Yes Virginia, we are in a Depression

Don’t be fooled, this is a Depression

As America begins its fifth month of shutdown from the Covid-19 virus, considerations must be  given to what condition the economy is in. To hear tell, pundits and politicians alike are generally claiming that America is recovering from the shutdown and the economy is coming back. Then they cite statistics to back up their claims, but are the statistics an accurate portrayal of an economy coming back? Let’s take a look at some of the things going on.



For the month of February 2020, the unemployment rate stood at 3.5%, one of the best months ever recorded. By April 2020, the rate was increased to an all time high of 14.7%. In May, it decreased a bit to 13.3%, second worst on record and far worse than the days of the Great Recession.

20.5 million people lost their jobs in April leading to the 14.7% rate to go with 881 thousand in March. The Great Recession saw only 7.4 million people losing jobs.

The way that the Bureau of Labor Statics calculates the unemployment rate, it is reasonable to add another 5% onto the rate as referenced by the accompanying document that goes with the Labor report. Therefore, April saw about a 20% and May a 19% total unemployment rate which is Depression territory.

Jobless Claims is another category to pay attention to in looking at unemployment. Since the beginning of the Covid-19 crisis, close to 45 million Americans have filed for unemployment benefits. First time filings have never fallen below 1.2 million claims since they began falling. This is about 1 in 5 workers, another indication of an actual 20% unemployment rate.

Jobless claims numbers are deceptive though. They do not include the 4.1 million Americans receiving benefits through the Pandemic Unemployment Assistance (PUA) program, the Coronavirus Aid, Relief, and Economic Security (CARES) Act-granted system that include gig workers and others normally ineligible for benefits. So unemployment numbers are even worse that depicted.

As the total number of new filings slow, watch the continuing claims number. This number reflects how many people are returning to full time work.

May 10 saw continuing claims at 24.9 million. By Jul 4th, that number had fallen to 17.3 million as the economy began to reopen and recover. But since then, with rising infections rates, states have shut down again. This will lead to both new claim increases and continuing claim increases.

The end result will be an increasing unemployment rate consistent with Depression numbers.


Gross Domestic Product

Gross Domestic Product is another measurement of how the economy is doing. Generally, two quarters of economic contraction indicates a recession is underway, but as with Covid-19 and unemployment, it indicates a closer look is warranted.

The American economy contracted the most in a quarter since Dec 2008. On an annualized basis, the economy contracted 4.8% an unbelievable number. But more important is that the contraction occurred over the last two weeks of March, when the Covid-19 shutdown went into place.

As more states in April shut down and as unemployment increased, it spells a “ill wind blowing” for the second quarter of 2020.

The good news for second quarter GDP is that the stimulus has been sent to both businesses and Americans. The money was quickly spent, so this should offset a significant part of the expected GDP decrease. Still, the Federal Reserve Bank of Atlanta predicts a 41.9% contraction for the second quarter. This is another indicator of a Depression in progress.


Consumer Spending

Consumer spending has been severely affected by Covid-19 and the loss of employment and shutdowns. State shutdown orders have prevented consumers from going out and shopping for retail products. Instead, the consumer shops online for necessary products and spend only what they can afford to spend.

Brick and mortar stores are suffering heavily the loss of being able to open for retail shoppers. Airlines and hotels have seen drops in business up to 90% or more.

Restaurants have mostly closed as well as bars, with a majority of them likely to never reopen. With them, the businesses that cater to restaurants and bars are suffering huge losses and many will likely never reopen.

Entertainment is also affected. Cinemas and theaters are closed, and even where allowed to open, must practice social distancing, cutting down on customers and profits. Sports venues remain closed with any prospect of reopening doing so without fans in the stands.

GDP data proves this out. Consumption dropped 7.8% in the first quarter. Sales for retailers and restaurants for April dropped 16.5% at first glance, twice as much as the 8.3% drop from March.

Clothing stores dropped 89% and restaurants and bars fell 48.7% in April

Only on-line shopping incurred an increase, seeing volume increase by 8.4% over April.

As the Covid crisis slackens, there is no reason to expect any significant recovery for months. Only 1/3 of consumers have said that they would feel comfortable shopping in brick and mortar stores within the first month of a store’s reopening. Instead, on-line shopping will be bigger than before, but still not enough to offset tradition shopping spending.

Once again, these are signs of a Depression in progress.

Consumer Confidence

Consumer Confidence is the next item to look at. It is a leading indicator of where consumer spending is headed. If consumer confidence is low, then consumers will reduce spending. If high, they are more willing to spend.

Consumer confidence fell to an eight year low of 85.7 in April after dropping from over 135 in February. It recovered slightly in May to 86.6 and 98.1 in June. It is believed that the increase is attributable to both the reopening of some sectors of the economy and the stimulus payments provided to both businesses and consumers.

With new stay at home orders and business shutdowns, Consumer Confidence will likely fall once again in July.


Federal Reserve Actions

Covid-19 has not only affect unemployment, retail spending and GDP, but it has also affected the financial industry as well.

In September 2019, the beginnings of a financial crisis were at hand. The REPO markets broke, forcing the Federal Reserve to take action. Through the execution of hundreds ofbillions of dollars in REPO transactions, the Fed pumped huge amounts of money into the financial system to prop up banking institutions and restore liquidity to the market. These actions were ongoing into March 2020 when the Covid-19 crisis hit.

Reacting to Covid-19, Fed Chairman Jerome Powell announced an initial cut in interest rates by .50 basis points and then 13 days later, cut interest rate to zero.

Since then, the Fed has engaged in an unprecedented and unlimited bond-buying program, pumped trillions more in dollars into the system through short term REPO transactions and created 11 new emergency lending facilities to enable credit to flow again across the country.

As a result of the Fed’s actions, though Treasury bills are at their lowest yields ever, the volatility experienced in the markets have greatly subsided.


Housing & Mortgage Lending

The Housing Market has not avoided the effects of the Covid-19 crisis. All parts of the Housing sectors have been seriously affected, though listening to the “experts and pundits” you would never know it.

Housing Starts in February 2020 totaled 1.567 million residential units on an annualized basis. In March, the number of starts fell to 1.269 million and April saw 934 thousand units, a 30% drop. May saw an uptick in starts to 1.011 million and June’s numbers came in at 1.186 million.

Proponents are proclaiming that the Housing Market is recovering with these numbers, but one must look further into the economic environment to see why starts have increased.

First, interest rates have fallen to record lows, now under 3% for 30 year fixed rate mortgages. This encourages developers to build new homes.

Additionally, in many parts of the country, with the Covid shutdown, homeowners have elected to pull their homes off the market. After all, who wants potentially sick people tramping through their homes and contaminating the rooms with Covid-19 particles?

Another possibility exists as well. Developers are not dumb. They got caught with their pants down in 2008 with the Housing Crisis of that time. They may be taking property owned by them and quickly building homes, before the market drops and they lose everything.

Mortgage lending is another story though. With the record low interest rates, banks and other lending institutions are swamped in purchases and refinances to the point that they cannot keep up with the volume.

With Covid-19 and the shutdowns, Bank of America has taken steps to slow down their volume of business. They have increased interest rates significantly and tightened up on down payment requirements. Add to this the number of people who have lost their jobs with Covid and can no longer continue with their refinances or purchases, Bank of American has slowed their business to the point that they can now downsize their work force.

Wells Fargo is taking their own actions to mitigate Covid effects. They have now instituted polices that for jumbo loans, a borrower must have at least $1 million in assets. And they are reducing the work force. Chase is requiring $750 thousand in assets for jumbo purchases.


Mortgage Delinquencies

Another measure of where America stands with regard to financial strength involves the mortgage servicing market. That is the market which involves people making payments on their mortgages.

Approximately 50 million first mortgages are currently in existence across America. Of them, 4.1 million are not making payments on the mortgage. Instead, most are taking advantage of the GSEs, FHA and VA allowing people to not make payments and instead, have those payments tacked onto the end of the mortgage term.

The 4.1 million delinquent loans are already about equal to those of the Great Recession of 2008, and we are only four months into the Covid battle. And just as the economy begins to reopen, many states are shutting back down again due to increasing Covid cases, throwing many people back out of work and likely adding to the number of delinquent loans.

Adding to the mortgage woes, the first month of the new school year has grades K-12 in many districts going to online learning. In the lower grades, two income families will mostly cease to exist so that one family member can stay at home and watch over the home bound child. As incomes tighten, more homeowners will be forced to make a decision, pay the mortgage or put food on the table. Mortgage delinquencies will increase putting further strain on the economy.

At first glance, the economy appears to be improving. But as with the stimulus payments, this is deceptive. No mortgage payments being made results in money “saved” being redirected to other parts of the economy artificially making consumer spending look better than what it is.

At some point, servicers will be required to stop tacking payments onto the back end of the loans. They will begin to “offer” loan modifications again, but with the unemployment picture and drop in income for so many homeowners, large numbers of modification denials will be the norm, just last the 2008 crisis. Foreclosures will then begin to rise in increasing numbers, leading to a significant drop in values.

When taken into account, it just reinforces that with everything else going on, America is in a Depression.


Commercial Real Estate

For the last decade, America has been seeing the decline of brick and mortar stores. Commercial real estate, especially strip mall and indoor malls have faced massive losses with both small retail and the big anchor businesses going out of business or closing unprofitable stores. With online shopping having gained a greater portion during Covid, this will make the strip and indoor malls redundant. Expect them to continue to close in greater frequency.

Office space is suffering as well. Vacant offices are increasing in number. Many companies have already found that with Covid, they can operate just as well with work from home plans and meetings conducted through Zoom. Office space can now be downsized saving significant money on rents.

In all, commercial real estate is in for its own bumpy ride and will also reflect a growing Depression Environment.


Manufacturing & Industrial Production

Manufacturing and Industrial Production has been hurting for some time with the ongoing US – China trade tensions.With the Covid crisis, activity plunged 11.2% in April for the steepest decline on record. It has recovered some of that amount with the attempted reopening of the economy, but with the shutdowns once again occurring, expect another drop in July.


Inflation or Deflation

With the normal printing of money, the biggest fear that countries experience is the fear of inflation. Rampant inflation and runaway prices have been experienced in the recent past in Argentina, Venezuela and other countries. And of course, the Weimer Republic during the 1930’s.

Some experts are warning that America is facing the same scenario of excessive inflation resulting for the trillions of dollars of stimulus being injected into the economy through both Congress and the Federal Reserve.

Central Bankers are more worried about Deflation and dropping prices due to falling demand for products.

In the past few years, Central Bankers have struggled to meet their Inflation Target of 2% per year. For the recent 12 months, Personal Consumption Expenditures, one way of measuring inflation, rose 1.2%. The Core Consumer Price Index rose to a yearly adjusted average of 0.4%.

The fact is that in this unstable environment, people have cut back on spending due to both reduced income and an uncertain future ahead.


Final Thoughts

As we enter the final two months of summer, staring into an uncertain economic future, the next few years appear rife with challenges for everyday Americans.

Fifty percent of all Americans have not even $1000 in savings in the event of an emergency. They live paycheck to paycheck, with many heavily burdened with mortgage and consumer debt.

All it takes is a burp in the economy, the loss of a job, an illness or another unexpected event and their “house of cards” comes crashing down.

The government’s stimulus packages end over the next 2 1/2 months. Unemployment stimulus ends at the end of the month and will leave many unemployed without enough money to meet expenses, not to mention rent or mortgage payments.

In the next 6 months, it is reasonable to expect that mass evictions and foreclosures will begin, and in far greater numbers than that of the 2008 Housing Crisis. Millions of people will be in for a great amount of pain. Homeless camps will increase in size and numbers.

Something needs to be done, beginning with reopening up the economy. It has already been shown that Covid-19 is not the threat that it was portrayed to be. So it is time to end the charade and end the shutdowns.

Though many will disagree, those who are unable to return to work and are unable to find alternative jobs will need a security net provided until they and the full economy can recover. People will complain about the cost, the increase in the Federal Debt owed, but the only real concern is servicing the Federal Debt. And with interest rates at a minimum, that will pose only a limited problem.  (Ducks from the thrown tomatoes and other things.)

Reality is that in typical 4th Turning fashion, America is in for a rough ride for the next decade. If we can ride it out, we will be stronger for it.

So Yes Virginia, We Are In A Depression!

As always, thank you Mark and all the others for allowing me to post my thoughts and opinions. Hope everyone finds this post informative at the very least, even though it is filled with doom and gloom.

And don’t forget….

LIFE IS GOOD!  (Just look for the silver lining.)




Written by PatrickPu

Former Loan Officer and currently a Case Consultant and Expert Witness in Foreclosure and Lending Litigation cases. Avid follower of NCAA Football and Top 25 teams.


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