Has the Recession Begun?

Popular Economics Weekly

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It might not matter when the so-called infection curve begins to flatten, or the epidemic “washes away”, as President Trump has said. The economic damage has already been done, due in part to the lack of preparedness by the White House, our broken health care system, and weak recovery from the Great Recession.

This recession probably began in March, said former Fed Vice-Chairman Alan Blinder recently. The first economic indicators affected by the coronavirus pandemic have plunged, including February's retail sales and Empire State manufacturing index.

It is what happens when companies are shut down and workers are quarantined in what has become a just-in-time economy. This is an economy in which workers are hired ‘just’ when they are needed, and parts aren’t stockpiled, but ordered to arrive ‘just’ in time to be used—mostly from China and other low-cost Asian countries these days.

We are in this fix because corporations now think short time—i.e., about their quarterly profits rather than longer term growth prospects. It wasn’t always that way. Until the 1980s and the politicization of economic theory (i.e., trickle-down economics) corporate bosses didn’t earn that much more than their employees.

Today, the Boss is always right, and workers have lost their bargaining power to stockholders and management that want to see a quicker return. The result is corporations have become so efficient there is no inventory or backlog of parts for automobiles, airplanes, or whatever else is still assembled in the U.S. of A.


Perhaps the first sign of what now seems inevitable—the next recession—is in retail sales that plunged 0.5 percent in February and declined to a 4 percent annual growth rate, per the above FRED graph.

Manufacturing is already in recession.  Activity has been contracting for the past six months.  The Empire State’s (New York) February survey to manufacturing activity literally tanked, to use a non-economic term.  It posted its biggest one-month decline on record, falling 34.5 points to an 11-year low of (-21.5). The six-month outlook index was as bad, falling almost 22 points to its own 11-year low. 

The U.S. Treasury Bond market even seemed to seize up last week, which panicked the financial markets.  So the New York Fed just announced that it may buy up to $1.5 trillion in U.S. Treasury bonds awhile dropping their short term rates to zero, injecting more money into the general economy.

The lowest-paid workers suffer the most, as in past downturns, while this recession could turn into a Greater Recession, or even another Great Depression. 

Why?  We currently have an income inequality that matches that in 1928 before the Great Depression.  And it was this level of inequality that caused workers to borrow on the easy credit terms prevalent then.  But when said borrowers couldn’t borrow any more to meet rising living costs, the U.S. economy crashed.

The Brookings Institute reported in the United States, 53 million people must get by on low wages, with median hourly earnings of $10.22. Based on a normal 40-hour week, that comes to just $21,258 annually before taxes.

It about equals the 2020 federal poverty level (FPL) income numbers of $21,720 for a family of three that is used to calculate eligibility for Medicaid and the Children's Health Insurance Program (CHIP).

Many of these workers aren’t earning enough for decent housing; so much so that 30 percent of the homeless are such workers.  That’s why we are seeing a repeat of homeless encampments last seen in the 1930s.

The so-called Hobo Jungles were a feature of the Great Depression memorialized vividly in songs such as Woody Guthrie’s, “I’ve been havin’ some hard travelin’, I thought you knowed...”

“The United States economy is like a poker game where the chips have become concentrated in fewer and fewer hands, and where the other fellows can stay in the game only by borrowing,” said Marriner Eccles, the Federal Reserve Chairman during the 1930s, “When their credit runs out the game will stop.”

We are at even greater debt levels today.  A recent NYTimes Op-ed by Morgen Stanley’s chief global strategist, Ruchir Sharma, highlighted the role of too-highly leveraged Zombie companies—companies that earn too little even to make interest payments on their debt, and survive only by issuing new debt.

“Hidden within the $16 trillion corporate debt market are many potential trouble-makers, including the zombies,” said Sharma, “that account for 16 percent of all publicly traded companies in the U.S.” 

 There are fiscal remedies coming from congress that may provide some relief—including Democrats’ $830B proposal for outright cash payments supported by the White House, aid for the airline industry, and a range of other ideas, including President Trump’s emergency declaration that frees at least another $50B. 

 But more will be needed. The Troubled Asset Relief Program (TARP) approved by Congress in 2008, which made available $700 billion to the Treasury Department to buy deeply depressed assets from banks, and Obama’s $840B American Recovery and Reinvestment Act (ARRA) of 2009 wasn’t enough to bring back prosperity for most Americans.

Harlan Green © 2020

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