The Tale of Two Recessions

Its official; the Pandemic Recession lasted just two months! The previous cyclical peak was February 2020, and the trough occurred in April 2020.  March and April 2020 are in the books for the shortest recession on record. Since that time, we have been in an expansion.  This  news comes from the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), which has dated the peaks and the troughs of business cycles back to 1850s.

Numerous factors are considered when identifying the peaks and troughs in economic activity. Recessionary periods are marked by clear declines in economic activity across the national economy while expansions are periods of rising economic activity dispersed across the economy.  Dating the peaks and the troughs requires the determination of the turning points, with the peak occurring at the tail end of the expansionary period and the trough occurring at the end of the contraction.

Faced with the unique pandemic recession, the committee had to determine when economic activity bottomed out –- the trough -- and whether the recovery after that trough is ongoing.  Based on monthly data (such as employment) the committee dated the peak of the last expansion as dated February 2020.  Based on quarterly data (such as real GDP) the committee dated the peak of the previous expansion as the fourth quarter of 2019.

Let’s look at the last two recessions through the lens of nonfarm employment to illustrate business cycle periods including peaks, recessions, troughs,  and expansions. Nonfarm employment is derived from a large, establishment level survey, the Current Employment Survey. The figure below contrasts the Great Recession and the Pandemic Recession. Nonfarm employment for each recession is normalized to the employment value at the peak of the preceding business cycle.

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For the Great Recession, employment is normalized, or indexed, to its value in December of 2007, the peak of the preceding expansion. The length of a recession phase of the business cycle includes the first month after the peak until the month determined to be the trough. The trough of the Great Recession occurred in June of 2009, making the Great Recession the longest recession since the Great Depression. Other indicators such as the index of industrial production, real manufacturing and trade sales, and monthly conversions of quarterly GDP indicated June 2009 as the trough. As illustrated in the figure, nonfarm employment continued to decline after the official trough. This often occurs during a business cycle; output recovers faster than employment.  At the trough, employment was 94.7% of employment at the peak, but employment itself bottomed out in February 2010 at 93.7% of employment at the previous peak.

The Pandemic Recession differs markedly from the Great Recession. Employment dropped much more, falling by April of 2020 to 85% of employment in February 2020. Since April, nonfarm employment has generally risen, and as of June 2021 employment had recovered 10 percentage points and stood at 95.6% of the previous peak. This demonstrates that although the depth of the employment decline during the Pandemic Recession was more severe than the decline during the Great Recession, the pace of the recovery has been much more rapid. Much of the remaining employment recovery will require adding jobs in the Hospitality and Leisure sector, the sector where job losses are concentrated.

Employment based on the household level Current Population Survey confirms the two-month decline. The business cycle dating committee also noted that non-transfer real personal income and real personal consumption expenditures also bottomed out in April 2020.

Quarterly real GDP provides the broadest measure of national economic activity. The following graph of indexed quarterly GDP is similar to the employment graph. It also shows just how different was the Pandemic Recession  from the Great Recession. At the trough of the Great Recession, real GDP was 96% of GDP at the previous peak, but at the trough of the Pandemic Recession, real GDP had fallen to 89.9% of the previous peak.  However, for the current cycle, GDP had risen to 99 percent of the previous peak by the first quarter of 2021, or only five quarters after the peak. In contrast, it took 11 quarters after the start of the Great Recession for GDP to recover to the same level relative to the previous peak.

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The last value of GDP for the current cycle, the second quarter of 2021, is an estimate based on a forecast from the Conference Board. This estimate places GDP at 101.3% of the previous peak.  By comparison, four years passed from the start of the Great Recession until real GDP had reached a similar level relative to the previous peak.

The last two business cycles have been dramatically different from prior recessions, but also different from each other. One was the longest since the Great Depression, the other is the shortest on record. The current recession had an abrupt beginning, with a substantial decline in economic activity due to the widespread lockdowns aimed at curtailing the spread of COVID-19, while the Great Recession had a more gradual decline in economic activity. In the current cycle, the recovery since the trough has also been quite rapid.

Paramount to the continuation of the current expansion is the widespread sustained resumption of normal activities. This will be accomplished through learning to live and work in a world where we coexist with the Covid-19 virus.  It is not going away.  Vaccinations and natural immunity will play an important role  in enabling the sustained resumption of normal activities. 

Although GDP is on track to surpass pre-Covid levels, employment still lags behind its pre-pandemic level.  Initially there was a large decrease in demand for workers, especially in the Hospitality and Leisure sector, which led to job losses.  There was also some change in willingness to work due to health concerns and other family concerns including the availability of childcare. More recently, as demand for workers in that sector has grown, certain policies put in place to help workers during the pandemic, especially the expanded and extended unemployment benefits, have reduced the supply of willing and able workers.  Moving to a full recovery in the labor market, and eventually to an expansion in employment beyond the previous peak, will occur over time with a sustained increase in the demand for labor and an increase in labor supply as the period of expanded benefits comes to an end.

 

Posted: July 21, 2021 by Dennis W. Jansen, Andrew J. Rettenmaier