The U.S. economy has experienced sudden stops in the past, but nothing like this
By Justin Lahart
The U.S. economy has experienced sudden stops in the past, but nothing like this.
The abrupt disruption to business over the past few days is without precedent. While there have been more jarring hits to the American psyche in the past century—the attack on Pearl Harbor, the assassination of President John F. Kennedy, the Sept. 11 felling of the Twin Towers—nothing has led to such a precipitous drop in everyday commerce quite like the moves people, governments and businesses have taken to counter the spread of the novel coronavirus.
A recession is a given.
How steep the decline in spending has been won’t be known for some time, but early indications—the collapse in box-office receipts over the past weekend, the big drops in mass-transit use—show how bad it is. Much is obvious to the casual observer.
From restaurants to real-estate offices, barbers to gyms, the list goes on and on of businesses that have been severely curtailed, if they haven’t simply closed.
History offers two examples in the past 50 years of the economy abruptly falling off which, while they may not match the magnitude of what is happening now, may offer some insight into where things are headed.
Box-office receipts collapsed over the past weekend. People exit an AMC theater in Los Angeles on Saturday. / Photo: Marcio Jose Sanchez/Associated Press .
In 1980 the economy received a short, sharp shock after President Jimmy Carter, in an attempt to break the back of rampant inflation, persuaded the Federal Reserve in March 1980 to introduce stringent controls on the use of credit.
The controls had an immediate effect on behavior, tanking spending and leading to large job losses. Final sales of domestic product, a measure of overall economic demand, fell by an inflation-adjusted 7.7% in the second quarter. On July 3, 1980, the Fed removed the controls and demand rebounded, ending what was the shortest recession on record.
The other example is more familiar: The 2008 financial crisis. The sapping of confidence and the drying up of credit that began that fall led to final demand falling 2.5% in the third quarter and 6.5% in the fourth. Despite aggressive action by the Fed and fiscal authorities, there was no sudden rekindling of demand after the shock.
Too many businesses went under and too much wealth had been destroyed. The recession stretched on, and when the recovery began in mid 2009, it was feeble.
There may end up being elements of the 1980 experience and the 2008 one in what happens next.
As with the 1980 credit controls, the steps being taken to reduce the virus’s spread will, in the end, be temporary. Businesses are operating under the assumption that sales will come back, and people who have been sent home are hoping they will get back to work. The key is weathering the gap between now and then.
The Fed, with the aggressive steps it took last weekend, is trying to ameliorate that suffering.
The fiscal spending plans Congress and the White House are hammering out will, depending on how large and well-crafted they are, do the same.
But there is unlikely to be any sudden clearing of the skies. Even as the virus’s spread lessens and we learn how to better contain it, many activities will remain curtailed. So the recession will likely last longer, as in 2008, and the initial recovery will be feeble.
It probably won’t be until a vaccine or other therapy is developed and widely distributed that things will come roaring back. It will be a cause for jubilation.
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