Households saved cash and banks amassed capital, but supply shortages are popping up and some employers can’t find workers By Gwynn Guilford and Sarah Chaney Cambon of The WSJ. Some good points about what causes recessions and what usually happens during them (passages in red). Excerpts:"Past recessions typically resulted from a rise in interest rates or a decline in asset values that hurt output, income and employment, sometimes for more than a year, said Gail Fosler, an economist and president of The GailFosler Group LLC. The damage to household finances and financial institutions after the 2007 housing crash led to lost demand that weighed on the economy for years.""In downturns, consumers fearful of losing their jobs or incomes often cut back on
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By Gwynn Guilford and Sarah Chaney Cambon of The WSJ. Some good points about what causes recessions and what usually happens during them (passages in red). Excerpts:
"Past recessions typically resulted from a rise in interest rates or a decline in asset values that hurt output, income and employment, sometimes for more than a year, said Gail Fosler, an economist and president of The GailFosler Group LLC. The damage to household finances and financial institutions after the 2007 housing crash led to lost demand that weighed on the economy for years."
"In downturns, consumers fearful of losing their jobs or incomes often cut back on spending, amplifying the slump. This time, consumer spending in areas unaffected by lockdowns such as autos barely flagged, and to the extent that some consumers did hold back, it was more out of fear of the virus than fear of losing their jobs, a U.S. Census survey conducted throughout the pandemic suggests."
"Analysis of census data by Aaron Sojourner, a labor economist at the University of Minnesota Carlson School of Management, found that for every 100 working-age people vaccinated, 12 are becoming newly employed, on average. Mr. Sojourner said that employment rates were rising more quickly in subpopulations that had faster growth in vaccination rates."
"Usually in the months or years after a recession, the labor market remains slack as job seekers vastly outnumber job openings. High unemployment and weak wage growth hinder consumer spending and discourage businesses from expanding. The longer it takes for spending to rebound, the greater the risk that businesses will fold and workers will leave the labor force, taking with them the human and organizational capital needed to restore growth.
The economy appears to be dodging that vicious cycle. “The fact that it has recovered so quickly has limited the scope for a lot of scarring relative to, say, in the Great Recession,” said Stephanie Aaronson, an economist at the Brookings Institution."
"The coronavirus brought about a faster and bigger monetary and fiscal response than in any previous recession, limiting damage to the economic system and setting the stage for a faster recovery.
The Federal Reserve cut rates, initiated large-scale bond purchases and outlined a new commitment to keeping interest rates near zero until full employment had returned and inflation was headed above its 2% target. Officials say that rates may not rise until 2024. The Fed’s balance sheet surged from $4.2 trillion in early March of 2020 to nearly $7.1 trillion by late May; the increase was less than $1.3 trillion during the previous recession.
Congress acted faster than in previous downturns. It shored up business and household balance sheets through multiple rounds of stimulus payments, expanded unemployment benefits and the Paycheck Protection Program. Congress’s fiscal response to the Covid-19 pandemic will amount to $5.1 trillion, or 4.4% of gross domestic product through 2024, according to the Committee for a Responsible Federal Budget. By comparison, stimulus legislation enacted in the wake of the 2007-09 recession cost roughly $1.8 trillion, or 2.4% of GDP between 2008 and 2012."
"“Often recessions happen because of some sort of imbalance—we have too much housing or too much debt or too much inflation,” said Karen Dynan, an economics professor at Harvard University. When those imbalances start to reverse, the damage to the economy can build on itself, she said. Households and businesses rein in spending, which in turn depresses others’ incomes and leads to further cutbacks.
But few such imbalances existed when the pandemic hit, and fiscal and monetary support staved off broader damage. Households, banks and businesses are emerging in much sounder shape than after previous recessions, Ms. Dynan said.
Saving often rises when recessions hit, as worried households forego purchases and cling to cash, but never this much. Americans were saving at an annualized rate of $2.8 trillion in April—twice as much as more than before the crisis, positioning them to spend lavishly as the economy reopens. That compares with a rate of $734 billion in June 2009, or about $909 billion in 2021 dollars.
While federal relief contributed to some of the surge, so did business restrictions that prevented spending on many services. Higher-wage Americans, who were shielded from the pandemic’s labor-market hit because they are more likely to work remotely, were able to accumulate savings.
The delinquent share of outstanding debt dropped to 3.1% in the first quarter of 2021, the lowest since records began in 1999 according to the Federal Reserve Bank of New York and Equifax. That share compares with 5% at the end of the 2001 recession and 11.1% in 2009. This is in part thanks to forbearance offered through federal coronavirus relief and some lenders which protect borrowers’ credit records from missed or deferred payments.
A surge in startups signals growing confidence among businesses—even amid a wave of small business closures. Filings to start new firms among a subset of owners who tend to employ other workers exceeded 830,000 through early May, a 21% increase over the same period in 2006, the next-highest year.
The financial sector also is in good health. Banks and other lenders were weighed down by bad loans for years in the aftermath of the 2007-09 recession. Now, financial institutions have loss-absorbing capital equal to 16.5% of risk-weighted assets, the highest share since records began in 1996, and well above 12.3% in 2006, the year before the financial crisis began, according to the New York Fed. They are thus poised to lend.
One downside of the fast recovery is that demand is bouncing back faster than supply can keep up, triggering bottlenecks and wage-and-price pressures that normally emerge years into a recovery.
“The power of this spring surge, as I’m calling it, has caught most businesses by surprise,” said Carl Tannenbaum, chief economist at Northern Trust.
Inflation often falls in recessions and early in recoveries, then slowly picks up as the expansion ages. This time, it is rebounding as the economy reopens. Consumer prices excluding food and energy soared 0.9% from March to April, the sharpest one-month increase since 1982.
Inflation is emerging earlier than in previous cycles and stronger wage growth could lead it to remain high, prompting the Federal Reserve to raise interest rates sooner than markets expect, Mr. Knightley said. That could trigger a stock selloff, since currently heady valuations are based in part on extremely low long-term rates. It could also slow growth by dragging down interest rate-sensitive industries like housing.
The Fed will also be closely eyeing job growth, which was much slower-than-expected in April. Economists say lack of child care, fear of the virus and extra unemployment insurance are keeping many workers on the sidelines.
Employers seeking to hire face a relatively small pool of available workers. Between April of last year and March of this year the number of job seekers per job opening plummeted from 5 to just 1.2, much swifter than after the previous two recessions."