- The coronavirus pandemic created a recession like we’ve not seen before, one driven by a deliberate policy choice.
- This created a bizarre economic downturn and an even odder recovery so far.
- Homeownership seems to have held up, the federal government is spending far more to cushion the economy than in the past, women are losing jobs faster than men, and even the US dollar seems to be softening.
- This means the previous recession playbooks are out the window.
- Neil Dutta is the head of economics at Renaissance Macro Research.
- This is an opinion column. The thoughts expressed are those of the author.
- Visit Business Insider’s homepage for more stories.
There has been little normal about the economic collapse caused by the coronavirus pandemic and ongoing recovery.
This recession was caused not by economic factors but instead a deliberate policy choice meant to slow the spread of the coronavirus. Recessions are meant to be avoided, not induced. Similarly, the recovery is unusual in several ways — from the housing market to the performance of the US dollar.
Let’s start with housing. In a normal recession, households become credit constrained — meaning it is hard for them to access loans and mortgages. As a result, homeownership tends to decline, renter-occupied real estate tends to grow, and home price growth slows. This was obvious following the 2008-09 recession.
Interestingly, however, the recession that began in March saw a relatively shallow decline in both new home sales and housing starts. And now, just a few months later, there has been a fairly rapid recovery in housing market activity. This would imply that homeownership rates have likely kept rising.
With interest rates low and the pandemic making cities less desirable, perhaps prospective buyers are speeding up the process of moving to the suburbs. With millions out of work, a sharp rebound in new home sales was not expected, but that’s precisely what we’ve seen.
Countercyclical fiscal policy — that is increased government spending in the face of an economic downturn — has long been used as a tool to stabilize economic conditions during a recession. In this regard, the recession and recovery has been relatively normal. Like previous recessions, we have seen countercyclical policy.
What’s been unusual is the scope of the federal government’s response, which has been larger and faster given the size of the economic drop. Our nearby figure plots peak to trough declines in real GDP against the increase in subsequent nominal federal government outlays. Not surprisingly, we see that the deeper the contraction, the more the government spends.
But doing the math, the government’s response has been about 40% larger than we would’ve expected based on this historical relationship. Indeed, despite unprecedented job loss, personal income is higher now than it was in February.
Men tend to make up a large majority of the workforce in cyclical industries such as manufacturing and construction. By contrast, women tend to dominate public administration and parts of the services sector, including leisure and hospitality. Public sector and services work tends to be more stable. As a result, in recessions, men tend to account for much of the job loss.
For example, in the last three recessions, female employees as a percent of total employment rose. But in contrast to those previous downturns, in this recession, the percentage has dropped meaning more women are losing their jobs than men.
Unlike past recessions, services industries – hotels, restaurants, retail – have borne the brunt of job loss. These are occupations that require close physical proximity to the end consumer. By contrast, manufacturing and construction – two industries that never really shut down and were first to open in most reopening plans – are likely to see more rapid rebounds.
Dollar selling off
In times of economic stress, investors tend to rotate into safe-haven trades. As a result, the US dollar exchange rate tends to appreciate. The US is seen as stable while growth tends to fluctuate much more outside the US. The pandemic period has been unusual in that the dollar advance was relatively short-lived.
Today, the broad dollar index actually sits at its lowest level since mid-2018. The coronavirus appears to have changed growth differentials relatively rapidly. With cases spreading in the US and coming under control in other parts of the world, notably Europe, investors have rotated away from the US, pushing the dollar lower. The dollar’s descent could also be one reason why inflation manages to hold up reasonably well given the weakness in the domestic economy.
This was not a normal recession and the recovery has not been normal either. Global looks better than domestic. Housing is holding up. Services look worse than goods.
In short, we’d advise not blindly following standard recession and recovery investment playbooks. Some cyclical sectors should work while others, largely tied consumer services like restaurants and hotels, will have trouble.
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