This Looks Like a Depression, Not a Recession

Until we have a vaccine, we are barreling toward economic catastrophe

Photo: National Film Board of Canada/Getty Images

Just weeks after the stock market crashed in 1929, President Herbert Hoover assured the country that things were already “back to normal,” Liaquat Ahamed writes in Lords of Finance, his Pulitzer Prize-winning history of the financial catastrophe. Five months later, in March 1930, Hoover said the worst would be over “during the next 60 days.” When that period ended, he said, “We have passed the worst.” Eventually, Ahamed writes, “when the facts refused to obey Hoover’s forecasts, he started to make them up.” Government agencies were pressed to issue false data. Officials resigned rather than do so, including the chief of the Bureau of Labor Statistics.

And we all know how that turned out: The Great Depression.

Today, President Donald Trump is accused of minimizing the coronavirus as it has bored down on the United States, initially barring most foreigners who had visited China from entering the U.S., but then losing a full month before taking further measures. The virus would not spread in the U.S., he said February 26, “especially with the fact that we’re going down, not up. We’re going very substantially down, not up.” Even today, the White House has failed to organize a nationwide mobilization that would arrest the virus and persuade traders, CEOs, and ordinary Americans that the crisis is in hand. As a result, Covid-19, on its current trajectory, threatens the U.S. with a profound economic downturn.

Covid-19 arrived amid the longest expansion in modern American history. The economy had grown for more than 11 years and added jobs for 113 straight months. Stock markets were hitting repeated highs. But the economy at large was slowing — it grew by 2.3% in 2019, down from 2.9% the prior year, the slowest in three years, and far below the 3.1% projected by the White House. For 2020, the Federal Open Market Committee forecast just 2% growth in 2020, and economists surveyed by Bankrate estimated a 35% chance of recession by the November election. Red lights of a laggard or even a bad year were blinking: Businesses were not investing in the future — private investment growth had plunged to 1.8% from 5.1% in 2018. Even consumer spending, the singular engine of growth, was just 1.8% in the fourth quarter, down from 3.2% in the prior three-month period.

But left barely spoken is the explicit economic threat: a depression-like downturn rivaling the 1930s — prolonged double-digit joblessness, an unprecedented economic contraction, and widespread bankruptcy.

It was the same globally. Economic growth hit a six-year low last year in Germany, Europe’s engine, falling to 0.6%, its slowest since 2013. Japan’s economy shrank by 6.3% and the country already appeared to be headed for its first recession since 2015. The global economy as a whole rose by just 2.4% last year, its lowest rate since the 2009 financial crash. An expectant mood grew of something that would finally push the U.S. and the world into an economic contraction, though no one could say what it would be.

Today, a rising level of alarm over the coronavirus has led 30 states to shut down large parts of their economies and the rest to issue varying stay-at-home advisories. Against the financial toll, the Fed has struck, marshaling far greater firepower than it did in the Great Recession. Congress, too, has approved triple the relief it spent attacking the 2009 financial crash, and is now talking about another, even pricier package. In all, the government has so far thrown some $6 trillion at Covid-19, most of it at the economic fallout.

In part, the reason for the government’s distress is a widely accepted estimate that up to 240,000 Americans could lose their lives even with current measures against the virus. But left barely spoken is the explicit economic threat: a depression-like downturn rivaling the 1930s — prolonged double-digit joblessness, an unprecedented economic contraction, and widespread bankruptcy.

The reason for the grim economic outlook is, oddly enough, the government’s very concentration of its financial cannons on the economy. When the government shows it has a convincing regime in place to restrain the virus — massive, population-wide testing, and a way to trace and quarantine those with whom victims have been in contact — the markets will gain confidence, and a floor will be created underneath the economic collapse. Until then, we are looking at the current freefall.

To shore up the economy, the virus needs to be brought under visible control. But there is no sign that is where the U.S. is headed.

In a rare peek at official thinking, James Bullard, president of the St. Louis Fed, told Bloomberg last week that the jobless rate could climb to 30% next quarter and that the economy could contract by 50%. That was not counting for the impact of hundreds of billions of dollars thrown at companies by Congress as support to hold on to their workers. But even so, private estimates after the legislation are similar — Goldman Sachs forecasts a 34% economic contraction and 13.2% unemployment in the second quarter, and Deutsche Bank 33% and 12%.

Although no one placed the forecasts in historical context, if we reach anywhere near those numbers, it will be far worse than the Great Recession, and nearly the magnitude of the Great Depression.