A recession caused by illness might not be as bad as the crash of 2008. But the US is still highly vulnerable

Chaos on the stock markets, Europe in crisis, emergency interest-rate cuts from central banks – those with clear memories of the 2008 financial crisis and the crushing recession that followed could be forgiven a shudder of deja vu. But this time it is different – if not necessarily better.

Since the US economy crawled from the wreckage of the last meltdown, it has enjoyed its longest period of expansion in history. US unemployment has hit record lows and stock markets have hit record highs even as Europe has continued to suffer and growth has slowed in China. Plenty of problems remain but, if you squint, the US economy has looked rosy.

Now the Covid-19 pandemic looks set to bring that all to an end. But how badly and for how long? “The tornado is in our backyard,” said Mark Zandi, the chief economist at Moody’s Analytics – and until we know how long that tornado will last, the depth and severity of any recession are hard to predict.

“At this point, this feels much worse than 2008,” Jason Furman, Barack Obama’s former economic adviser, said on Friday. It has hit everyone all at once, unlike the financial crisis, but he too concedes it is all about how long it goes on.

The 2008 crisis caused a recession that rivalled the Great Depression of the 1930s, drove US unemployment up to 10% and burst a housing bubble that was both tragic and almost beyond parody: people with no income, no job and no assets were being given mortgages to buy homes they couldn’t afford. US household debt climbed close to 100% of GDP, according to the Federal Reserve. At the same time, Americans were saving just 3.6% of their income in 2007, leaving them little room to manoeuvre when they lost their jobs or had their wages cut.

This time, the US has learned some lessons. Household debt as a percentage of GDP has fallen sharply since 2008 to 76% of GDP at the end of 2019. The savings rate has risen to 7.9%.

The last financial crisis also led to mass layoffs in construction, banking and property, and spread through the entire economy. This crisis comes as employers are still fighting to hire workers, the banking sector seems secure and the housing market is far from overinflated.

The coming recession – if it happens – is likely to expose the fact that many of the jobs added since the last downturn have been low-wage

As a result, this recession may not spread as wide or end up being as deep. The last recession officially lasted 18 months – from December 2007 to June 2009, the longest since the second world war. Gus Faucher, chief economist at the US bank PNC, thinks this one is more likely to last “closer to six months than a year”. If the outbreak proved brief, the US could bounce back fast, he said.

However, while this time it may be different, there are worrying factors that could trigger a longer-lasting recession, and the downturn is likely to expose fault lines that the good times kept hidden.

Central bankers rode to the rescue after the last crisis, cutting rates close to zero and pumping money into the economy via stimulus packages. The Fed is cutting rates again – even before any recession has been declared – but now it has little wriggle room. The interest rate is now 1%-1.25% after it made an emergency cut earlier this month, and another reduction is expected.

Corporate debt is another concern. Zandi describes it as a “barbell”: at one end there are highly profitable companies with mountains of cash that have taken advantage of low interest rates to raise even more money. At the other end are a lot of highly risky companies that have been financially engineered to exist on loans that are hovering close to “junk” status.

For now Zandi thinks it doesn’t present the sorts of issues the US experienced in 2008. But the political impasse in Washington and the Trump administration’s – until recently lackadaisical – response to the pandemic could worsen the situation. Also, the coming recession – if it happens – is likely to expose the fact that many of the jobs added since the last downturn have been low-wage, and that so much of the economic gain has gone to the top 1% that even they are worrying about economic inequality.

For many Americans, while “the best of times” may be over, a recession may finally expose something they felt all along. “We have just had the best stock market we have ever seen,” said Scott Nyerges, a writer and editor in Austin, Texas. “And still my friends are worried about whether or not we will ever be able to retire.”