The world’s biggest economy is in a technical recession – data out last month confirmed that. But if this recession feels very different from the last big one, during the 2008-09 global financial crisis (GFC), that’s because it is. Here are five ways this time is different – and why that matters.
1. Inflation
At 8.5%, the US inflation rate is currently near a four-decade high. It’s also more than double what it averaged in 2008 (3.8%). What’s more, the inflation rate was in negative territory for most of 2009, meaning consumer prices were actually decreasing.
Inflation is a whole lot higher today than it was during the GFC. Source: Bloomberg
2. Employment
The flip side of the current painful inflation situation is that the US job market is going strong, with the unemployment rate at just 3.5%, near a five-decade low. In contrast, during the GFC, unemployment more than doubled, eventually hitting 10% in 2009 and staying as high as 8% even as late as January of 2013.
The unemployment rate is much lower today than it was during the GFC. Source: Bloomberg
3. Consumer health
Soaring living costs and a technical recession are weighing on consumer confidence today, sure, but consumers are in far better shape than they were during the GFC. A good way to measure consumer health is to look at credit card default rates. These started rising sharply in 2006 and 2007 and stayed elevated for several years, even after the worst of the downturn was over. Right now, we’re still not seeing anything of the sort.
Credit card default rates are very low today. Source: Bloomberg
4. Housing
Needless to say, there’s a sharp contrast in the housing situation today compared to the GFC, not least because the crisis was partly caused by a crash in the property market. Back then, home prices started slumping in early 2006. Today, we’re seeing some demand weakness in housing, but so far the big national home price measures haven’t started turning down.
Home prices today are holding up. Source: Bloomberg
5. Shortages
Both recessions saw shortages, but of very different things. During the GFC, the world was basically plagued by a shortage of money – customers were broke, banks were troubled, and some governments couldn’t meet their financial obligations. Today, there’s a shortage of actual stuff – from semiconductors to energy.
What does all this mean for the recovery?
The differences between the recessions today and during the GFC have big implications for how the Federal Reserve responds. The Fed, for its part, has two responsibilities: keep employment high, and inflation low and stable. During the GFC, unemployment shot higher while inflation shot lower, becoming nonexistent or even negative for most of 2009. That meant the Fed had the capacity to slash interest rates to stimulate the economy without worrying about fueling inflation.
Today, the situation is the exact opposite: unemployment is at a half-century low, while inflation is still near the four-decade highs it hit this summer. That ties the Fed’s hands, forcing it to keep on aggressively hiking interest rates until inflation is brought to heel. So while the Fed’s rate cuts during the GFC helped stimulate the economy and fight off the recession, the US central bank is doing the opposite during today’s technical recession. And those higher interest rates could exacerbate the economic slump.
The issue is made worse by shortages of actual stuff. See, higher interest rates are effective at cooling down inflation caused by strong consumer demand, but do little to combat inflation caused by supply shortages – especially oil and natural gas shortages that cause energy prices to spike. Put differently, the Fed’s tools aren’t as effective at tackling the current type of economic situation. This is in contrast to the GFC: back then, there was a shortage of money, and the Fed’s actions – cutting rates and purchasing huge amounts of bonds – helped tackle that by flooding the economy with liquidity (i.e. money).
On the bright side, today’s low credit card default rates – combined with house prices that are holding up fine – mean there’s little risk of a repeat of all the credit defaults that happened during the GFC, which led to a near collapse of the global financial system.
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