The next recession will be almost unlike the crash of 2020

  • If the US falls into a new recession, expect it to look different from the recession of 2020.
  • Economists expect spending on goods to return to normal while spending on services continues to recover.
  • The next recession will also be well below the record low in early 2020.

In early 2020, the US economy experienced an unprecedented decline as the first wave of COVID-19 spread across the country. Spending on personal services hurt. Unemployment reached its highest level in recent history as companies announced massive layoffs. Overall economic growth rates have declined in history.

But the next day


Recession

The opposite is expected, with spending on goods returning to its pre-crisis trend, services booming continuing, and the economic pain much less severe.

It remains to be seen whether the United States will fall into a recession next year. That hasn’t stopped economists from making their best guesses, and their forecasts suggest that the next downturn could be the perfect foil to a recession in early 2020.

The differences come from the most likely cause of the next recession. Bearish economists largely agree that a recession will be bolstered by the Federal Reserve’s efforts to cool inflation, which would lead to a more “natural” recession than one caused by the unprecedented public health crisis in 2020.

While higher interest rates and weak demand may slow growth to a halt, they will not lead to the same kind of downward slump seen just over two years ago. Gross domestic product contracted at an annual rate of 31.2% in the second quarter of 2020, marking the worst quarter of economic downturn since at least 1947 by an incredibly wide margin. Unless a new, more serious viral variant emerges or an unpredictable “black swan” event appears, the United States is unlikely to experience another downturn like the one two years ago.

“2020 has been, of course, a very unique situation,” Alex Lane, chief US economist at Bank of America, told Insider in May.

“The speed and scale of the decline was something we hadn’t seen before,” Lin added. “The consumer has accumulated tons of wealth over the course of this cycle, so there will be some flexibility.”

Exactly where growth will slow is also in stark contrast to the 2020 economy. Strict shutdowns immediately cut spending on services, particularly in personal businesses such as restaurants and bars. However, spending on items such as furniture, appliances, electronics and cars boomed as families drew on their stimulus-enhanced finances and bought things that made quarantine a little easier.

Those service companies that fought through the lockdowns are now spending a moment in the sun. The reopening of the economy has unleashed slices of pent-up demand for businesses that Americans have been unable to access. That shift is still going strong today, with shoppers now shifting their spending on goods toward services like travel, dining, and live entertainment.

This shift is key to keeping the economy from suffering a major downturn, Brett Ryan, chief US economist at Deutsche Bank, told Insider. The bank sees commodity producers bearing the brunt of any slowdown while pushing services sectors toward a full recovery. Ryan said the economic downturn would look more like an industry slowdown than a “massive contraction” across the board.

“We don’t see a highly leveraged consumer going to have to rein in spending,” he added. “It’s all about the commodity side that gives you a mild slump, just the regression of spending on commodities back into the pre-COVID trend.”

To be sure, the US economy can still avoid a recession of any kind. May’s jobs report showed salary growth slowing at a healthy pace, prompting many to rein in their fears of a looming deflation and predict a gentle transition to a normal labor market rather than a Fed-fueled collapse. Wage growth slowed and participation improved, suggesting an easing of inflationary pressures in the labor market. Michael Feroli, JPMorgan’s chief US economist, said Friday that the report was “probably about the best the Fed could hope for” in the early rounds of the tightening cycle.

However, the economy is not out of the woods. Inflation remains high, and signs of an ongoing slowdown have been few and far between. Fed Chair Jerome Powell said that while a “soft or soft landing” is possible, avoiding a recession will be a “challenge.”

But if the economic downturn materializes in the United States, it will not look very much like the most recent downturn. The companies with the biggest losses in 2020 will do the best, and instead of an economic downturn, Americans may take comfort knowing a downturn is more likely.

Leave a Comment