The Next Recession
Over the last few years, the same thought has repeatedly popped into my head: What will happen during the next recession? Every recession is different, none are easy to navigate. Yet, I fear that the next one is going to have seismic impacts, the like of which will be far different from those associated with previous recessions. Why? Because it’s been so long.
With the exception of the Covid Recession, there hasn’t been a sustained contraction in economic activity in the United States since June of 2009. That’s an astonishing 15 years. That’s 15 years of workers being able to find employment, and for months at a time, workers being more in demand than at any point in US history. I don’t think we’ll ever see anything like the 2021 labor shortage again. This is all good news for workers. Wages have risen, especially among the poorer half of Americans. People are spending more on homes, going on vacation, and buying new cars. The country is flush and has been for years.
The problem with all this is we have forgotten what a bad labor market feels like. This struck home when I saw the sixth episode of the most recent season of “The Bear”, titled “Napkins” (read my post about “The Bear” here). In “Napkins” we see the origin story of Tina, who plays one of the line cooks throughout the show. Tina begins the episode as a payroll clerk at a Chicago confectioner. She’s then laid off and spends much of the episode trying to find a new job as the bills pile up. She tries to find jobs in payroll, then in retail. She will work any job anywhere but is unsuccessful. The episode is well-done, an average installment of “The Bear”, meaning a fantastic episode by the standards of almost any other show.
The problem is the narrative doesn’t ring true. Especially for the last two years, a person with Tina’s resume would be able to find work. She’s 47 years old, with 15 years of experience working in payroll at a reputable employer. She presents herself as likable, competent, and well-organized. Exactly who any employer would want for an entry-level administrative position. The idea that such a person can’t even get a minimum-wage job in today’s world is inaccurate. Someone like Tina pounding the pavement every day, applying to jobs in person and posting on LinkedIn, willing to work any job, would find one quickly.
Of course, there have been times when the Tinas of the world couldn’t find a job. Even those with skills and experience and effort would be wearing out their shoe leather for months without any leads or hopes. It was just so long ago. There are an entire generation of American workers who only know good times. We, as a society, are in for a world of hurt when that comes crashing down. That isn’t to say that there haven’t been any layoffs in the last 15 years. Of course there have been. Millions of Americans have been fired, laid off, made redundant, or otherwise become unemployed in the last decade. The difference is that those layoffs have been industry-specific. Both tech and finance have had a few rounds in the last two years. But there haven’t been systemic layoffs affecting millions of workers from different industries all at the same time. To find a cohort that knows what it’s like to go through a round of mass layoffs across the economy you’d have to look at workers that are now in their 40s.
What about the Covid recession? Doesn’t count. Yes, the unemployment rate did shift from a historically low 3.5 percent in February of 2020 to an apocalyptically high 14.8 in April of 2020. That would normally be terrible, but the Covid recession was unique in two ways that make it discountable. First, it was short. By April of 2021, the worker shortage was already in full swing. Secondly, and crucially, worker incomes increased during that time. Due to the multiple rounds of government stimulus, wages not only increased, they went higher than they ever had or have. From the spring of 2020 to the summer of 2021, American workers did the best they have ever done. So yes, there was a period when unemployment was high, but it was the one time in economic history that unemployment and wages both increased. Workers weren’t searching for work, to the contrary, millions were being paid more to not work than they were to work.
Currently, we are at a point where unemployment has been at historic lows for years. Again, omitting the Covid recession, there are workers nearing 30 who have never seen an unemployment rate above 5.0 percent. That’s unprecedented. Nothing like this has ever happened before. From 1974 to 1996, the unemployment rate never went below 5.0 percent. What would count as the best labor market for the early Baby Boomers would be the worst labor market for Generation Z. That’s a stunning shift.
Because of this relative prosperity, the next recession is going to likely have pronounced psychological effects on Generation Z and Millennial workers. For anyone born after 1986, any spell of unemployment has been during a period of falling unemployment or low unemployment. Things were bad in the early 2010s, but at least everything was trending in the right direction. Worse, Generation Z and Millennials are not known for their emotional strength. On the contrary, rates of depression are higher than ever. If that’s how young adults are feeling during a time of plenty, I fear for what the reaction will be during hard times.
Beyond psychology, so many other things will change. The last time the unemployment rate was above 5.0 percent, gig work was just getting started. Uber was taking off, Airbnb was minuscule, and DoorDash had just been founded. So much of the current economy has only existed in a time when people had money to burn. How everything unfolds during the next recession will be studied by economists for decades. Some industries will become shells of their current selves. Others will find firm footing and establish themselves as constants in American life. Which are which is hard to say. So many firms that are now household names have never gone through a significant economic downturn. Some will be woefully prepared to deal with an economic contraction. Others will flourish.
When will the next recession occur? I have no idea. As I wrote last year, there is no way to predict the next recession. Anyone who does so with confidence is not to be trusted. From 2015-2020, there were constant predictions that a recession was imminent. Those that predicted 2020 were correct, but only because Covid bailed them out. There will always be weaknesses in the economy. When Silicon Valley Bank imploded, there was a contagion risk that might have caused a recession. The coming presidential election, if not conducted fairly and respected by the losing party, could also cause difficulties. These are just guesses, however. What causes the next recession and when it happens is unknowable. But when it comes, it’s going to have an impact unlike any other.