Comparing US Recessions,descriptive 2009 vs predictive 2020

I have been planning to write my blog on business scenarios for many days and thought this could be a right topic to start with, since many of friends and peers are discussing about probability of recession in United States and comparing it with 2009 great recession. I'm writing down my analysis and views with circumstantial data.

I could start saying that we are currently in 'Recession period.' To understand what recession means, according to National Bureau of Economic Research if the real GDP of a country shrinks by 2% for two consecutive quarters in addition with negative growth trends in real income, employment, manufacturing and retail.(which are direct proportional factors to GDP).

The primary difference is that 09' recession was due to financial imbalances started from housing bubble and fundamental bad business plans while the current financial downtrend is result of surprisingly external factor , the virus COVID-19. Each Recession model is unique so as 09'& 20', but they share common characteristics. Although we didn't yet enter the 2 quarters of the trajectory cycle, but all the trends and forecast models clearly indicate the encounter.

09' recession, root cause: The root cause for 2009 recession was the sub prime mortgage crisis in the housing sector. In 2000 with the dot com bubble and fed's lower interest rates (Fed has lowered its interest rates to spur the growth), made more people to invest in the real estate/housing. The greedy hedge fund owners who were always in pressure to show the income, considered this an opportunity to lend loans to borrowers who are never even qualified. Even the investors who got burned in 2000 bubble crash considered housing as an alternative investment arena. This had a huge proportionate increase in lending sub prime mortgages and purchases and increased the house prices. From 2004-2006, Fed raised the interest rate several times in an attempt to slow this down and avoid serious inflation. By the end of 2004, the interest rate was 2.25%, by mid-2006 it was 5.25%. The borrowers started defaulting in turn making the hedge fund owners run into loss who unlike banks incurred money from mortgage securities. This was a self destruction business strategy until Wall street realized in 2008. And this caused ripple affect which lasted long for 18 months.

20'recession root cause: Well everyone understands the fact that unlike previous recessions the current one is because of virus which started as epidemic and now is a global pandemic. It started back in China, but is declared as global disaster in US. Though it is considered to hit the retail market directly now like airline, transportation, restaurants etc.. it'll soon have ripple affects on all the other industries. Remember in economy ,one's spending is someone's income and vice versa. The basic building block which drives economy is 'Transaction'. And consumer can be any like mortgage companies, banks, Industries, private companies,govt departments etc. When consumer stops spending, the transactions terminate creating a catastrophic damage to a macro economy.

source: Bureau Of Economic Analysis(BEA)

The top industries contributing to US GDP are Financial services, Real estate, Manufacturing, Healthcare, Wholesale/Retail respectively. In 09' it was real estate which started crashing, then the mortgage companies, then the banks and so on..

For quantitative analysis,I considered the major economic indicators (refer to principles of basic economics in general category to understand basic economic terms: https://kmrayyappa.wixsite.com/ayyappa/post/principles-understanding-of-basic-economics)

List of Basic Economic Indicators :

• GDP growth rate

• Unemployment rate

• Manufacturing

• Retail

Quarterly analysis of GDP:.

• Great Recession GDP peaked at 2008 Q4 @-4.1%

• JP Morgan Chase forecast, @-14%

• Goldman Sachs March 15th ,20' GDP forecast Q1 @0%, Q2 @-5%, Q3 @3%, Q4 @4%

• Goldman Sachs March 20th ,20' GDP forecast Q1 @-6%, Q2 @-24%, Q3 @4%, Q4@10%

source: commerce department, JP Morgan Chase, 09' vs 20'

Unemployment rate:

• Morgan Stanley forecast : -12.8%

• Goldman Sachs march 15th,20' forecast : -9%

• Goldman Sachs march 20th,20' forecast : -15%

• Bank of America forecast : -15.6%

Three weeks ago, 3.3 million Americans filed for unemployment , and last week additional 6.6 million enrolled.Over about two months, total job losses could be between 16 million and 20 million, according to Bank of America

source : NY Time's economic blog

Manufacturing:.

Manufacturing business confidence in light of Purchasing Managers Index in the United States is expected to be 30.00 points by the end of this quarter, according to Trading Economics global macro models and analysts expectations. The record negative in 2009 ended at 34.00 points until it saw any upturn.

source : trading economics

Retail sales:

Annual Consumer spending growth rate peaked i 2009 at -3.8%

Annual Consumer spending growth rate 2020(Deloitte march forecast model) : -4.7%

Even business investments and foreign trade are projected to go worst of the decade.

The real question is how bad the recession affect would be?

I think from Chinese economic recovery, it could be a V-shaped model. The growth rate curve fall will be very shallower compared to 09'. After economic recovery in 2020 the GDP curve looks flatten but unemployment rate will still prevail to be at peaks and complete economic tailspin could actually be seen only after 2021. Quick economic recovery depends on how soon countries can control their virus affected numbers, treatments and vaccine readiness. In 09', one housing sector destructed the economy, but now many industries are affected and many are near to be bailed out.

And the next thing is how will Government fight the recession? Fed bank will start the deflation measures. First, to create transaction movements in market, fed will lower the interest rates. During 09' recession, interest rate on mortgages were decreased to as low as 0%. Fed bank will print notes to supplement government's quantitative easing and help them to steep up employment. Obama released $787 billion American Recovery and Re-investment Act of 2009 to help the economy. And now, Trump government already announced stimulus package of $2.1 Trillion . Fed govt may re-adjust the increased tax tariff on the upper slab so as to re-distribute the wealth. But both at macro and micro levels, the strategy will be to increase productivity either by increasing the work force and work or by decreasing the expenditure, because real economy growth is all about productivity growth. Japan tried to come out of 1990's recession by increasing its productivity well and organizing its labor and work hours.

To all the immigrants from India, whether H1B/F-1, get ready for the brace. Keep all your efforts on securing job and maintaining emergency funds. I will recommend to think back on unnecessary expenditure. I saw many of my friends investing in stock markets, but I would say it's a gambling risk. Fed govt is push flowing the markets , so make a calculated risk on any kind of investments you make. If housing sector gets affected and if real estate value drops, the collateral market value drops. If collateral value drops more than the residual principal, then lenders may collect it from borrowers. So keep an eye on the back up funds.