Why this time feels different

August 25, 2022

Why does 2022 feel so different from previous downturns? When you look at the numbers coming from central banks and investment markets, there’s not much argument about where we are. Clearly, we’re in a downturn. But why does this time feel so different from others we’ve lived through?

Every downturn has an arc. It’s like a story. It usually starts with a catalyst. In 2007 problems started in the mortgage market. Borrowers were over-extended and unable to make their monthly payments. The issuers of the mortgages, and their investors, were the first to be affected. Layoffs in the real estate and mortgage industries began, and then it started seeping into other segments of the economy. When people saw what was happening in the housing market, consumer confidence began to fall, and other employers slowed hiring or started laying off employees – often preemptively.

As contagion spread into other industries, sales slumped in building material and home improvement companies. To cut costs, they laid off employees. Unemployment increased and consumer confidence fell even further. That led to less consumer spending, and within a few more months, GDP growth turned negative, marking the beginning of a nationwide recession.

In previous recessions, the story was remarkably similar, although each had a different catalyst. In 2000, it started in the dot.com and telecom markets. In 1990, it began when Savings and Loan companies crashed. In each case, as problems moved from one industry to the next, unemployment rose, and consumer spending declined.

Labeling things nearly always causes some disagreement, but even so, each of these downturns could reasonably be called a “Demand Side Technical Downturn.” In each case, the actual drop in GDP growth was the result of falling consumer demand. As unemployment rates rose, people had less money to spend, and as consumer confidence fell, it didn’t feel good to spend what little they had left.

I think we can all agree, this is not the type of downturn we are in now.

For there are other conditions under which GDP growth has slowed in the past. In particular, during wartime. Here’s another, quite different storyline, from a few generations ago:

My grandfather’s car breaks down. He goes to the dealer to purchase a new one – he was a Dodge man. The dealer tells him that ordinarily he could have a car by this time next week, but unfortunately, Dodge has only 15 operational assembly lines in Hamtramck, MI, and right now, because it’s 1945 and we’re in the middle of World War II, only one of them is making cars. The other 14 are currently making radars and jeeps. My grandfather is unable to drive a new car home that day. Instead, he gives the salesman a deposit, and is told he can expect his new car in 6 to 9 months. Dodge was unable to sell him a car that day. They sold it to him later, when it was delivered – almost a year in the future.  

Two months ago, I encountered a similar situation.

In our house, we have a mini fridge under one of the kitchen counters that recently died. It was easier to replace it than to build a new cabinet to fill in the empty space. When I tried to buy a new mini fridge I learned that they are out of stock.  But I could put down a deposit on one. When it is delivered – in 3 or 4 months – I will pay the remaining balance. I asked the owner of the company what they do with my deposit. He told me it sits in an escrow account until the unit is delivered. They won’t book the sale until I receive my fridge, and if that’s not until 2023, then that revenue will not appear on their bottom line in 2022 – it won’t be in anyone’s “GDP number” until 2023.

My situation is not unique.  If you have had to make a big purchase in the past year, you probably have a similar story to tell.

This situation in which we currently find ourselves is clearly very different from a “Demand Side Downturn.” It’s more like a “Supply Side Technical Downturn,” because it’s the lack of supply that’s created a drop in sales.  

When was the last time we faced a nationwide shortage like this? You’ll have to think back to the early 1970s, and the oil embargo. I guess maybe that’s why it feels so different this time. It’s been 50 years since something like this has happened. And some of us may not even be old enough to remember it.