The US labor market is far from a full rebound. Compared to the last recession, however, the recovery is moving at a breakneck pace.
The economy added 559,000 nonfarm payrolls in May, data out Friday showed. The reading marked a fifth consecutive month of job additions and a strong uptick from the disappointing gains seen in April. The US unemployment rate also hit a pandemic low of 5.8% and major stock indices neared record highs on the encouraging news.
Still, payroll growth hasn’t enjoyed the kind of V-shaped bounce-back staged elsewhere in the economy. At May’s pace of job creation, it would still take until July 2022 for the economy to recoup every job lost during the pandemic. It would take about another year from then to recapture jobs that would’ve been made had the pandemic not occurred. The projections also don’t take the nationwide labor shortage into account, which could further drag on job additions.
Comparing the pandemic recovery to the Great Recession and other downturns tells an entirely different story. In a Friday post, economics blogger Bill McBride of Calculated Risk contrasted job creation from recent months to that seen during post-World War II recessions.
The trend is clear: despite seeing far more severe job losses at the start of the recession, the labor market’s recovery is the most V-shaped in modern history.
A few factors explain the pronounced rebound. The government’s response throughout the pandemic was unprecedented. Congress approved roughly $5 trillion in fiscal stimulus, and the Federal Reserve eased monetary conditions through historically low rates, massive asset-purchase programs, and extraordinary lending programs. Combined, the efforts helped economic activity bounce back relatively soon after the pandemic first hit.
The nature of the recession also played a role. The economic crisis was simply a symptom of a once-in-a-century pandemic. Lockdown measures used to curb the virus’s spread were a top reason for weaker activity. Once those restrictions were lifted, Americans with pent-up demand and bolstered savings got out and revived the economy.
The current downturn also doesn’t possess the same structural problems faced in the late 2000s. The Great Recession was fueled by a collapse of integral financial systems. Long-trusted institutions were suddenly behind an economic collapse, and the government was forced to step in with then-unheard-of support. Distrust in said institutions and severe damage throughout the housing market led to a painful and plodding recovery.
The COVID-19 crisis, by comparison, was simple. A deadly virus was spreading throughout the country, so authorities forced lockdowns that caused great harm to the economy.
The US has also learned from the Great Recession and the recovery that followed. An early push for fiscal austerity and inadequate aid for state and local governments hindered the labor market’s healing for years after the financial crisis. Payrolls didn’t return to their pre-recession highs until more than six years after the initial drop, longer than any previous postwar recession.
Policymakers are trying something else this time around. The $1.9 trillion stimulus measure approved in March included $350 billion for state, city, and local governments to offset budget shortfalls. On the monetary front, the Fed’s newly updated goals signal it will maintain ultra-easy monetary conditions well after the pandemic threat fades.
“Now is not the time to be talking about an exit,” Fed Chair Jerome Powell said in January. “I think that is another lesson of the global financial crisis, ‘be careful not to exit too early.'”
The predicted baby boom is looking more like a baby bust.
While many thought a year locked up would lead to some serious babymaking, Brookings Institute economists Melissa Kearney and Phillip Levine forecasted the opposite last June: The pandemic would lead to 300,000 to 500,000 fewer births in 2021, they said.
So far, their predictions are on track.
Nine months after the first lockdowns began in the US, the number of births in the country had declined by 7%, according to data provided to CBS News by health departments across more than 24 states. And fertility rates – the number of live births a woman is expected to have over her lifetime – are already lower in the first few months of 2021, said Christine Percheski, associate professor of sociology at Northwestern University.
“We’re going to see many fewer babies in 2021,” she told Insider.
The drop continues a pre-pandemic trend of declining birth rates and fertility rates, as childbearing women, many of whom are millennials, delay having children. Both of these rates decreased by 2% from 2017 to 2018, per the latest CDC data, with the birth rate hitting its lowest in 32 years. As of January 2020, the US fertility rate sat at 1.73 births per mother – a stark contrast from the peak in 1957 at 3.77 births per women.
Demographers have expressed concerns over what this means for the future of America, as the fertility rate is below the replacement rate – producing as many births each year as deaths – of 2.1 births per woman.
The decline in births over time is the result of both economic distress as well as progress for women in the workplace, with potential long-term implications, such as a smaller workforce and higher cost of caring for the aging. It’s too soon to say whether we should be concerned about these economic effects, but it’s already clear the economy is in for a big change based off what happens to the American birthrate.
Catching up to a global shift
American women are having babies later. While US birth rates have declined for nearly all age groups of women under 35, per latest CDC data, they rose for women in their late 30s and early 40s.
But this is actually bringing the US in line with worldwide trends – or helping it catch up, depending on your perspective. High-income countries, and increasingly middle-income ones, have long seen women delaying their first child until later ages compared to American women, Percheski said.
It’s a sign of better access to education and employment opportunities, a rise in individualism and women’s autonomy, better sex education, and a shift from religious-based to more secular values, she said. But on a more individual level, having kids at a later age is also a result of women choosing to stay in school longer, waiting until later to marry, and paying off student debt first.
Recessions typically have the strongest economic influence on birth and fertility rates. “People tend to wait during periods of political and social and rest,” Percheski said.
The Great Recession saw a 9% decline in births, per Brookings, about 400,000 babies fewer than there would have been otherwise. And while the Spanish Flu only resulted in an economic contraction, that public health crisis also led to a drop in births. A pandemic lumps together economic and health turmoil, which Brookings says could result in a greater impact on births.
But whether the current lapse in babymaking will translate to fewer babies overall or just a childbirth postponement, Percheski said. She said she thinks we’ll see a reduction in the number of women having two or three kids, as happened during the financial crisis.
Mauro Guillén, Wharton professor and author of “2030: How Today’s Biggest Trends Will Collide and Reshape the Future” told Insider that the decline in births is a “temporary blip,” likely to last one to two years.
“Young couples have said, ‘Give me a rain check, I don’t want the baby now because there’s too much uncertainty,'” he said. “But they will have those babies later. They don’t cancel their plans to have babies for life.”
A ‘demographic time bomb?’
A decline in birth rates has sparked worries that the US may be headed for what’s known as a “demographic time bomb,” in which an aging population isn’t replaced by enough young workers.
This could slow the economy in the long term by creating higher government costs and a smaller workforce, who will have to front the care costs for aging populations. It could also create a shortage of pension and social security-type funds and impact things like school enrollment and college demand.
But Percheski said a decline in births isn’t necessarily bad – it will just require structural adjustments, like creating new public policies that respond to changes in population size.
In some ways, fewer classmates for those born in 2021 could be good, she added.”If there are fewer people competing for jobs when they hit the job market, that’s not bad from their perspective, but it does require us to make adjustments.”
America can also change now to avoid having to do it later, such as making childcare more affordable. “Raising children is one of the great joys of life, but it’s also one of the great burdens,” economist Tyler Cowen said in a recent panel with the American Enterprise Institute. “If we don’t have innovations to make raising children either easier or more fun or less costly, we’re in big trouble.”
But if the pandemic-fueled birth decline just results in women bearing children at a later age rather than having fewer kids or none at all, per Brookings, the fertility rate may be underestimated. It could even result in a delayed baby boom.
Guillen said he thinks we’ll see a higher number of births in 2022 and 2023, which could make preschools fuller. He said he’s more concerned with the mortality rate than the birth rate, but in any case the full effects of the birth decline won’t truly be seen until 20 to 30 years later.
“Generally, it would be better to have a smoother evolution of pace, but recessions always have their effect,” he said.
In fact, the generation can expect average annual real returns of just 2% on their investment portfolios – a third less than the 5%-plus real returns that millennials, Gen X, and baby boomers have seen. Credit Suisse’s analysis took in average investment returns since 1900 and forecasted them going forward for Gen Z.
The yearbook acknowledges that marked deflation could increase bond returns, The Economist reported, but it said inflation is more of a concern. What the report calls a “low-return world” is yet another another financial obstacle for the generation, who may be on track to repeat millennials’ money problems.
“Like the financial crisis in 2008 to 2009 for millennials, Covid will challenge and impede Gen Z’s career and earning potential,” the report reads, adding that a significant portion of Gen Z is entering adulthood in the midst of a recession, just as a cohort of millennials did. “Like a decade ago, the economic cost of this recession is likely to hit the youngest and least experienced generation the most.”
Gen Z was hit hardest in the workforce
Gen Z been been impacted the most in the workforce, facing the highest unemployment rates.
They entered a job market crippled by a 14.7% unemployment rate in May – greater than the 10% unemployment rate the Great Recession saw at its 2009 peak. Those ages 20 to 24 had an unemployment rate of nearly 27% when the unemployment peaked last April according to data from the St. Louis Fed, more than any other generation.
Recessions typically hit younger workers hardest in the short-term, but can reap long-term consequences.
“The way a recession can really hurt people just starting out can have lasting effects,” Heidi Shierholz, a senior economist and the director of policy at the Economic Policy Institute, previously told Insider. “There’s a lot of evidence that the first postgrad job you get sets the stage in some important way for later.”
A follow-up study showed that by 2019, this cohort had narrowed that wealth deficit down to 11%. Such financial catch-up could be an optimistic sign for Gen Z in terms of regaining any ground lost building wealth during the pandemic.
However, millennials have had a 5%-plus annualized investment return on their side. With a projected 2% annual return for Gen Z, building wealth may be even harder to do.
There’s more to building wealth
Of course, stocks and bonds are just two asset classes. There are other ways Gen Z can build wealth, such as investing in real estate or by becoming successful entrepreneurs. Many Gen Zers have already embarked on an entrepreneurial path as early as their teen years, which could go a long way in wealth creation.
Within the next decade, Gen Z’s income will rise to such a point that they’ll effectively take over the economy, but their wealth could well be far behind previous generations by the time they get there.
Three little words strike more fear into investors’ hearts than anything else: stock market crash.
It’s not just that they mean losses (another word that scares investors). It’s also that no one knows for sure when a stock market crash is going to happen – though the signs were often there in retrospect – or even exactly what it is. There’s no one official definition.
Generally, though a stock market crash is seen as a single trading day in which a stock exchange/market drops by at least 10%. But it can also be “anytime there’s suddenly a lot of volatility that makes you wonder whether the world is coming to an end tomorrow,” says Terry Marsh, a finance professor emeritus at Haas School of Business at the University of California Berkeley.
Here’s the scoop on eight of the most notable stock market crashes in recent financial history, their causes, and their fallout. Unless otherwise noted, they occurred on US exchanges, though the effect often spread to other countries.
1. The Panic of 1907
What happened: A group of investors borrowed money from banks to finance an effort to corner shares of United Copper Company. UCC went bust under the weight of speculation, and then other firms followed: Stocks lost 15% to 20% of their value. Public confidence in banks fell and depositors rushed to withdraw their money, causing ruinous runs.
The damage: Some banks and stock brokerages failed, and many top executives at surviving financial institutions either resigned or were fired. Businesses couldn’t get bank loans, causing them to fail.
What resulted: “We learned that when more than one financial institution is in trouble,someone must inject liquidity” into the system, says Carola Frydman, a finance professor at Kellogg School of Management at Northwestern University. At the time, private financier J.P. Morgan put together a rescue package that finally restored order on the exchanges. Realizing how economically significant the stock market had become, however, the US government created the Federal Reserve System to formulate monetary policy and provide emergency funds in crises.
2. Black Monday and Tuesday, Oct. 28-29, 1929
What happened: For nearly a decade, the stock market had kept rising in a speculative spiral. Overproduction in factories and a Roaring 20s giddiness led consumers to take on too much debt and believe financial instruments would climb perpetually higher. Finally, catching on to the overheated situation, seasoned investors began cashing out. Stock prices dropped first on the 24th, briefly rallied – and then went into free fall on Oct. 28-29. The Dow Jones Industrial Average dropped 25% in those days. Ultimately, the market lost 85% of its value.
The damage: The Crash of 1929 didn’t cause the ensuing Great Depression, but it served as a wake-up call to massive underlying economic problems and exacerbated them. A panicked rush to withdraw money caused overextended banks to fail, depriving depositors of their savings. Deprived of lenders, businesses began to collapse, leading to scarcities of goods. As many as 25% of Americans ended up jobless, spurring foreclosures, migration, and demoralizing poverty. Gross domestic production (GDP) dropped 30%. The economic woe spread overseas, hitting Europe particularly hard.
What resulted: A slew of reforms and new legislation. They included the Glass Steagall Act of 1933, which separated retail banking from investment banking – and led to the creation of the Federal Deposit Insurance Corporation (FDIC) to insure bank depositor funds. The National Industrial Recovery Act was passed to promote stable growth and fair competition, and the Securities and Exchange Commission (SEC) was established to oversee the stock market and protect investors from fraudulent practices.
3. Black Monday, October 19, 1987
What happened: Sinking oil prices and US-Iran tensions had turned the market pessimistic. But what led to the wipeout was the relatively new prevalence of computerized trading programs that allowed brokers to place bigger and faster orders. Unfortunately, they also made it difficult to stop trades soon enough once prices started to plummet. Ultimately, The Dow and S&P 500 each dropped more than 20% and Nasdaq lost 11%. International stock exchanges also tumbled.
The damage: Fortunately, the crash didn’t cause a recession or hardship. Trader Blair Hull helped set things right by putting in a large order for options at the Chicago Board Options Exchange on Black Monday. The main casualty of the crash was consumer confidence. It was essentially a computer-IT “plumbing problem” that “scared people,” says Marsh.
What resulted: The financial community realized how stock exchanges around the world were interconnected. The SEC implemented circuit breakers, also known as trading curbs, to halt trading for the day once a stock exchange declines by a given amount. To ensure liquidity, then-Federal Reserve Chairman Alan Greenspan ensured credit was available and made it clear that “the Fed has your back,” says Marc Chandler, a chief market strategist at Bannockburn Global Forex.
4. Japanese Asset Bubble Burst, 1992
What happened: Japan’s real estate and stock markets had flown to unprecedented heights in the 1980s. At first backed by fundamental economic growth, the spiral had become speculative by the decade’s end. In 1992, the bubble of inflated real estate and stock prices finally burst.
The damage: The Nikkei index fell by nearly half, setting in motion a minor, slow-moving Japanese recession. There were never mass business closures – though “high-end restaurants didn’t do as much business,” says Marsh – but not much growth either. US investors weren’t hurt badly because they typically had only small amounts of Japanese stocks in their portfolios. Japanese investors, however, never fully regained their confidence in the stock market.
What resulted: The Japanese government placed subtle controls on its financial system. “Still, it took decades for the Japanese [stock] market to recover,” says Tyler Muir, an associate professor of finance at UCLA Anderson School of Management. The economy too: In fact, the 1990s are dubbed “The Lost Decade” in Japan.
5. Asia Financial Crash of 1997 (aka Tom Yum Kung Crisis)
What happened: Under pressure because the country borrowed too many US dollars, Thailand saw its baht currency collapse on July 2, 1997, declining 20% in value, and spurring debt and defaults that sent a ripple effect throughout several Asian financial systems.
The damage: Currency in other Asian countries, including Malaysia and Indonesia, tumbled as well. “In South Korea, women were giving the government their gold rings to melt down” and make into ingots for international sale to help a suddenly bankrupt nation pay off its debt, says Chandler.
What resulted: “East Asia got the lesson to self-insure” after the International Monetary Fund imposed tough measures in exchange for financial relief, says Marsh. And the crash raised awareness of the interconnectedness of regional financial markets and economies.
6. Dot-Com Bubble Burst, 2000-02
What happened: In the 1990s, with the internet revolutionizing professional and personal life, stocks in companies with “.com” after their names surged. Twelve large-cap stocks rose more than 1,000%; one, chipmaker Qualcomm, saw its stock increase more than 2,500%. Investors gobbled up shares of tech IPOs but seemed unaware that not every company tied to the World Wide Web could sustain its growth – or even had a viable. “A new economy was being born and it was hard to place a value on it,” Chandler says. But finally, people did – aided by some tighter money policies imposed by the Federal Reserve. They started to sell. By October 2002, the tech-heavy Nasdaq had fallen more than 75% from its March 2000 crescendo of 5,048.62.
The damage: Pets.com, Toys.com, and WebVan.com went out of business, along with numerous other internet companies large and small. Even larger, blue-chip tech companies suffered.
What resulted: Along with revealing that many tech startups had no clothes, “the overall downturn also exposed things that otherwise would have stayed hidden” in other firms, like accounting irregularities, says Muir. The Sarbanes-Oxley Act of 2002 was established to protect investors from corporate fraud. And “a lot of broker-dealers probably did more due diligence before they put more money into any internet funds,” says Marsh.
7. Subprime Mortgage Crisis, 2007-08
What happened: At the turn of the 21st century, real estate was hot. Hungry for commissions, lenders practically gave money to under qualified homebuyers. Investors bought up mortgage-backed securities and other new investments based on these “subprime” loans. Eventually, though, the inevitable happened: Burdened by debt, borrowers began to default, property prices fell, the investments based on them dived in value. Wall Street noticed, and in 2008 the stock market started to decline. By early September, it was down almost 20%. On Sept. 15, the Dow Jones Industrial Average dropped nearly 500 points.
The damage: Financial giants that had invested heavily in real estate securities, including venerable firms Bear Stearns and Lehman Brothers, failed. Businesses couldn’t get loans because banks “didn’t know who to trust,” says Muir. Unemployment approached 10%. The misery spread overseas, where the Nikkei dropped almost 10% on Oct. 8, 2008. The US entered the Great Recession, which officially lasted until 2009, though economic recovery remained sluggish for years.
What resulted: Through the Troubled Asset Relief Program, or TARP, the federal government rescued hobbled financial institutions; it also assumed control of other agencies, like troubled mortgage-market-makers Fannie Mae and Freddie Mac. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 regulated swaps and other exotic investments for the first time and led to the creation of the Consumer Financial Protection Bureau.
8. COVID-19 crash, March 16, 2020
What happened: By the beginning of 2020, COVID-19 had spread widely in China and then to Europe – notably Italy – and to the US, where restaurants and nonessential stores closed to stem the tide of infection.
As investors realized the extent to which the coronavirus could spread and negatively affect the economy, the stock market began to quiver. On March 16, with mandatory lockdowns being announced,the Dow Jones Industrial Average lost nearly 13% and the S&P 500 dropped 12%.
The damage: Struggling businesses furloughed or laid-off workers and some shuttered forever. Restaurants were limited to deliveries only and then partial-capacity table service. Travel restrictions kneecapped the airline and hotel industry. The human loss of the COVID pandemic has been devastating, with more than 300,000 deaths in the US and 1.5 million worldwide. As of September, more than 31 million people were either unemployed or lived with an unemployed family member, according to the Center on Budget and Policy Priorities.
What resulted: The Cares Act of 2020 allowed extended unemployment payments, and government stimulus funds helped Americans stay afloat. The stock market bounced back as e-commerce companies like Amazon, makers of personal protection equipment, and pharmaceutical companies surged in value. Many businesses whose employees worked remotely during the COVID crisis said they would continue a similar arrangement once the pandemic passes, but “it remains to be seen whether it’s a permanent shift,” says Muir.
The Financial Takeaway
Many of the above examples demonstrate how disasters that strike stock exchanges can leave positive legacies in their wake – even though they cause plenty of immediate pain.
Some stock market crashes maul economies for years. Others merely shake up investor confidence, making people more cautious in their choices. They can cause human tragedies and result in game-changing government reforms.
While the triggering events for stock crashes vary – involving everything from copper-mania to condo prices – the ultimate outcome has always been the same: The market recovers.