Recent developments support my April 27, 2020, “Worldwide 1930s Style Depression Has Begun!” thesis for it to be years for the US and global economies to climb back to 2019 levels. There will not be a V-shaped recovery. My conclusions are based on the following:
- Deloitte’s recent forecast for the US economy through 2025.
- Research findings from the three prior US economic contractions which were caused by sudden Covid-like shocks to the US and global economy.
- 1929-1939 Great Depression
- 1973-1975 Recession
- 1981-1982 Recession
The data in the tables below were obtained from a June 15, 2020 Deloitte US economy forecast. Deloitte’s detailed and very granular report includes the actual comparative metrics for years 2014 through 2019 and three forecast assumptions for the years 2020 through 2025:
- Best Case
- Worst Case
From my 43 years of experience a forecast from a major US accounting firm for the economy is always more objective when compared to forecasts from an investment firm. The data in the tables below were pulled from Deloitte’s report.
The chart and the table below depict that Deloitte’s best-case scenario is for unemployment to not get back to under double digit levels until 2022. Under its worst- case scenario unemployment will not get to below double digits until 2025 (9.9%).
The best-case in the table below is for GDP to have year over year (yoy) growth of 1.0% in 2021.
The chart below depicts that GDP will not exceed its 2019 high under Deloitte’s best-case scenario until 2023. The worst-case scenario would be 2025.
The table below depicts that Consumer Spending will either increase or decrease by approximately 3% in 2021 as compared to 2020.
The chart below depicts that under Deloitte’s best-case scenario Consumer spending will not get back to the 2019 high until 2023. The worst-case scenario would be 2025.
The table below depicts that after declining by a minimum of 30.4% in 2020, Corporate after-tax profits will not increase until 2022 under Deloitte’s best-case or worst-case scenarios.
The chart below depicts that under Deloitte’s best-case scenario Corporate after tax profits will not exceed 2014’s until 2023. Under Deloitte’s worst-case scenario corporate after-tax profits in 2025 will have declined by 19.1% as compared to 2019.
Other best-case notables from Deloitte’s forecast:
- Household wealth will not get back to 2019 level until 2023.
- Capital Expenditures by businesses will not get back to 2019 level until after 2025.
Deloitte’s best and worst-case scenario forecast for the personal savings rate which is depicted in the chart below is the eye opener. Even under the best-case scenario the consumer is going to retrench. Should Deloitte’s worst-case scenario for the personal savings rate play out a US economic depression would be inevitable.
A factor that could increase the probability for Deloitte’s worst-case scenarios is Covid-19’s lingering shocks to the US and global economy. There were two prior periods which caused lingering shocks to the US and global economies:
- Twin 1973 and 1979 oil embargos for the 10 years ended 1982
- Rolling bank failures for the decade ended 1940.
Everyone born in or before 1960 would have lived through at least one of the two oil shocks which are well covered by Wikipedia.
The 1973 oil embargo caused shortages and resulted in the price of a gallon of gas increasing by 400% according the page below which resides on the Federal Reserve’s website.
The 1979 oil embargo caused further shocks to the economy.
The oil embargos were likely the reason why the US had two significant recessions (1973-75, 1981-82) within six years as depicted in the chart below.
The sudden shock to the US economy which is the most analogous to Covid-19 is the bank failures that occurred after crash of 1929. The bank failures, unlike the two separate event oil embargo shocks, lingered throughout the decade that began in 1930.
Economists had believed that the US economy was set to recover in the fourth quarter of 1930.
Instead, the ongoing bank failures resulted in US economy entering into a depression.
The phrase “Only Thing We Have to Fear Is Fear Itself” in Franklin Delano Roosevelt’s (FDR) 1933 inauguration speech which became famous pertained to the public’s widespread fear of bank failures.
The common denominator of Presidents’ Roosevelt and Trump is that both treated their respective bank failure and Coronavirus crises as wars within the US. Borders.
FDR concluded his March 4, 1933 inaugural speech with:
“I shall ask the Congress for the one remaining instrument to meet the crisis—broad Executive power to wage a war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe.”
ABC News reported “Trump now calling coronavirus fight a ‘war’ with an ‘invisible enemy” on March 17, 2020.
FDR was able to overcome the fear of bank failures by establishing the FDIC (Federal Deposits Insurance Company) in 1933. Trump or Biden should he be elected as President will not have it that easy. To overcome the Coronavirus fears a vaccine must be developed and given to the entire world’s population.
With the probability very high for the Coronavirus to continue to linger the most important US economic metric for all investors to closely monitor is the rate of personal savings as a percentage of disposable income. The rate is published monthly by the US Commerce Department’s Bureau of Economic Analysis (BEA).
The rate is key since it has a direct inverse correlation to Consumer Spending. The higher the percent of personal savings versus the disposable income the lower consumer spending will be as a percentage of GDP. A steady decline of consumer spending increases the probability of an extended economic contraction. The chart below depicts that consumer spending as a percentage of GDP steadily increased from 1980 to 2020. However, at April 1, 2020, consumer spending as a percentage of GDP declined to 67.1% which is the lowest since July of 2007.
The higher the percentage of personal savings as compared to disposable income the higher the probability of an economic depression. The lower the rate the higher the probability of a V-shaped economic recovery.
The Savings as a percentage of disposable income rate spiked to an average of 16.9% for the first five months of 2020 vs. 7.9% for 2019. The rate reached as high as 32.2% for April and declined to 23.2% for May. Deloitte’s best-case scenario for 2020 is 18.4%.
Bloomberg’s July 23, 2020 article “Recession-Shocked Savers Rein In Rates With a $20 Trillion Hoard”, included an interview of Danielle DiMartino Booth. Ms. Booth a former advisor to the Federal Reserve and the founder of Quill Intelligence Research. Booth “likens this year to the Great Depression, a slump which was followed by an era of austerity and increased savings”. Note that the rate was also elevated from 1970 to 1976, the period which encompassed the first oil embargo shock.
Under Deloitte’s worst-case scenario as depicted in its forecast charts above, the percentage of savings to disposable income would remain above the highest rate of 14.6% (10-1-73) until 2025 when the rate declines to 13.9%. Should the worst-case scenario occur a depression for the US economy would be unavoidable.
Click here to receive the monthly percentage of savings to disposable income rates when they are published by the BEA.
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