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Published: April 10, 2020 at 10:01 a.m. ET, By Cullen Roche<\/p>\n
In my recent research note<\/a> on the coronavirus, I noted two potential scenarios:<\/p>\n 1. Short and painful. Six months of lockdown with a modestly fast recovery (about 15 months).<\/p>\n 2. Short-ish and painful. Around 12-18 months of lockdown with devastating economic pain and a much slower recovery (24-plus months). (The average drawdown in real GDP in the past seven recessions was 20 months, so a 24-plus-month recovery would be a very deep recession by any standard.)<\/p>\n Case 1 happens if social distancing is working, herd immunity is building, treatments are improving, warm weather helps and we can stave off the virus long enough for a vaccine to be developed before the next flu season.<\/p>\n Case 2 happens if the virus mutates and lingers through the summer, decimating us like the Spanish Flu did in the fall\/winter of 1918.<\/p>\n It\u2019s virtually impossible to make an economic prediction based on the outcomes of an exogenous virus, but from what I gather it does appear that case 1 is the more likely scenario. Still, even in case 1, you\u2019re going to see some economic data in the coming months that will look unbelievably bad \u2014 the kind of data we haven\u2019t seen since the Great Depression. This has led many people to assume that this means we\u2019re in for a Great Depression-type of recession. That is, a super-long and drawn-out recovery.<\/p>\n I think this is wrong for several reasons.<\/p>\n 1. The U.S. economy is massively different than it used to be<\/strong>. In 1929, the economy was basically a manufacturing and agriculture economy, with over 40% of GDP coming from those two sectors. In the post-war era, it became massively more diverse. Manufacturing and farming are now only 10% of GDP, and no sector makes up more than 10%.<\/p>\n This is important because it means we are much more robust to downturns.<\/p>\n 2. The policy response is completely different.<\/strong> In 1929, the government responded in all the wrong ways. It tightened monetary policy, tightened trade, tightened fiscal policy. That exacerbated all the problems that led up to the Depression.<\/p>\n![\"Industry](\"\/blog\/wp-content\/uploads\/2020\/04\/economy-different.png\")
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