Many readers have probably seen the headlines and stories claiming this recession could be as bad – or worse – than the Great Depression. To that I say, don’t take the bait.
The Great Depression was a slow, long, grinding downturn for the U.S. economy. From 1929 to 1933, the economy shrank for 43 consecutive months, with unemployment hovering around 25% for years. Even as the jobs picture improved over the course of the decade, unemployment remained over 10%.
In the coming month, it looks like U.S. unemployment could push past 20% (it stood at 14.7% in April data).1 It’s this piece of data that is drawing the biggest comparison to the Great Depression, but I think the argument is misguided and incomplete. I don’t see this recession coming close to the Great Depression in terms of severity or duration, and I’ll give you three reasons why.
1 – Unemployment Figures Do Not Paint a Complete Picture
The U.S. economy is losing millions of jobs – there is no sugar coating this fact. But if we take a very close look at the job losses across the economy, we find that a large percentage are furloughs (temporary layoffs) as opposed to permanently shrinking the workforce (data below):
Source: Zacks Investment Research2
In the current environment, employers appear to be keeping employees close by, in anticipation of the economy’s reopening. A recent survey conducted by Morning Consult found that two-thirds of workers believed that they would return to work for their current employer, which could help restart business much more quickly than if the employer had to rehire. 4 When employees are asked to return to work, there’s no need for training, recruitment, job search, background checks, ‘onboarding,’ etc., all of which are costly and time-consuming. Workers can return to their jobs and immediately be productive.
Additionally, more than half of job losses have come from hospitality, accommodation, food services, retail trade and other service-sector jobs. Those who can work remotely – typically in high-skilled, higher-income jobs in tech, finance, management, professional services – saw a much smaller change to payrolls in March and April. The implication here, in my view, is that the majority of layoffs come from industries that could resume operations immediately when lockdowns and restrictions are lifted – which is beginning to happen now.
Jobs disappeared during the Great Depression because there was no demand, no capital, no functioning Federal Reserve or financial system. Companies had to permanently restructure – or declare bankruptcy – in droves. There was no safety net during the Great Depression.
Today, businesses are struggling in major ways, but they are also receiving financial support from the government with payroll loans that are in many cases forgivable, and workers across many industries are seeing close to full replacement of income from unemployment insurance under the CARES Act.5 This is not a Depression-like outcome.
2 – Event-Driven Shock Versus a Structural/Financial Crisis
The collapse of the financial system was one of the major causes of the Great Depression. Today, banks are very well capitalized and the credit markets remain stable. Comparing the financial system during the Great Depression to the financial system today is essentially comparing night to day.
Because the causes of the Great Depression were structural, industrial production fell by more than half during the entirety of the 1930’s. Back then, industrial production was a critical component of the economy. Production trickled higher over a four-year stretch during the mid-1930’s, only to plummet sharply again in 1937-1938. 6 Again, the Great Depression was a long, grinding decline. The current lapse in production and services is expected to last a few quarters – not years.
Historically, “event-driven” bear markets (which is how I would characterize the current downturn) have been shorter, less severe, and take less time to recover from than structural or cyclical downturns. I do not believe this time will be different.
Source: Goldman Sachs7
3 – Policy Mistakes Drove the Great Depression Deeper
Governments and central banks failed miserably in their response to the Great Depression, doing basically the opposite of what needed to be done.
In the midst of the 1930’s downturn, central banks tightened monetary policy in order to maintain the gold standard, resulting in severe deflation which raised the cost of debt and lowered real incomes. The U.S. government equally fumbled the response by putting austerity measures in place (cutting spending) just as the economy needed it most. The government also passed the Smoot-Hawley Tariff Act in 1930 in an effort to help domestic producers, but it only resulted in more pain due to the loss of global demand.
The policy response in the current crisis has drawn from lessons learned during the Great Depression, and the government and central bank are essentially doing the opposite of what they did during the Depression. The U.S. government has spent some $2.9 trillion in stimulus to boost the economy, and the Federal Reserve slashed rates to the zero bound in addition to offering basically unlimited liquidity to the capital markets.8 The difference in responses is night and day.
Bottom Line for Investors
I strongly believe the current recession will be shorter, less painful, and will inflict far less damage on households and businesses than the Great Depression. But that’s not to say it will be an easy and painless downturn. All recessions hurt the economy and society at-large, and it will take time to rebuild.
In my view, however, getting the economy back to a strong position may require about 15-18 months, versus the 10+ years that were needed to recover from the Depression. There’s no comparison, in my view.