Why the Recession Will Continue Through the Last Half of 2020 and Into 2021

Image is of Norm Miller, PhD

Do you know or have you ever known anyone who lived through the 1929 depression, or the blockade of Leningrad during WWII, or similar survival challenges? If you have, one thing that you observed is an extreme assiduousness towards conserving resources and an animosity towards wasteful or extravagant consumption. Frugality and efficiency in the use of all resources stays with them for life, even if they become wealthy. They are the exact opposite of the disposable-everything current consumption household, or worse yet, those who borrow against the future income for higher current consumption. Many Americans have never experienced even a mild recession in their adult lives. While nothing today could compare to a German blockade that starved over a million people, there will still be significant scars left upon those who have lost their jobs, when the unemployment and benefit checks run out. 

Over the last two decades, the annual U.S. household savings rate has run around 5.5 percent to 7.7 percent, however, among the lower 90 percent of the income strata it has been near zero for quite some time. For the top 1 percent the savings rate is 40 percent or so, skewing the averages. The point is that most Americans don’t save much. They remain optimistic and ebullient, unconcerned about the fact that they only have enough savings to go for one to two months without a paycheck before defaulting on a mortgage or rent payment. This behavior will all change.

In May, the average U.S. savings rate was near 33 percent in April and 23 percent in May (BEA), and in June, with bonus checks that may stop in July — but it will remain very high. There were two reasons for the high savings rate. One is that people realize bonus checks won’t last forever. The other reason is that many households received more income via the subsidies than when they were working, as shown in the charts below by the CoStar Group. Aside from the short-term disincentives from seeking work, a reasonable degree of paranoia has set in among the unemployed and underemployed. Unemployment will likely be extended, as this is an election year, but the bonus checks will be curtailed to a much smaller group and will not last that much longer. At the same time, the state and local government layoffs and university layoffs have yet to occur, and many retailers will go bankrupt as some counties are forced to shut down again.

With the COVID-19 infection rate on the rise in many counties and no testing and tracking in place, we await that savior vaccine, likely being developed overseas, and hope we can all get into the queue to receive it before our economy tumbles into a depression.

What is likely, is that this will take another 12 months or so, and during that time, our savings rate will be as high as humanly possible given our historic culture of consume now and pay later. My guess is that we will spend some 10 percent less than normal, in part because of less spending on restaurants, theaters, sports, travel and just about everything that is discretionary in nature and in part because of fear over how long this pandemic will last. With about 70 percent of our GDP driven by consumption that will result in a 7 percent decline in the GDP, absent more massive government stimulus offsetting this trend and shifting the burden to future generations. So, for at least the last half of 2020 and first half of 2021, we will very likely remain in recession.  After the vaccine arrives, it will take about two years to recuperate and get back to some form of normality, albeit slowed down by the new higher savings rate.

It is certainly not an evenly distributed recession. Online product and service providers win. Anything requiring in-person provision loses, except for healthcare services and these workers lose via the health risks they take. This disproportionately affects African Americans and Latinos, who hold front service jobs. But all Americans are likely to come out of this experience with a heavy dose of those behaviors we observe in those who lived through the great depression. The good news is that we will be more resilient next time. The bad news is that such behavior actually prolongs the recession.

— Norm Miller, PhD, Hahn Chair and Professor of Real Estate Finance



Kimberly Malasky
(619) 260-4786