economic plunge. Now we have an economic plunge caused by a virus creating a financial crisis. The causality is actually going the other way.”

The canary is singing a new song and it’s one that no economist has heard before. Too many economists agree. According to Maria Paola Rana, lecturer in economics and finance at the Salford Business School in northern England,

The economic challenges we are currently experiencing with COVID-19 are unprecedented.”

According to chief economist from research company Capital Economics, Neil Shearing,

This recession is like no other — there are very few parallels we can think of.”

Mark Zandi, chief economist at Moody’s Analytics, said,

This is an economic tsunami. We’re about to see a dizzying decline in economic activity. There’s no analogue to it in the modern era.”

From Recession to Depression

There’s an old saying: “A recession is when your neighbor loses his job, and a depression is when you lose yours.” But economists have some measures for identifying a recession, and how and when they will reluctantly admit to a depression.

According to Ibrahim Shikaki, an assistant professor of economics at Trinity College.

The most common marker of a recession is two consecutive quarters of negative economic growth, as measured by the gross domestic product, or GDP. Depressions entail little to no growth for more than a couple of years, significant increases in unemployment, a fall in production, and a drastic decline in aggregate demand.”

And there you have the 4 measures to watch:

  1. Little to no growth (Gross Domestic Product or GDP)
  2. Significant increases in unemployment
  3. A fall in production (goods and services)
  4. A drastic decline in demand (consumer spending)

Laid Off Worker Wearing Face Mask

Gross Domestic Product (GDP)

A country’s gross domestic product or GDP is the value of all the goods and services the country produces. In 1930, as the Great Depression swept the U.S., GDP shrank by 8.5% and lost another 6.4% in 1931 and another 12.9% in 1932.

For the next quarter of 2020 in the U.S., Federal Reserve Bank of St. Louis President, James Bullard predicts a 50% drop in GDP as a result of the COVID-19 pandemic.

It took 3 years for the U.S. GDP to drop 27.8% during the Great Depression. Bullard is predicting a 50% drop over the next 3 months. 

Even the optimists are facing an unprecedented reality. Goldman Sachs is forecasting a 24% drop next quarter. That’s half of Bullard’s estimate, but no single year of the Great Depression saw a drop in GDP that steep, let alone a drop of 24% in a single quarter.

The most optimistic forecast is from JPMorgan predicting a 14% drop next quarter. That still exceeds the worst year of the Great Depression which saw a drop of 12.9% across the entire year of 1932.

Not to be outdone, Morgan Stanley is predicting a 30.1% decline in GDP next quarter. That amounts to the worst quarterly performance in GDP in 74 years.

There is no good news related to GDP from any credible economists. The prediction squarely puts the U.S. in a depression on the first measure of GDP. For that matter, it puts the world into a depression. According to International Monetary Fund economist Gita Gopinath,

The cumulative loss to global GDP over 2020 and 2021 from the pandemic crisis could be around $9 trillion, greater than the economies of Japan and Germany combined.”

Significant Increases In Unemployment

World Bank economists believe the COVID-19 pandemic will push somewhere between 40 million and 60 million people into poverty. According to the Oxford Economics Think Tank,

Financially, the pandemic will spare no country, with global growth over the entire year set to drop to zero.”

But factors affecting unemployment go beyond zero growth to the fundamental need to create social distance, not only in theaters and sports stadiums but at most places of employment defined as non-essential.

Complicating matters further, consumers are not spending on many goods and services, from new cars to haircuts. The result is growing unemployment. The question is whether it will match or exceed the unemployment rate of the Great Depression.

Peak unemployment during the Great Depression reached 24.9% in 1933, according to the Bureau of Labor Statistics; in 1929, just four years prior, unemployment was just 3.2%.

If that’s a pattern for a depression, the latest unemployment statistics are chilling. This past February, the unemployment rate was 3.5%, according to the Bureau of Labor Statistics (that number does not take into account the COVID-19-related layoffs that have ramped up in earnest recently).

James Bullard of the Federal Reserve Bank of St. Louis did not paint a rosy picture. He feels the U.S. unemployment rate could hit 30% next quarter.

During the Great Depression over the 10 years of 1929 to 1939, unemployment was about 20%. The worst year was 1933 with an unemployment rate of 25%. And once again, the time frames are compelling. 20% over 10 years versus today’s estimate of 30% over 3 months.

The big question is what lies beyond the next quarter. Over 20 million jobs have been lost since this downturn began, and it’s inevitable that more job losses will follow. According to Jeffrey Miron, an economist at Harvard University and the Cato Institute,

We haven’t seen all of the layoffs and all the [business] closures and all the people who are going to end up unemployed yet.”

What remains to be seen is the duration of the unemployment. There are demands and efforts to reopen the economy, but there’s evidence that may not be the solution many hope for.

Coronavirus Morning Consult Survey

This recent survey indicates that most Americans are not anxious to return to the old normal. Trips to grocery stores and pharmacies will no doubt continue as essential services remain open, but the unwillingness of people to frequent anywhere from a movie theater to a clothing store will not only have an adverse effect on employment but consumer spending as well.

A Fall in Production (Goods and Services)

As people continue to stay at home, there have been significant impacts on the manufacture, distribution, and purchase of goods and services.

Before the coronavirus pandemic, food eaten at restaurants accounted for 16% of consumption, according to David Portalatin, NPD Group Inc. food industry advisor. Due to the high price, food away from home accounted for 50% of U.S. food dollars spent.

Now shoppers are making 9% more of their meals at home. “Clearly it’s a dramatic change in overall behavior.”

Imports and the Global Supply Chain

A bigger factor than the effects of social distancing and stay at home lockdowns are the global impacts of COVID-19 on imports of food, home goods, and even pharmaceuticals.

  • 80% of generic prescription medicines in the U.S. are produced in China.
  • Much of the produce in grocery stores (especially in winter) is grown in Central and South America.
  • Manufacturers face critical manpower shortages due to the pandemic and the shipment of raw materials especially from foreign sources may be compromised.
  • Hoarding has stressed the just-in-time supply chain implemented across the U.S. resulting in recurring shortages of basic goods.
  • Factory closures in China and the subsequent impact on supply chains led chief economist from research company Capital Economics, Neil Shearing, to warn last month that the coronavirus threatened the very nature of globalization itself.

Shearing summed it up with one statement,

What made the Great Depression so great was that there was a big fall in output and then it endured, for a long period of time.”

A Drastic Decline in Demand (Consumer Spending)

Consumer spending is the engine that drives the economy. Consumer spending makes up about 70% of the U.S. economy, so any disruption would have dire effects on growth. That spending has shifted dramatically.

Spending is now directed to basic necessities and “essential” goods and services. You can still get gas at the gas station, but forget the latest fashions and manicures, and who wants to go house hunting with a Real Estate agent right now?

How we spend and what we choose to buy have become highly focused due to a variety of factors.

  • We don’t want to risk going to a store and getting infected for a common luxury or single item.
  • We’re worried about our job, investments, kids, the future, and would rather save than spend.
  • We don’t want to incur any debt given unknowns related to our future employment or the current and future state of any investments.

That doesn’t mean people are simply going to stop spending. According to Impact Data Source, spending will go up in some categories and down in others.

Out Of Business Coronavirus Sign

Increased Spending

  • Groceries
  • Utilities
  • Internet, cable and wireless services
  • Mortgage or rent
  • Home cleaning supplies
  • Healthcare
  • Insurance
  • Books
  • Education
  • Tobacco

Decreased Spending

  • Real estate
  • Auto and truck purchases
  • Entertainment
  • Personal care products
  • Hotels and resorts
  • Air travel
  • All other public transportation
  • Apparel
  • Car rentals
  • Gasoline
  • Vehicle expenses
  • Household furnishings and equipment
  • Restaurants

What becomes apparent from the data is that consumer spending has moved away from some big-ticket items to fundamental needs and necessities. As long as spending is driven by functional considerations, there is the possibility that the economy will see continually diminished growth.

It’s All a Question of Time

How long will the pandemic last? The current science indicates that until a vaccine is developed, the virus will not be contained and current behaviors will continue. That would indicate that the economic factors predicted for the next quarter will not improve for a year and a half.

It’s also unlikely the economy will magically rebound to previous levels a year and a half from now. The only thing that seems for certain is that the statistical measures that define a depression appear to have already been exceeded and will most likely continue into 2021.

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9 Comments

  1. Elbert Jones on July 5, 2020 at 3:40 pm

    Americans companies need to start manufacturing stuff in THE U.S. again. trump should lead by example. all of his clothing line is mainly made OVERSEAS.

  2. Rick Palmer on May 18, 2020 at 2:34 pm

    While some factual material is here , there is also a lot of shall we say “organic fertilizer “.
    Keeping in mind that human beings tend to have agendas , how many of these predictions are being made by people who play the economy, so that they win if it goes down ? Unfortunately greed will prompt some to want to take advantage of everyone else . Hopefully the people will come together as we have done in the past .

    The best thing is to stop pandering to China , bring back American jobs , don’t settle for cheap crap made overseas . Please don’t get me wrong, l am not a paranoid ultra right nutcase. I am a 75 year old that volunteered for the army , did 2 tours in Vietnam, that loves the freedom we have in this country . Do we have some faults , yes , but we still have more freedom here than any other country . And yes l have been to several others , and always glad to come back to the U.S.

  3. Nigel Duncan-Adam on May 18, 2020 at 12:39 pm

    And that load of codswallop is how you spread fear and panic leading to depression and possible suicide the great depression was in a by gone era where news was slow and transportation was the same.

    Even the weather played a part in the depression with dust storms in the agricultural belt farmers are better equipped and vastly more able to produce food people are better informed and more willing to act than those of days gone by when the people in general had great faith in their leaders now America knows better.

    • Rick Palmer on May 18, 2020 at 2:04 pm

      AMEN, AMEN ,AMEN ! The people of America will bounce back . We are an overwhelmingly resilient people . The biggest issue is are the politicians in liberal states going to stand up for their country or continue to only do what they think is best for themselves ?

    • Mensa Graham on May 18, 2020 at 5:44 pm

      You bring back memories of reading the ‘Grapes of Wrath’ way back when. When it got personal it was extremely bad!

      I don’t see the same scenario for a couple of reasons. One is that we do not have the external factors that forced a depression. Two is that I truly think, given we re-elect Trump, that we will begin to manufacture our own ‘stuff’ instead of relying on China. Manufacturing should grow – not rebound.

  4. Mic on May 18, 2020 at 10:35 am

    All of this might be true, especially overseas, but the Trump economic stimulus provisions should help the US economy, avoid a Depression.

    Of course there are a lot of Political points to be made to keep the recovery delayed past the election in Nov and to blame it all on Trump.

    Then there is the fact that we (more than most countries), were protesting so we could go back to work. We have a much stronger work ethic and a bigger consumer demand than most countries. Both of those will support a strong and quick recovery.

    From what I can see,( lots of people out shopping after the lock downs open up). most sectors of the economy will recover quickly.

    Although big ticket items, especially like new autos and homes, may take a little longer to recover.

    So often as Preppers we fall into a negative mindset.This is a bad thing. Survival is always based upon Hope. As soon as Hope is lost, the will to survive follows along right behind it.
    So get out of the habit of looking at the Negative, look at reality and hope for the best.

    • Rick Palmer on May 18, 2020 at 2:11 pm

      Mic,
      Dead on ! Unfortunately we have large cities that are run by people who only have their own self interests at heart . Hopefully voters will wise up and take a stand to get people in office that will think in terms off what is best for the people first.

    • Mensa Graham on May 18, 2020 at 5:48 pm

      I am from Georgia. We are mostly open and our infection count is going down. I’m going out on a limb and saying that it appears as though Corona virus is dying out even on its own.

      Now that being said I think the disease will still be transmitted by the same routes it did so far. Mass transit. Places like NYC and others that rely heavily on mass transit are so F’d. If this virus isn’t dying on its own NYC is totally screwed for the future. Good by big cities!

      • Josephine on August 5, 2020 at 10:39 am

        I live in Georgia as well. Our infection rates have gone up 34% since the reopening. Our hospitalization rate has increased 24% in the last 2 weeks. Georgia is now a much bigger hotspot than places like Arizona.

        Even in rural Georgia where I live, we’ve had a 42% increase in hospitalizations. My spouse is older than me and has COPD — probably from working in a sawmill his whole life. I don’t get what the problem is about masks. If by me wearing one and others wearing them I lessen the chance of bring Covid-19 home, that’s a very good thing. And my husband is less likely to get sick.

        If we have mandatory evacuation orders what’s the issue about doing something that may save a 73 year old Silver Star recipient?

        No COVID-19 is not going away.

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