I’ve argued that we’re in a new depression. The depth of the new depression is clear. What is unclear to most observers are the nature and timing of the recovery.
The answer is that high unemployment will persist for years, the U.S. will not regain 2019 output levels until 2022 and growth going forward will be even worse than the weakest-ever growth of the 2009–2020 recovery.
This may not be the end of the world, yet it is far worse than the most downbeat forecasts. Some sixth-grade math is a good place to begin the analysis.
Make 2019 economic output 100 (the actual figure is $21 trillion; “100” is 100% of that number, a convenient way to measure ups and downs).
Assume output drops 40% in the second and third quarters of 2020. (Many estimates project larger drops; 40% is a plausible if conservative estimate.)
A 40% drop for six months equals a 20% drop for the full year assuming the first and fourth quarters are flat on net.
A 20% drop from 100 = 80 (or $4.2 trillion of lost output).
Now let’s see what happens if we estimate back-to-back growth years of 10% in 2021 and 2022…
First, is 10% growth even a reality? Past history says no.
Since 1948, U.S. annual real growth in GDP has never exceeded 10%.
In fact, post-1980 recoveries averaged 3.2% growth. And since 1984, growth has never exceeded 5%. So 10% is a very optimistic forecast to begin with.
If our new base is 80 (compared with 100 in 2019) and we increase output by 10% in 2021, this brings total output to 88.
If we enter 2021 with a new base of 88 and add another 10% to that, we come to 96.8 in total output by the end of 2022.
Here’s the problem.
Using 100 as a yardstick for 2019 output and assuming an unrealistic back-to-back years of 10% real growth in 2021 and 2022, one still does not get back to 2019 output levels.
The hard truth is 96.8 is less than 100.
It would take the highest annual real growth in over 40 years, sustained for two consecutive years, to get close to 2019 output levels.
It’s far more realistic to assume real growth will be less than 10% per year. That puts the economy well into 2023 before reaching output levels last achieved in 2019.
This is the reality of this depression.
It’s not about continuously declining GDP. A depression is an initial collapse so large that even years of high growth won’t dig the economy out of its hole.
Analysts and talking heads debate the recovery’s strength using letters that mimic the shape of a growth curve as shown on a graph.
A V-shaped recovery goes down steeply and back up steeply to get output back where it started in a relatively brief time.
A U-shaped recovery goes down steeply, does not grow materially right away and then makes a sharp recovery.
An L-shaped recovery goes down steeply and is followed by low growth for an indefinite period of time.
Finally, the W-shaped recovery goes down steeply, bounces back quickly and then falters for a second time before finally recovering and getting back to earlier levels of output and growth.
The post-2009 recovery produced only 2.2% growth. It was an L-shaped recovery.
It was a real recovery, yet the output gap between the former trend and the new trend was never closed.
The U.S. economy suffered over $4 trillion of lost wealth based on the difference between the former strong trend and the new weaker trend.
That lost wealth was a serious problem for the U.S. before the New Great Depression.
Now the prospect is for even lower growth than the weak post-2009 recovery.
The new recovery, far from the 10% growth discussed in the example above, may only produce 1.8% growth, even worse than the 2.2% growth before the pandemic.
It’s another L-shaped recovery, the second in a row. Now the bottom of the L is even closer to a flat line and the output gap compared with the long-term trend is even greater.
There will be no V-shaped recovery. There are no green shoots despite what you hear on TV.
We’re in a new Great Depression and will remain so for years.