How to Think About the Covid Recession
Americans everywhere remain concerned about getting past what feels like a never-ending litany of Covid-19-induced economic problems, from out-of-stock products to inflation and continued fears of exposure to illness when going out. When will it finally end?
Professional economic forecasters are struggling to answer this question.
Many are turning to previous recessions as a guide to how things will go. But one of the most important things to understand is that while the pandemic created a collapse — and for some even an economic disaster — it really wasn’t a recession in the normal sense.
That sounds strange. Indeed, the arbiter of these things, the National Bureau of Economic Research, declared that the United States had a two-month recession in March and April 2020.
But past business cycles look nothing like what the United States has gone through in the pandemic, so they are the wrong place to find lessons for where things are going now.
The causes of recessions vary, but they follow a basic pattern: The hardest-hit industries are the cyclically sensitive sectors where demand dries up. Those sectors include sales of big-ticket items like furniture, construction materials, appliances and cars, as the Bureau of Labor Statistics and others have documented. These are purchases that can be delayed when times are bad. Recoveries begin when demand returns to these cyclical industries, when prices fall enough or interest rates get cut enough or pent-up needs build sufficiently for demand to return.
Recessions have much smaller impacts on noncyclical industries like hospitals, nursing care, gas and electric utilities, and the like. Demand there is steady regardless of the cycle. Some service sector industries, like education, see demand rise in recessions.
None of these familiar patterns held during the pandemic economic collapse. Spending on consumer durables went up. Indeed, sales of TVs with screens larger than 65 inches rose 77 percent from April to June 2020, compared to the year before, as the bottom dropped out of the economy. Watching TV was one of the few things people could still do during lockdown. Demand for other cyclical industry goods like housing and construction materials boomed too.
During the pandemic downturn, Americans also reversed a decades-long trend toward spending on services rather than goods. For 75 years, consumers in the United States have been spending less and less of their money on physical goods (from 60 percent of spending in the 1940s to 31 percent in 2019). Counter to this trend (and contrasting with previous recessions), the share of consumer spending on physical goods actually jumped during the pandemic to the highest level in 17 years and among the biggest jumps ever recorded.
In other words, this was a recession like no other in recent memory. The pandemic downturn was driven by all those industries that are supposed to be recession-proof — trips to the dentist, electricity usage in offices and malls, and so on. And the normally countercyclical education sector had big enrollment drops despite the bad economy.
Of course, this was because of the coronavirus. But it means that the recovery from past recessions doesn’t really say much about how the recovery will go now. Everyone is trying to predict when there will be a rebound in service sector industries that normally don’t decline, like health care, child care and education. That’s really more of a question about how quickly we can control the spread of the virus than it is about recession fundamentals.
At the same time, the unusually large demand for physical goods in the United States and other rich countries has exceeded supply, driving up inflation and leading to shortages.
So the most important thing to watch if you want to understand the economy is, as has been the case for a year and half now, the progress made against the virus. Related, and also worth watching, is how much Americans spend on goods relative to services. (It was 31 percent in 2019 and has risen to 35 percent now.)
While economic growth in the United States was disappointing in the third quarter of 2021, it could easily turn around if coronavirus case numbers improve. The U.S. employment numbers released on Friday were encouraging. New Covid-19 cases are down significantly and millions of children are now eligible for vaccination, which could reduce infection rates even further.
Looking beyond the coming months, though, the most interesting questions aren’t really about recession and recovery. They center on whether any of the pandemic changes will last. Some companies, for example, are now trying to hold more inventory and keep their supply chains local to avoid disruption. Many people are working partly from home and some have moved to the exurbs. But how long before they rediscover why we ended up with lean manufacturing and a global supply chain in the first place? And Americans are already moving back to cities.
My view is that reversals of longstanding economic trends are not likely to become permanent. Once the economic memory of the pandemic has faded, the old lessons from the regular business cycle will probably become relevant once more. Until that happens, though, best to get in line for a vaccine booster and keep your eye on the case numbers.
Austan Goolsbee (@Austan_Goolsbee) is a professor of economics at the University of Chicago Booth School of Business and was chairman of the Council of Economic Advisers from 2010 to 2011.
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