Moving into part three of our four part series, the next question that we need to ask is: Are we headed towards another recession, and what does that mean?
When we talk about where we are today, the reality is that we can feel the slowdown occurring across the county, and it will continue to have an impact on economic activity. When addressing this question/concern, we have to ask ourselves what a recession truly is. A recession is a slowdown in economic activity. Now when we hear the word “recession” we immediately have these ideas and thoughts of what the prior recession was. If we talk about an economic slowdown, it’s very different, and keeping that in mind as we continue to talk about it is critically important in these times. To help discuss this, we’ll turn to the experts. Bill McBride from Calculated Risk had this to say:
“With this sudden economic stop, and with many states shutting down by closing down schools, bars restaurants etc. my view is the US economy is now in a recession (started in March 2020), and GDP will decline sharply in Q2 (as Goldman Sachs is forecasting). The length of the recession will depend on the course of the pandemic.”
Now certainly we can say that we are feeling this slowdown, and it can be said that we will continue to feel this throughout the course of the pandemic. If we look at where we were in 2008 compared to today, 2008 was like a tornado that had ripped through our town and tore things that had to be slowly rebuilt over time, and what we are experiencing today is a heavy snowstorm that is shutting things down. What we do know is that as time moves on, we will start to see things open back up again. We will be able to go to bars, restaurants and sporting events with the only challenge being getting into these places as everyone is going to be out and about.
Looking at that graphically speaking, the figure above provided by Goldman Sachs begins to show a “V” of recovery, and not a “U” like we saw in 2008, being a sharp decline followed by a sharp increase displaying further strong gains as we head into 2021. When looking at what the experts have to say, Wells Fargo agrees as well, saying “We do not expect a repeat of the severe recession of 2008-2009, because the virus and oil shocks are not endemic to the financial system, but are, rather, external. Once the virus infection rate peaks, we expect a recovery to gain momentum into the final quarter of the year and especially into 2021.”
Referring back to the analogy previously used, we will not have to rebuild our financial system like in 2008. Once the snow melts from this current storm, things will kick in, and that’s why we see that “V” curve instead of the “U” curve.
So rather than use the actual word “recession” we should look to use the definition, being an “economic slowdown” and if that does happen, we need to look at our history of events that have shown similarities to what is occurring, and what we can expect to see moving forward. The visual provided below shows what has occurred with changes in home price over the last 5 recessions.
What we can see from this graphic is that in three of the last five recessions, home prices actually increased as a result. We did see a slight decrease in 1991, but what we all really remember is the significant decrease shown in 2008.
The message that needs to be taken from this is that recession does not equal a housing crisis.