Ask HN: Are we looking at a recession ahead?
Economics enthusiasts of HN: The Covid-19 crisis - when it settles down, what kind of economic impact can we expect? Especially in the tech sector?
1) In what scale can we expect the economic slowdown to be?
2) Will this be as bad as the 2008 recession?
3) What kind of economic climate can we expect for the next one year?
4) What will governemnts across the world do to overcome the crisis?
91 comments
[ 3.2 ms ] story [ 169 ms ] threadThe COVID events are so sudden a way that doesn't seem to fit any real good pattern to look for in the past.
Even with that from my understanding since 2008 a lot of fundamental economic beliefs / predictions haven't really played out as folks would expect. Or at least the data available seems to not provide much in the way of ... understanding / predictability based on the past. (this is not my area of expertise)
Politically things seems fairly unpredictable even pre COVID ... toss in some economic / health crises and I don't know how anyone could feel they know anything.
It seems like it is the unknown layered on the unknown here. I'd be highly skeptical of anyone making anything other than a very general prediction.
10 mill unemployed in the US in two weeks is a pretty good signal if you ask me ;D. That is something like 6% of the total work force.
The only real answer is, nobody knows. By the time anyone could collect enough data to even have a real guess, we'll already be running the natural experiment directly to see how many people get back to work.
One thing I will predict with confidence though is that the result will not be exactly the same as if the "normal economy" had produced a 30% unemployment number. Straight-line projections of that nature are useless.
Businesses are closing permanently in Seattle. It may take some time for these jobs to rematerialize.
We just don't know. We've never seen anything like this in the modern era.
I do suspect that we're going to see one of those generational shifts like the Great Depression, and a lot more businesses are going to start thinking in terms of "runway", and trying to keep around a few months of "runway" in the future.
Banks might benefit from that, but they’re simultaneously getting hammered by low interest stimulus loans.
1) This will be a function of how long the average person has to be out of work.
2) Honestly they seem like different beasts. An economic slowdown like this is more easily understood (imho) than the last one. This graph gives me great pause: https://www.visualcapitalist.com/worlds-money-markets-one-vi...
Look at the size of the derivatives!
3. I think this will be a function of how long we're inside. I don't think it will be good, but I'm an optimist and I think the world economy will roar back into life once we're through it. I'm already craving a few things, like going to a restaurant.
4.Print money and enact measures (some authoritarian). The big players might make some power moves.
> The 1957 Asian Flu Pandemic killed around 70 to 100 thousand people in the United States (the 57 flu was not as infectious or deadly as COVID-19). In the last quarter of 1957 the growth rate (on an annualized basis) was -4% and in the first quarter of 1958, -10%, the largest such decline in post WWII history, bigger even than in the financial crisis. By the third and fourth quarters of 1958, however, the growth rate had surged back up to nearly 10% and for the year as a whole GDP declined by less than 1%–a bad recession, 3rd worst by depth in post WWII history, but not unprecedented.
https://marginalrevolution.com/?s=1957+flu
Some experts think otherwise:
"When the global economy recovery arrives, it may look more like a “swoosh” than a V, according to Davy, Ireland’s largest securities firm.
“It’s like a Nike-shaped swoosh,” Aidan Donnelly, head of equities at Davy’s private clients unit, said in an interview. The firm has assets worth over 14 billion euros ($15.4 billion) under management."
https://www.bloomberg.com/news/articles/2020-03-31/get-ready...
"The virus won’t last forever, the global economy will recover,” said Donough Kilmurray, Chief Investment Officer at the Dublin-based firm’s wealth management business. “A V-shaped recovery feels too optimistic, but an L-shaped view is probably too pessimistic.”
We were overdue for a slump even without the virus such that we probably should assume it will progress (or not progress) like a typical modern slump, with its slow recovery.
Ideally we'd pay down the debt during the up times so that we can have big stimuluses during slumps. There's a lot of old infrastructure to be repaired in the US anyhow. Unfortunately Wash. DC lacks such discipline: they failed to save up for a rainy day, and it's pouring now.
You're in one.
1) The immediate impact is the retail and entertainment sectors, which employ a large amount of the population. The loss of incomes and consumer confidence from those people will cascade. They'll buy less cars and appliances. Car companies will in turn buy less [everything else]; anecdotally one of the world's largest automakers has called a worldwide stop to new purchases - of anything. This cascade will affect a majority of the economy. What made the 2001 tech crash bad was that all the startups that had other startups as their customers saw their revenues evaporate. Think about the 1000 variants of MarTech tools today.
2) More 1930s than 2008 unless governments act in a hyper competent manner. Ray Dalio has been writing about how the next recession will not be solvable through QE: https://www.linkedin.com/in/raydalio/detail/recent-activity/...
3) No one knows
4) Currently: print money and worry about the consequences later. It's novel to see them "helicopter drop" cash directly to consumers. It's much more fair than just buying financial assets, which enriches investors first. (They're still doing lots of that, just not exclusively)
For example, I can't go to my mechanic to swap off my winter wheels and tires so I bought so new equipment to do it myself
The FED's balance sheet now hold almost every asset imaginabe, interest rates are 0% and they are out of tools.
1. Globally? China's growth rate was faked for at least a decade, so if that comes out that the 6.8% rate was fake, that instantly drags the World's second largest economy down. [1]
2. It is already BY FAR worse than the 2008 recession in every way. This is a health, economic and societal issue.
3. Inflation is ugly and usually avoided at all costs. The world is diving head first into the shallow end of the pool by printing unlimited money. Over the next year prices will sky rocket and many will starve. E.g. Egg prices are at record levels [2].
4. Stop printing money to help the short term. Build hospitals, NOW and Return to a sane monetary policy (will never happen).
[1] https://www.investors.com/politics/editorials/new-study-shin...
[2] https://www.ams.usda.gov/mnreports/pybshellegg.pdf
If your houses and stocks are worth half what they were, isn’t the money printing offset?
If nobody is spending, doesn’t that offset price rises?
I think when we return to good times, the extra money splashing around is inflationary. But it doesn’t feel like we need to personally be concerned with inflation for the next few years at least?
https://www.clevelandfed.org/our-research/indicators-and-dat...
So I don't know why people on HN so often are.
Official economic dogma is that inflation is caused by pay rises. This has always been self-serving nonsense, but it's particularly unhelpful now because it disguises the real causes of commodity inflation - which is a combination of supply/demand shocks that spike the prices of essential commodities, combined with loss of trust in national currencies, often made worse by foreign debt obligations.
(Asset price inflation is a different thing, and is caused by too much cheap money pumping up the cost of rent-seeking assets - which happened after 2008. If you're on the wrong end of the rent-seeking process it's still price inflation, but it's usually considered a good thing rather than a bad thing in official figures.)
It should be obvious that there's a danger of at least some of the above. Down-to-the-bone commodities like food and medical supplies will become more expensive, and there may be some spill-over into industrial commodities.
Luxury and "entertainment" commodities - which have driven the Chinese economy - are going to take a severe hit, because part of their customer base is going to be wiped out financially.
Rent-seeking assets are probably going to have a bad time too. As is bricks and mortar retail. I'd expect a wave of bankruptcies and default among landlords at all level. Even those who own property free and clear may struggle.
tl;dr: A rebalancing away from luxury/investment/speculation towards basic essentials, which will spike in price, with a lot of collateral damage at all levels.
In the short run, while everything is locked down, there's been a near total destruction of demand and (generally) a fall in prices. Businesses are not making any revenue, they can't afford to pay workers, the workers are being laid off, and nobody can afford to buy anything even if they were allowed to go outside anyway. That's deflationary.
The Fed's monetary policy response has been to pull out all the stops to reverse that. There'll be trillions of dollars injected directly into the economy within the next month.
The problem comes when lockdown ends and people start buying things and going out again. That should be right around when the supply chain impacts of the virus hit (there's usually about 1-2 quarters worth of product buffered in various stages of the supply chain). High demand + low supply + basically free money = lots of inflation.
It's also hard to eliminate inflation from the economy once it starts, because the Fed's primary tool is interest rates and you have to get ahead of the inflation rate. The real interest rate = nominal rates - inflation, so if inflation is running at 20%, then to raise real interest rates to just 10%, you need nominal rates of 30%. Particularly if inflationary expectations are increasing, your policy tools may not be sufficient to temper those expectations.
The Fed's balance sheet only holds US treasuries, and a small amount of high quality corporate bonds. They are considering purchasing municipal bonds (i.e., local government debt) but I don't think that's happened yet.
The Fed primarily provides liquidity, and it does that by purchasing bonds (aka debt) that nobody else wants to buy, but it's primarily US treasuries (i.e., US government debt).
Yes this will lead to inflation (if you look at real numbers, not the shady official CPI numbers), but the USD is also the world's reserve currency, so the US will probably come out mostly unscathed as other countries look to horde USD.
That said, no one knows what's going to happen so allow me to toss in my speculations
Bearish:
1), 2) It'll be worse than 2008 because a lot of people cannot work, and we run a consumption-based economy. People spend less during economic uncertainty (falling rates is an attempt to minimize this effect).
3) Cascading effects could be very bad (think 2+ months out). Everything was green and good and many businesses took on cheap debt to finance operations. When people aren't buying your products/services businesses will resort to layoff to minimize costs and when that doesn't magically go away because we're still quarantined and spending less, they'll have to slowly liquidate assets or default on their loans.
We've already seen a few corporate bonds downgraded and there will be more to come. Retail, Food, and Hospitality are going to have a very bad time lenders overexposed to those sectors will likely need a bailout and some consolidation.
4) Governments will keep printing money and will pass bills to provide hobbled safety nets for people all over the world. Many people will fight systems that attempt to provide financial safety nets the reduce the incentive to work so we'll end up with some crappy versions and a lot of QE. Federal reserves will buy some more corporate bonds because banks will be reluctant to touch them for a while. Long term effect of that is anyone's guess but expect some currency wonkiness
5) 2nd wave of this virus hits us shortly after we declare "everything is fine" and people freak out again
Bullish: We get very lucky and 1) Find a cure soon, and/or 2) It dies out after some herd immunity similar to SARS
I don't see government responses as being much different from 2008, ie bail out the large institutions and markets and leave average people in debt, and solutions like that tend to make for very gradual recoveries, barring a sudden attack of common sense, the window for which is already closing. I would therefore submit that we may expect the economic climate to take a year or more before government officials are able to lie believably about seeing promise on the horizon.
The low oil price is screwing the US for a separate reason: it means US shale is no longer economical in comparison.
1) We can expect unemployment in the teen %s. Some economists think we can get as high as 30%.
2) It will be worse
3) Consensus is a big V-shaped dip, assuming that the virus is contained, managed, tested and tracked.
4) Stimulus bills, debt relief-- things they've all, for the most part, already done.
Otherwise it seems the only way we beat this thing is with a vaccine, and that means a series of consecutive quarters of negative GDP growth... like 4 ~ 8 of them, at best.
The NBER, which is the main US body that previously used the "two consecutive quarters" definition, no longer uses that definition and now says a recession is defined as "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."
By that definition, we may already be in a recession.
See also: https://www.calculatedriskblog.com/2020/03/the-economic-outl...
jk, hope you figure things out.
Most families of childbearing age are pretty terrified about bringing a child into this world in this particular time, anyway. One of my wife's friends just gave birth a couple days ago and reported that there were COVID patients on either side of her delivery room. My wife's first comment was "I'm really glad that I'm not pregnant right now."
Many people gave up, moved back home with Mom and Dad, and went off into very unexpected and disappointing career directions. Many hit the career snooze button by going to graduate school. I myself, a freshly minted MIT grad whose summer 2010 internship fell through at the last minute, found myself applying and being rejected from such emergency jobs as barista, pizza delivery person, target cashier, aquarium ticket salesperson, and SAT tutor. There was a period in the fall of 2010 where I became semi-homeless (sleeping in common areas at MIT and Harvard) and was stealing the bulk of my food from Harvard dining halls. I ended up going to graduate school and was extremely grateful to have a $25k/yr graduate stipend as income.
This looks to be worse. I am very very worried for today's college-age population, as well as any career changers who have invested in that but not completed the transition. My wife just went through a year of self-studied bootcamp type work and now I'm not sure when, if ever, she'll be able to get a job.
When you think of the tech sector, remember that big companies tend to weather downturns like this better than medium sized companies. Big companies they may lay off people, have reduced earnings, but they can survive. There's hysteresis in the system: perhaps fewer aircraft are bought, but engines are still needed for the ones in the pipeline. Only if that pipeline dries up and related lines of business can't carry it will such a company fail. Sure there are exceptions (Lehman, Enron, etc) but this isn't a bad rule of thumb. One relative advantage the US will have is that the average age of its population will drop over the next 3-8 years, which is a major driver of economic growth.
Very small companies can survive these events both due to some support from the the new bailout bill and because if you have one or two key customers (or a toehold in a viable sector, say games) it can be enough. tighten the belt a bit, focus on profitability, and you can survive and be positioned for growth when the time comes. A mouse needs much less to survive than a hippo.
Medium sized companies are the most at risk as they need that revenue and typically have a smaller margin for error.
As for the tech implications, it's hard to say. Today VCs are really happy with certain consumer companies (delivery, games, video) in their portfolio and feeling pain for their enterprise-focused portfolio companies. That can change as the market dynamic shifts: if we do see growth and you have an enterprise product that can drive top line growth you'll be in a pretty good position; once people are no longer locked up they'll be eager to spend their money on things they couldn't while locked up.
Looking for "where the puck will be": since there will be a log of "reboots" (people looking for new jobs, many empty storefronts and closed businesses): look for structural and secular shifts in how both the macroeconomy and macroeconomy shifts: the same businesses won't be back in all those empty storefronts. Many will remain empty for a long time, but not all. The things to look for are: when someone new starts a new business what will they need? Can you help them out? At the macro scale this has modulated (not completely changed) the attitude to remote work (for jobs where that is possible): what can you provide to take advantage of that? There will be a flood of office space on the market; will companies consider going away from "open plan" bullpens? They were common until the 60s and then came roaring back in the 00s. So times can change.
etc
> Forget predictions that the U.S. economy will enter a recession this year due to the coronavirus pandemic — the UCLA Anderson Forecast says it has happened already.
> On Monday, the school revised a forecast it issued just last week that stopped short of predicting a recession. The revised version says the economy has already stopped growing and will remain in recession through the end of September.
We're gonna have massive unemployment that'll dwarf 2008. Some industries will come back relatively quickly (dine-in, coffee, etc), but others will take years (travel, hospitality). Government support will leave everything with massive debt, which doesn't seem like a problem now (money is on sale!), but the scale of it will eventually cause austerity. I think this will leave many people in a more prepper / saver / hoarder mindset, which will further slow down the recovery.
We'll hopefully start to see a recovery towards the end of next year and mostly recover within two years of that.
I think this is exactly right. It’s what happened to the generation that lived through the Great Depression (heard many stories from my Grandmother who lived through it).
But the others, in the current (and last 20-40 year) political climate are a no go, I bet. Some will die because "green" is anathema to half the population. Others will die because they are not proper earmark-able vanity projects that you can stamp a rich person's name on (grid modernization, I'm looking at you).
Overall, and maybe I'm pessimistic, I would bet absolutely none of the things on your list will happen. I used to say that they wouldn't happen until something catastrophic occurred, but now that we're here, I don't buy that anymore.
They'll be called socialism, or a waste of time, or outright called lies from the left/right/wherever. But I am not, and may not be able to be convinced that the US can accomplish anything positive and productive, at all, for the foreseeable future.
The bailout packages may lead to higher interest rates due to government borrowing but inflation is probably in check due to low demand.
The question is whether it will be worse than the Great Depression, when there were two follow on crashes of similar magnitude. The stimulus is trying to prevent the last crash from growing into a second crash.
The main thing governments can do to overcome the economic crisis is to admit defeat and get it over with. Delaying gives time to build hospital space and improve treatment regimes, but, at best, that halves the death toll. (Unless we find a cure for the common cold this year.)
Putting it in perspective, getting COVID-19 roughly doubles your chance of dying this year, regardless of your age (except kids, which are much better off). If 100% of the population catches it tomorrow, it will reduce average life expectancy in the US by about a month (at most). If we rationally allocated the $10T’s the COVID-19 response is costing, we could end global warming and also increase life expectancies by way more than a month. Doing that would be political suicide.
Speaking of which, the lockdown does have one other benefit: it lets politicians time the collapse of the hospital system until after the next election. This seems to be exactly what the US is planning to do (the second peak of deaths is scheduled for late November / December). Also, making big sacrifices gives people an impression of strong leadership.
So far this strategy is working well for the politicians. Trump’s approval ratings are at an all time high, despite the fact that he repeatedly mismanaged the crisis. So are Cuomo’s, even though Newsom’s (California’s) handling of the crisis was much more decisive and successful so far.
It reminds me of the effect where you have an incompetent “firefighter” software developer that causes a string of crises, and then heroically “saves” the company over and over, gets promoted for it, and then promotes more fire fighters.
At least in the US, governments seem to be stringing the country along with "just a little longer" promises, but as the virus continues to explode despite unprecedented restrictions it seems increasingly unlikely that we're going to see a return to normal any time in 2020. Businesses and individuals who could have easily survived a month of shutdown are going to be unable to survive for 6-9 months of shutdown and things are going to start getting very chaotic.
3) Weird. Some sectors of the economy are going redline as demand surges, but others are going to flatline.
4) They'll print money and pray that we can pull out of the dive. This is going to be much easier for some countries (US) than others (Euro zone). It will be very interesting to see how quickly politicians are willing to acknowledge that they're not facing a short-term issue, but rather a long term issue with a ton of uncertainty.
2) It will be far worse.
3) Initially, it will be massive job losses, massive spending, and massive regulations. There will be an apparent bump whenever the lockdowns are relaxed. The bump will likely be smaller than expected, but any bump may initiate a strong market response. Since this is an election year, there will be no stop to the handing out of money to nearly every sector of the economy. This will be followed by increases in CPI, which will further accelerate.
4) Institutional investors and then governments around the world will begin to sell their USD reserves as CPI rate of increase goes up. When they see that there is no counter-response to selling of USD reserves, the rate of liquidation will increase, yet further increasing the rate of CPI increase, though this may be a few years out. The onset of hyperinflation in Wiemar Republic Germany was preceded by a few years of high inflation, but the actual hyper-inflationary period was less than one year and set in within a month or two. This isn't to suggest that conditions in the U.S. are identical or even similar to conditions in Germany, but to demonstrate that hyperinflation onset is far more rapid than most realize.
As a side note, many people are not aware of the concept of Cantillon effects (including most of the popular Austrians and monetarists), which economists use to describe how money flows through an economy. In effect, newly created money does not instantly flow throughout the economy, and in many cases may only flow in very narrow sectors. For example, the bulk of money created over the last decade remained in non-consumer sectors and thus minimally impacted CPI. Further, even within something such as CPI, things may fall precipitously in price, such as airline tickets and gasoline, while other things experience dramatic increases, such as eggs and bread.
I observe there to be a handwavey treatment of anyone discussing inflation. I find across popular personalities, social media, and various forum comments that inflation is some relic of the past, but the only evidence provided is the lack of CPI increase in recent years, which cannot be held up as relevant given the current government activity is very different as it includes creation of money likely to flow directly into the consumer sectors while there is a forced reduction in production (i.e., yet more dollars chasing yet fewer products). Also, I'm not that great on the technical explanations, but I know that the way the QE was performed it created a very high demand for dollars, sending the USD very high. But the velocity of M2 was also very high, and that is largely what has been fueling the apparent boom, but I admit I'm a poor source for these more technical aspects.
https://tradingeconomics.com/saudi-arabia/gdp-growth
Saudi arabia has been in recession all of 2019. Russia has nothing to do with why they arent cutting production.
https://tradingeconomics.com/mexico/gdp-growth
Mexico as well. All of 2019.
https://tradingeconomics.com/japan/gdp-growth
Japan technically hasn't joined the recession game but there's no chance they don't announce recession in May.
https://tradingeconomics.com/france/gdp-growth
France announces recession May 1st. Their martial law and banning of basic human rights will have to end.
Now comes the big question; how much debt is the world governments putting on? Canada's private debt to GDP: https://tradingeconomics.com/canada/private-debt-to-gdp 266% debt is insanity.
https://tradingeconomics.com/canada/households-debt-to-incom...
Debt to income >100% means you cant pay your bills. Canada is above 170%. Canada cant take on any new debt. Bank of Canada has been writing papers on how the debt level is so tremendously high that we could never take an economic slowdown. That's certainly here due to the virus.
So the better question is not that it's a recession. Recession was already happening; it's certainty. The better question is if it's a depression.
US unemployment numbers are out. It's peak great depression numbers; though this is solely due to virus. Mind you also, this great depression number is France's status quo numbers.
There's also an analysis to be done, one of the unique things about depressions vs recessions is social tensions. Right before depressions, there's always an unusual amount of social tensions. Which if you're reading this site or just watching what's going on with world politics. That's certainly unusual. This may be a depression. Which yes, this will be worse than 2008 if that's the case.
The bigger issue with these problems. How much quantitative easing is happening? How much money is being printed to stem the crash. Unprecedented amounts of money is coming to the markets. The fed is buying so many bonds right now that they are artificially keeping the crash from happening. The bond market is about to explode. The fed cant keep this up. They haven't paid back the $4 trillion from the financial crisis.
https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
https://en.wikipedia.org/wiki/National_debt_of_the_United_St...
Eventually they money tree dies OR you have to print so much money to balance the books that your people become tremendously poorer. Japan is already at 250% debt to gdp. USA is around 100%. China has done this multiple times over the last 10 years. Greece was around 200% when they stopped reporting their debt a couple years ago. Good for them, they are down to around 15% unemployment in Greece. Disaster.
The house of cards aka debt will com...