29 recession questions, answered

We recently asked the Yahoo Finance audience to submit questions about the coronavirus pandemic and the sharp recession it has suddenly caused. Here are answers to 29 of them:

How can you call it a recession when a recession is two consecutive quarters of negative growth? It’s true that’s the traditional notion of a recession. But the National Bureau of Economic Research, which identifies the beginning and end of recessions after the fact, now defines a recession this way: “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” For what it’s worth, most forecasts do call for back-to-back declines in GDP in the first and second quarters of this year. And it’s clear from unemployment claims and other data that we’re undergoing a significant decline in economic activity.

What’s the difference between a recession and a depression? There’s no formal definition for a depression, except it’s a severe version of a recession, as measured by the change in GDP. Real GDP fell nearly 30% from 1929 to 1933, the deepest trough of the Great Depression. During the “Great Recession” from 2007 to 2009, real GDP fell by just 4%. Economists think the decline in GDP this time around will be much closer to 4% than 30% – so, with luck, a recession rather than a depression. If you see terrifying forecasts of a 20% or 30% decline in GDP, these are probably annualized numbers, which can be misleading. Still, the current downturn is likely to be bad.

How long will it last? Way longer than anybody would like. It’s possible some of the many states with stay-at-home orders will begin to ease the rules by June, but they’ll likely do this very slowly, to reduce the odds of the virus resurging. Some closed businesses will never reopen and some laid-off employees will never go back to their old jobs. Moody’s Analytics predicts a “W-shaped” recovery with a rebound in activity as some businesses are able to open and rehire workers, followed by a slump as businesses and consumers hunker down. The development of a vaccine will trigger the second phase of a recovery, but Moody’s Analytics doesn’t foresee a full recovery until mid-2023.   

Can there be a happy medium between keeping people safe but not having the economy continue to be hurt? This is exactly what governors calling the shots are trying to figure out, and there’s no playbook. There are obvious risks to sending people back into society without a vaccine, cure or treatment for the virus. But there are risks from closing businesses and interrupting workers’ livelihood, too. Governors will try to balance these risks by allowing the safest people to return to work first—young people and those who have survived the virus, developing immunity. Companies will probably space workers out more and perhaps require the use of gloves or masks. It’s also crucial to have widespread testing, to identify asymptomatic carriers of the virus and send them home before they can infect others. Either way, we’re likely to be living with more health and financial risk until a vaccine is widely available, in 2021, with luck.

Is coronavirus the sole cause of the recession? Pretty much. There were weaknesses in the U.S. economy before the virus hit, but we had solid 2% growth, a strong labor market and improving incomes. The virus shut down commerce in much of the world because it’s highly infectious and perhaps 10 times deadlier than the flu. Without treatment or a vaccine, the only way to stop the spread is to limit travel and human interaction, and impose strict distancing measures.  

[Got more questions? Tell us here, and we’ll answer them in an upcoming story.]

Are we past the worst? In terms of the virus spread, it’s possible. In the University of Washington’s forecasting model, the peak date for U.S. deaths was April 13. Some states, such as Washington and New York, appear to be past the peak for deaths. Other states, such as Georgia, Florida and Texas, don’t appear to have hit the peak for deaths yet. And containing the virus depends on the tough stay-at-home measures most states have enacted. If states relax those measures too soon, there could be new spikes in deaths. Economically, it’s a different story. The worst is probably ahead, as the recession drags on and it gets tougher for businesses and workers to survive.

How long will it take for everybody who lost a job to go back to work? It could take several years. Hard-hit sectors such as travel, hospitality and retail can’t get fully back to normal until most people have been vaccinated, which could take two years or longer. We’ll go back to doing some normal things before then, but businesses have shifted from expansion mode to survival mode. Business investment will plunge, some companies will slash payrolls and others will go belly up. Government aid will help protect some jobs, but it can’t substitute for the normal growth of a healthy economy.

The shelves of a Fresh Thyme market are emptied of toilet paper despite a limit on Easter Sunday just before the business closed early due to the coronavirus emergency, and Indiana Stay-At-Home order. (Photo by Jeremy Hogan/SOPA Images/LightRocket via Getty Images)

What’s with the shortages of food and toilet paper? Supply chain disruptions. The United States has very efficient distribution systems, with “just-in-time delivery” that leaves minimal inventory suppliers and retailers have to pay to store. But that leaves the system vulnerable to a surge in demand, which is what’s happening now, especially as people horde. Production lines can sometimes crank up the volume, but not as fast as the massive shift in consumer behavior that’s underway. Producers of now-scarce products such as toilet paper, flour and beans typically allot some of their production to consumer sales in stores, and some to commercial sales for office buildings, restaurants and the like. These products aren’t necessarily interchangeable. Supermarkets, for instance, sell 1-pound bags of flour, which are suddenly scarce, but they don’t sell the 50-pound bags a bakery might buy. And suppliers are reluctant to switch from commercial to retail production, because they’ll have to switch back at some point. There can also be production problems as coronavirus forces producers to spread workers out and even close some facilities, such as a giant Smithfield pork factory in South Dakota. This should even out over time, but consumers will need to adapt to shortages for a while. (Conan O’Brien has some tips.)

Why are some people working and also getting a check from the government? The CARES Act that Congress passed in March includes payments for most Americans, up to $1,200. It doesn’t matter if you have a job or not, the money is yours if you qualify. That’s because putting cash into people’s hands is a proven way to stimulate spending during a contraction, when it’s most needed. It’s not completely efficient and some people don’t need or deserve the money. But it generally works. To qualify, you need to be a U.S. citizen or legal resident with a valid Social Security number who’s not a dependent. The amount of the check decreases for individuals earning more than $75,000, and above $150,000 for married couples. The payment phases out completely above incomes of $99,000 for individuals and $198,000 for married couples.

How is the $2.2 trillion stimulus program paid for? It’s not, haha! The Treasury Department will simply borrow the money by issuing Treasury securities, which remain in high demand. The full amount of new borrowing will be less than $2.2 trillion, though, because some of the money is in the form of loan guarantees that aren’t the same as cash leaving government coffers. Oxford Economics estimates the actual increase in the federal deficit in 2020 from the stimulus spending will be more like $1.6 trillion.

President Donald Trump participates in a video conference with representatives of large banks and credit card companies about more financial assistance for small businesses in the Roosevelt Room at the White House April 07, 2020. (Photo by Doug Mills-Pool/Getty Images)

How long will 0% rates last? Futures markets peg the likelihood of 0% short-term rates at 100% all the way through March 2021. (Technically, those rates float between 0% and 0.25%.) Remember, these are short-term rates on overnight loans banks make to each other. Consumer rates are normally higher.

Are negative interest rates coming? Let’s hope not. There are already negative short-term rates in Europe, but Federal Reserve Chair Jerome Powell has said negative rates aren’t “appropriate” in the United States, which manages the world’s reserve currency and is the world’s largest issuer of sovereign debt. If we do get negative rates, remember that they would apply to overnight loans banks make to each other, not to consumer lending.

Will zero interest rates and high unemployment bankrupt Social Security. Not any time soon. The Social Security trust fund will be solvent until 2034, according to the most recent estimate by the agency that oversees the program. When the trust fund runs out, that doesn’t mean Social Security is bankrupt. It means it can only fund benefits at the rate of revenue coming into the program through the payroll tax that funds it, which would be about 75% of current benefits unless Congress fixes that (which is likely). Medicare is in worse shape, with its trust fund due to run dry in 2026. A new estimate of these programs’ financial health should come out this spring, and financing for both programs will surely deteriorate as the coronavirus recession kills jobs and the associated federal revenue.

Can the Social Security cost-of-living adjustment ever go negative? Nope, it can’t go negative. And if it’s 0 in a given year, the Social Security Administration can calculate the annual cost-of-living increase over a longer time frame, which might be more likely to yield a positive increase. With inflation very low, however, it’s likely this year’s COLA will be tiny.

Is it a good time to buy a car? Any dealerships open near you? Most states with stay-home orders consider service department essential businesses, but not all allow dealers to keep selling cars. But yeah, there are some good deals if you can find a dealer. Many automakers are offering special financing to move the metal, as they have during past downturns. Hyundai has a “job loss protection program” if you buy a car but then get laid off. General Motors has free financing for buyers with good credit, and Ford is delaying payments for six months on some models.

Will adding $2.2 trillion to the economy bring inflation? Not any time soon. It’s true that some of the Fed’s liquidity programs are a form of “printing money,” but that didn’t generate unusual inflation when the Fed rolled out three rounds of massive “quantitative easing” during the last recession, starting in 2008. Plus, other factors typically contribute to inflation, such as rising commodity prices (oil, especially) and rising wages. We’re now more likely to see disinflation, which is a declining rate of inflation, from, say, 2% to 1%. Oil prices have crashed, rather than spiked, and demand for many goods is drying up, likely to cause falling prices. And there’s rarely wage inflation amid mass layoffs.   

Federal Reserve Chairman Jerome Powell gives a press briefing after the Fed announced an emergency rate cut on March 3. (Photo by ERIC BARADAT/AFP via Getty Images)

Should the government seriously think about MMT and UBI? Some say we already have it. Modern monetary theory is the controversial idea that financially powerful governments such as the United States can run up much larger deficits than they traditionally have—and therefore spend more—because they can’t go broke or become insolvent. They can always just print more money. This is unproven, but we’re now testing the concept, to a degree, by pushing annual deficits to the highest levels short of wartime. Universal basic income entails regular government payments to every citizen, to help meet basic needs. While the government is now sending stimulus checks out to most Americans, those are one-time payments, not recurring ones. Former Democratic presidential contender Andrew Yang favors monthly UBI payments of $1,200 to most Americans, indefinitely. He’d also impose a 10% value-added tax to pay for it, which probably couldn’t pass Congress any time soon. In practice, we’re closer to MMT than to UBI at the moment.

Are housing prices going to fall like in 2008? Very unlikely. Home values fell by about 21% nationally from 2007 through 2011—and by a lot more in hard-hit areas like Florida and the Southwest. Those were unusually large declines, driven by the fact that the Great Recession began with an unsustainable housing bubble, which burst in 2008, causing massive collateral damage throughout the housing sector, including waves of foreclosures. Leading into this recession, housing has been stable, with no signs of a bubble. Prices could still drop somewhat—perhaps by mid-single-digits—as buyers become scarce.  Don’t expect fire sales, though, unless we’re still in recession with no end in sight a year from now.

Is it a good time to buy a house? Yes, but only if you’ve got cash, good credit and job security. Some potential buyers will undoubtedly pull back because they lost their jobs or feel like they might, or just decide to hunker down. That will leave less competition for available properties. But banks are already raising lending standards, making it harder to get a loan. If you do qualify, rejoice: Mortgage rates are at or near record lows, and they could go even lower. 

A man crosses the street in front of Macy’s, Monday, March 23, 2020 in New York. Macy’s stores nationwide are closed due to the coronavirus. (AP Photo/Mark Lennihan)

Is this the end for big retail? Only for some. Giant retailers such as Amazon, Walmart, Costco and CVS are hiring thousands of workers to meet increased demand for essentials and other things. They’ll probably end up stronger after the crisis. But some department stores and specialty retailers are very vulnerable and we could lose some. There are danger signs at zombie retailer Sears/Kmart, along with JC Penney, Neiman Marcus, GNC, J. Crew and even Rite-Aid. Macy’s and Kohl’s can probably withstand five months’ of store closures before things get dicey. Nordstrom might be able to hang on a bit longer. If some chains do declare bankruptcy, they could emerge smaller rather than disappearing completely.  

Why is the stock market going up when people are losing their jobs and businesses are closing? There was a notable bear market rally from March 6–10, when stocks posted the biggest weekly gain since 1938. That seems discordant, since it came during the same week we got horrifying news on job losses, business closings and coronavirus deaths. Yahoo Finance’s Sam Ro explains that this rally still left stocks down 18% from their high on Feb. 19. So stocks are up from their lows, but still down considerably. Stocks can also rise in a downturn when something very confusing to investors becomes a little more clear, such as the scale of the virus crisis and the possible timing of a peak. The Fed has been injecting massive amounts of stimulus and liquidity into markets, which may have convinced investors the cavalry has arrived. And keep in mind, markets are trying to guess the future value of companies, which means stocks can rise well before a recession ends. It’s also possible the recent rally won’t last and bad economic news will drive stocks to new lows.

Does the national debt even matter? Less than it used to! The U.S. national debt is now around $24.2 trillion, about 12% larger than the size of the economy. The debt could be $2 trillion higher by the end of 2020, on account of stimulus spending and falling federal revenue. Many economists once thought debt of this magnitude would cause a debt crisis that would sharply raise borrowing costs, while forcing large tax hikes and sharp spending cuts. It hasn’t happened (yet). There are still some budget hawks arguing for a rational approach to reducing the federal debt. But it will probably take a crisis to force politicians to make the tough tradeoffs this would entail.

Photo taken on March 19, 2020 shows U.S. dollar banknotes in Washington D.C. (Photo by Liu Jie/Xinhua via Getty)

Can the U.S. government continue to hand out such large sums of money? Yes. And it’s probably wiser to inject money into the economy early in a crisis—even if the national debt spirals higher—than to hold back out of fiscal restraint. The damage of a recession compounds the longer it goes on, as more people lose their jobs and end up with less money to spend. The total cost to the economy and to taxpayers can end up lower if there’s aggressive government intervention upfront. Remember, the United States can print as much money as it has to, should the need arise. Inflation would spike at some point, but that’s arguably not as bad as a recession with no end in sight.

At what level is the U.S. technically bankrupt? Basically never. The rating agencies Moody’s and Fitch still give the United States their top credit rating, while Standard and Poor’s applies its second-highest rating. The U.S. remains highly rated because it has nearly unlimited power to tax and raise revenue. It also has the world’s most powerful central bank and many other tools for preventing and controlling a fiscal crisis. That doesn’t mean Uncle Sam’s finances are in great shape. It means there are ample tools for dealing with a crisis if it materializes.

In an extreme scenario are there risks to brokerage firms? I’m worried my brokerage could fail. Probably not. The Federal Reserve intervened quickly in 2008 when there was a real risk to brokerage firms. That worked, and it indicated the Fed will do whatever necessary to prevent bank runs or anything remotely similar. It’s always possible a brokerage might need some kind of bailout, but federal agencies have aggressively protected depositor and investor principal and helped arrange private-sector mergers or buyouts when a financial institution fails.

Treasury Secretary Steven Mnuchin takes a phone call as he steps out during a meeting in the Capitol as negotiations continue with congressional leadership on a financial relief package for COVID-19 on Tuesday, March 24, 2020. (Photo by Caroline Brehman/CQ-Roll Call, Inc via Getty Images)

What about 401(k)s? Get in or stay out? Financial advisers warn against doing anything dramatic during a market selloff. If you sell when stocks are down, you’ve locked in losses. If you hold on, you retain the chance to participate in a rebound. What advisors do recommend is rebalancing your portfolio as sharp changes in the values of stocks and bonds alter the allocations among your investments. Just as selling in a downturn is risky, trying to time the bottom of a selloff and the right time to buy can backfire too, if you guess wrong and invest too much money at the wrong time. Anybody with investing concerns, such as sharp losses on stocks as you approach retirement age, should seek specific advice from somebody qualified to give it.

Is it legal to lay off older workers during this timeframe? Companies are obviously allowed to lay off workers, but not explicitly because of their age. Still, it happens, and may even be common, according to surveys by AARP. And some companies may couch layoffs of older works as “financial” decisions, because older workers typical earn more than younger ones. The law preventing age-based layoffs and other types of age discrimination applies to most workers except independent contractors and those working at companies with fewer than 20 employees. If you do feel you’ve been fired because of your age, you can sue, but prospects aren’t great. AARP and other advocacy groups are lobbying for better protections.

Why are we bailing out companies instead of people? The CARES Act Congress passed in March does a better job of targeting government aid at workers than the slate of bailouts in 2008 and 2009, which mostly bailed out companies while hoping companies would bail out their workers. In many cases, they didn’t. To that end, the CARES Act includes those checks for individuals up to $1,200, along with $600 per week for unemployed workers, on top of other benefits they’re already getting. That lasts for four months and by bailout measures, is pretty generous. Other measures are meant to keep companies in business, with incentives such as loan forgiveness for smaller firms that eventually return to payroll levels prior to the virus crisis. There are other provisions that apply to businesses rather than their employees, but it’s worth keeping in mind that employees need businesses to return to once the crisis subsides. There will doubtless be some abuses, but that’s a necessary evil for a massive program rolled out fast.

How will we look on 12-31-20? With luck, we’ll be able to move around by the end of the year, with protections such as face coverings and ways to enforce distancing. Small gatherings might be possible, but probably not packed sports games or concerts. Airlines will have to come up with ways to keep people safe in tight spaces. Restaurants might have to keep diners spaced farther apart than usual. Ditto movie theaters. And this would depend on rapid scaling of coronavirus testing capability and other public health measures needed to contain the virus. If states and cities fail to do that, further outbreaks could occur, forcing repeat waves of business closures, a much deeper recession and pervasive gloom.

By 12-31-21, we might actually be free of the coronavirus. Experts think a vaccine or several vaccines will be available by then, and governments have time to figure out how to massively scale production to get the vaccine to everybody. So 2022 is looking pretty good.

Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. Confidential tip line: [email protected]Encrypted communication available. Click here to get Rick’s stories by email.

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