We recall how the Covid pandemic upended our lives and economy – as well as those of people around the world.
The largely mandated shutdowns in early 2020 caused a devastating reduction of economic activity and huge job losses not seen since the Great Depression.
The downturn came as government restrictions and citizens’ fear of the virus kept people at home and businesses and schools shut – both here and abroad.
Workers in jobs that paid lower wages and required face-to-face encounters with consumers – in the hospitality and retail industries, for example – were especially affected.
Those facing massive employment and earnings losses were disproportionately women, workers of color, workers without a college degree, and foreign-born workers.
Congress, the White House and the Federal Reserve enacted significant fiscal and monetary relief measures in 2020 and 2021 to prevent the economy from facing a depression and to relieve hardships faced by everyday Americans.
Most economists agree that those actions helped fuel an economic recovery starting as early as May 2020, making the deepest recession in the post-World War II era also the shortest.
According to the National Bureau of Economic Research, the consensus arbiter of official business-cycle dating, the economic downturn lasted just two months – March and April 2020.
On the one hand, the CBPP says the expansion in economic activity in the recovery from the pandemic recession was stronger and quicker than initial forecasts.
Those cautious projections may have been tainted by the Great Recession of 2007-2009, which at the time was the worst recession since the Great Depression.
The recovery from which also was disappointingly slow, with high unemployment – in the range of 6-9% – lasting several years after the economy began to grow (see chart above).
By Dave Allen for Discount Gold & Silver
We recall how the Covid pandemic upended our lives and economy – as well as those of people around the world.
The largely mandated shutdowns in early 2020 caused a devastating reduction of economic activity and huge job losses not seen since the Great Depression.
The downturn came as government restrictions and citizens’ fear of the virus kept people at home and businesses and schools shut – both here and abroad.
Workers in jobs that paid lower wages and required face-to-face encounters with consumers – in the hospitality and retail industries, for example – were especially affected.
Those facing massive employment and earnings losses were disproportionately women, workers of color, workers without a college degree, and foreign-born workers.
Congress, the White House and the Federal Reserve enacted significant fiscal and monetary relief measures in 2020 and 2021 to prevent the economy from facing a depression and to relieve hardships faced by everyday Americans.
Most economists agree that those actions helped fuel an economic recovery starting as early as May 2020, making the deepest recession in the post-World War II era also the shortest.
According to the National Bureau of Economic Research, the consensus arbiter of official business-cycle dating, the economic downturn lasted just two months – March and April 2020.
On the one hand, the CBPP says the expansion in economic activity in the recovery from the pandemic recession was stronger and quicker than initial forecasts.
Those cautious projections may have been tainted by the Great Recession of 2007-2009, which at the time was the worst recession since the Great Depression.
The recovery from which also was disappointingly slow, with high unemployment – in the range of 6-9% – lasting several years after the economy began to grow (see chart above).
A Study in Contrasting Recessions
On the other hand, CBPP points out that the causes of and policy responses to the two recessions couldn’t have been more different.
For one thing, the global financial crisis in 2008 turned a mild recession into the Great Recession, while a global public health crisis brought on the pandemic recession.
For another, as the CBPP adds, the recovery following the Great Recession “was impeded by the lingering effects of a burst housing bubble and banking crisis on households’ income and wealth and on bank lending.”
Those two factors, among others, hampered growth in consumer spending and business investment – two big factors in the size of economic growth.
Fast forward to 2020, the ebbs and flows of the pandemic economy was influenced by virus caseloads and the extent of lockdowns and social distancing measures to address it.
As public health improved, business and consumer activity began to pick up quickly.
Then there was the federal government’s fiscal response to the Great Recession, particularly the Troubled Asset Relief Program (TARP) and the 2009 Recovery Act, which the CBPP notes was “large for its time and effective at arresting an even sharper downturn.”
“But it was neither large enough nor sustained long enough to promote a rapid recovery with stronger job growth,” the chart book adds.
The response to the pandemic recession – including the CARES Act and three other laws enacted in March and April 2020, plus a December 2020 package, and the 2021 American Rescue Plan – was a lot bigger.
Does that mean, as the CBPP suggests, that “policymakers had learned key lessons from the Great Recession experience?”
Probably some, but luck has a place in this discussion as do unintended consequences.
The Fed took similar action in both recessions, cutting its benchmark interest rate for monetary policy effectively to zero and implementing large-scale purchases of government bonds (aka Quantitative Easing).
Without enough fiscal support from Congress, though, the easing of monetary policy fell short of stimulating a quick recovery or raising the inflation rate to the Fed’s policy target of 2% after the Great Recession.
In contrast, the CBPP notes, these policies, together with strong fiscal stimulus, supported a much faster recovery from the pandemic recession.
For more than a decade after the Great Recession and before the pandemic, inflation was just too subdued for the Fed.
It struggled to reach its policy target of 2% inflation, “which it believed was appropriate for the smooth functioning of the economy.”
Then came early 2021. Growing demand for goods and services crashed into severe supply snafus, and inflation exploded, rising far above 2%.
The Fed and many other economists viewed the surge in inflation as temporary, predicting that high inflation would be a “transient” event and that inflation would soon return to around 2%.
Monthly changes in inflation did cool a tad in the summer of 2021 but then rose back to a worryingly high rate, one we hadn’t seen – and experienced! – in four decades.
The annual change in the CPI peaked at 9.1% in June last year as energy prices skyrocketed. Of course, inflation has come down a lot since then and was 3.0% last month.
During the Great Recession’s aftermath, the Fed’s loosening of monetary policy was theoretically consistent with realizing the Fed’s dual-mandated goals of both high employment and also stable prices.
That required them to lower unemployment and raise the inflation rate. That was also the case after the pandemic recession.
But the development of high inflation in 2021 created a more challenging scenario for the Fed and its monetary policy, requiring them to lower inflation while maintaining high employment.
So, the Fed reversed its expansionary policy in March 2022 and began raising its Fed funds rate target – which has gone from a range of 0-.25% to 5-5.25%).
It’s also been reducing its massive holdings of long-term Treasuries and mortgage-backed securities (aka Quantitative Tightening) – the Fed’s balance sheet has fallen from its April 2022 peak of just shy of $9 trillion to $8.3 trillion last week.
Since the onslaught of QT, Fed Chair Jerome Powell and his Band have stressed that they’ll do whatever’s necessary to keep higher inflation from becoming a new normal.
Perhaps more importantly, the CPBB says that “even with strong job growth, challenges remain to achieving a full and equitable recovery and ongoing economic expansion…”
The next Fed policymaking meeting starts next week. As of today, 98% of Fed fund futures traders believe the Fed will raise rates another 25 basis points to 5.25-5.5%.
Count me among that group, although another six weeks of holding rates steady wouldn’t be the end of the world.