I often think of the economy as a metaphorical set of pipes with money (the "water") flowing through them. Recessions typically happen when the pipes "clog," causing the water to flow well below its normal pressure. Governments have to respond, taking actions to "unclog" those pipes to get the "water" flowing again.
But the recession I believe we've already entered is very different in kind, not just degree. The coronavirus pandemic has forced large sectors of our economy to close down, severely restricting consumption and economic activity. This time, the "pump" has broken. It may not matter how much anyone tries to unclog the pipes, as little will flow until the pump starts working again.
This metaphor has some significant ramifications for what we'll experience over the next few months (yes, months, not weeks). It feels like we will have a two-stage recession:
- Stage 1 will be unlike anything we've ever encountered before. This is the current stage, where the pump is frozen. Many industries will experience an inability to stimulate demand no matter what they do. For example, Las Vegas casinos are not allowed to do any business and thus can't even make an offer. Airlines can cut prices to practically zero, yet very few people will fly. Normal pricing and revenue management actions like lowering the price to boost occupancy simply won't work the way they typically might.
- Stage 2 will be more like a typical recession, where weak demand meets excess capacity until supply and demand rebalance. Government stimulus will drive investment and demand and slowly, but surely, the engine roars back to life. Whether this will be a "V shape" like typical recessions or a shape more like the balance sheet-driven "Great Recession" is hard for me to predict (I'm an engineer, not an econometrician). But whatever it will be and however long it takes, it will mark the process by which we get back to "normal."
One other big difference with past recessions is the pace of the buildup. Past recessions tended to build up over time whereas this one came on us almost suddenly. The just-announced unemployment application numbers for last week prove this point. We went from “normal” rates one week to 3.28 million last week. By way of perspective, that is almost 5 times the record for any week (695K way back in 1982). There were roughly 155 million people employed in 2018, so 3.28 million unemployed is roughly 2% of the entire workforce being laid off in a single week.