Tough Times

Unemployment and Recession

In March 2020, I got a call from my cleaning company.

“Ms. Finlay, because of the pandemic, we are closing the business. We recommend you call this other company when you feel that it’s safe to have someone in your home again.”

The pandemic caused many of us to feel unsafe letting others into our homes. Along with the lockdown, some businesses failed, including cleaning services, restaurants, and day care centers. Demand for services dropped.

As demand falls, unemployment rises.

How does this happen?

As demand falls, producers sell less. If they sell less, they’ll pull in lower revenues and profits. Then they won’t need as many hours from their employees as they used to. They may lay off, let go of workers, or reduce the hours. When demand falls enough, some businesses fail, as my cleaning service did.

During the pandemic, unemployment rose to 14.3 percent. Many businesses failed because they didn’t have enough cash to pay their staff. If unemployment is too high and businesses are failing at higher rates than usual, then production (GDP) is lower than its potential.

When production falls for six consecutive months, the economy is in a recession.

The pandemic-era recessionary period was not long enough to qualify as a recession, but shutting down production led to a 28 percent decline in GDP during the second quarter of 2020. (The economy rebounded in the latter half of the year.) [1]

Poor regulatory and business decisions caused the worst recessions of the last century: the Great Depression (1929-1941) and the Great Recession (December 2007 to June 2009). Other downturns are the result of the Fed combatting inflation including the recessions of 1982-1983 and 2001.

Let’s look at the recession of 2007-2009 in more detail.

In 2007, nearly 25 percent of borrowers holding variable rate mortgages saw their mortgage rate rise to a level they couldn’t afford. [2] In the summer of 2008, the housing market crashed as homeowners stopped paying their mortgages. Foreclosures nearly doubled. In October 2008, the stock market crashed.

During the recession of 2007-2009, real GDP fell by 4.3 percent. The unemployment rate rose from an average of 4.6 percent in 2007 to 9.3 percent in 2008. [3]

The problems recession cause

Most American households expand their wealth by buying equities in the stock market and building equity in their homes. After the housing market and stock crashes, Americans lost a lot of wealth, an average of over $50,000 each.

My husband and I were upside down on our mortgage, as were many others. What we had in the stock market was half of what we’d put in.

We were lucky—our jobs were secure, and we weren’t close to retirement. Once we sold our old home (2008), we were out of debt. We could spend.

But most households decreased their spending because they weren’t sure they were going to keep their jobs. Jobs that had seemed secure were gone.

I remember seeing a well-dressed man at the end of an exit ramp in Stockbridge, GA, with a sign that said, “I was a program manager. Now I’m out of work. If you have work, please let me know.”

Some downturns are the result of unexpected problems, such as the pandemic. Since the best way to fight COVID was to wait 14 days after exposure or stay away from others, we minimized our shopping time. Shoppers, especially elderly ones, were afraid to go into stores. One older friend, Mike, used curbside pickup at every store.

Economic issues arising during recessions include food insecurity and loss of wealth. Home ownership rates went down as people lost their homes.

But Black and Hispanic families have only recently returned to the levels of wealth they enjoyed before the recession of 2007-2009.

So, we need ways to tackle the hardships households face during times of crisis.

For example, during the Great Recession, food insecurity rose to 14.9 percent in 2011 from an average of 11.1 percent from 1995 to 2007. By 2022, it was 10.2 percent, buoyed by federal assistance during the pandemic. [4] [5]

In case unemployment rises too much or too quickly, the government has the resources to alleviate some of these hardships. Since the Great Depression, the government has been quicker to act, but it still takes Congress months to decide on and enact special legislation.

These include government payouts and benefits, and temporarily reducing taxes, as Congress did during the 2008 crisis and the pandemic. During the pandemic, these tax cuts included extra credits for working parents. [6]

Fortunately, there are automatic responses that happen while Congress and the President decides.

We’ll spend time on this in the next post. We’ll also look at measures you can take to protect yourself from future recessions.

As always, thank you for reading and supporting my work,

Nikki

[1] https://www.bea.gov/news/2021/gross-domestic-product-fourth-quarter-and-year-2020-second-estimate.

[2] The Great Recession and Its Aftermath, John Weinberg, Federal Reserve History. https://www.federalreservehistory.org/essays/great-recession-and-its-aftermath.

[3] Data from BEA.gov.

[4] Food Security and Nutrition Assistance, Economic Research Service, US Department of Agriculture, updated Oct, 18, 2022. https://www.ers.usda.gov/data-products/ag-and-food-statistics-charting-the-essentials/food-security-and-nutrition-assistance/

[5] Unfortunately, food insecurity is on the rise. In 2023, 17.9 percent of households had trouble finding and paying for adequate, nutritional food.

[6] Data from IRS.gov.