The Recession: This Time It's Different

This recession is different, to say the least. It began with government-mandated business restrictions and business closures aimed at mitigating the public health ravages of Covid-19, and these led to a dramatic rise in unemployment that has no match in our history for speed and magnitude. Then as these government restrictions were lifted, there was a dramatic, but partial reversal of these movements, a sharp reduction in unemployment and a sharp increase in GDP. 

However, there are other differences to note in this recession. The accompanying graph shows the behavior of inflation-adjusted per-capita personal income, disposable (after-taxes-and-transfers) personal income, and personal consumption expenditures. The first two variables are measures of personal income, the largest component of GDP. The last variable is a measure of consumption spending from that disposable income.

Of note is the behavior for the last seven months, from March 2020 – September 2020, the period of the current recession. Personal income -- and disposable personal income -- skyrocketed at the start of the recession, and even after recent declines, it is still above the level in February, the month immediately prior to the recession. This is nothing like standard behavior during a recession. For example, look at the Great Recession period in 2008-2009. Personal income trended downward during the Great Recession, and disposable income was flat. There was also a corresponding decline in consumption spending.

Now look at consumption spending in the current recession. While personal income skyrocketed due to large federal government transfers, consumption spending cratered. Households had increased income and falling consumption, basically a large increase in saving. The fall in consumption occurred due to a combination of business closures and health concerns. Restaurant and entertainment spending declined precipitously, as did spending on travel service providers such as airlines and hotels.

The word “unprecedented” can be overused, but it is hard to think of a better word to describe the behavior of various aspects of the economy in this coronavirus recession.

Posted: November 04, 2020 by Dennis W. Jansen, Andrew J. Rettenmaier