The 128-month economic expansion that began at the end of the Great Recession in June 2009 marked the longest economic expansion on record. While no one anticipated it would abruptly end due to a global pandemic, consumers were better prepared to ride this one out, thanks in part to lessons learned during the Great Recession. However, before we look at those, it’s important to understand the difference between the two periods, including their origins.
The Great Recession that began in 2008 was systemic in nature and first took hold in the financial system, whereas the current crisis is cyclical, due to the economy coming to a sudden halt in response to the health crisis. In 2008, increased business and household debt and excessive leverage within the financial system led to imbalances, resulting in the bursting of the housing bubble and debt-laden companies and financial institutions filing for bankruptcy.
In contrast, in 2020, lockdown measures in the spring halted the “non-essential” economy, leading to a rapid increase in unemployment, high levels of uncertainty about the prospects for recovery, the flight to online-only shopping, and an increase in personal saving. Compared to previous downturns, we experienced a much deeper recession this time around, but a much shorter one than we experienced following the financial crisis of 2008/2009. Below, we look at some of the reasons for this, as well as lessons American’s took to heart after the Great Recession that helped them weather the last twelve months.
1. Government stimulus measures helped.
Individual stimulus checks in 2020 and 2021, coupled with the ongoing emergency supplement to unemployment insurance actually caused incomes to rise compared to their pre-pandemic levels. According to PEW, every state experienced an uptick in total personal income last year as historic gains in unemployment benefits, federal aid, and other public assistance drove the sharpest annual growth in two decades. Without government support, PEW writes that most states would have sustained declines in personal income—a key economic indicator—as the COVID-19 pandemic took a toll on business activity.
Personal income also shot up 10% in January of this year, the largest increase since last April when the government disbursed the first round of stimulus checks, according to Reuters. For comparison, income rose just 0.6% in December 2020. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, also jumped 2.4% in January. The combination of higher incomes and a rising number of fully vaccinated Americans is expected to unleash a burst of economic activity in the coming months.
2. Households have maintained healthy savings.
While consumers are willing to spend, a significant number are also focused on saving. A report from the New York Federal Reserve indicated that stimulus recipients expect to save 41.6% of their March 2021 checks and spend 24.7% this year. Following the first round of checks in the spring of 2020, consumers saved 34.5% and spent 29.2%.
That wasn’t the case leading up to the Great Recession, when household savings rates were low or, in many cases, nonexistent, and many consumers were highly leveraged. One of the reasons it took several years to recover from that recession is that the strong economic underpinnings that we have in place today were not in place going into 2008. So when the housing bubble burst, it revealed a fragile foundation and structural problems that took years to repair.
The lessons learned about the importance of building cash reserves and emergency savings following the last recession are clearly paying off today. In 2020, consumers entered the downturn with higher household savings rates and more personal wealth—thanks in part to a ten-year bull market. And with more Americans staying at home in 2020 due to the pandemic, the Federal Reserve Bank of Kansas City reports that Americans saved a greater share of their income than ever before. Savings as a percentage of disposable personal income rose from 7.2 percent in December 2019 to a record high of 33.7 percent in April 2020. Although the savings rate has since retraced some of this rise, it remained at 13.6 percent as of October 2020—higher than its peak in any recent recession and nearly twice its pre-recession level.
While the pandemic has provided a dramatic example of why emergency savings are important, keep in mind that unexpected events, including job losses and medical emergencies, can happen even in the best of times. The general rule of thumb for emergency savings is to set aside three to six months’ worth of living expenses. Working with a financial advisor can help you determine how much you may need, based on your personal circumstances and lifestyle goals.
3. Staying invested mattered.
During both the Great Recession and the current pandemic-driven crisis, staying invested mattered. That’s because missing out on the best trading days has a significant impact on long-term returns—and they often follow the market’s worst days.
Keep in mind that a steep drop in portfolio value, like we saw in February and March of 2020, when the S&P 500 fell 34%, can take a significant amount of time to recover from, even when the market quickly rebounds. That’s because recouping market losses requires a disproportionately higher percentage gain to return to breakeven. For example, if you lost 20% on a $100 investment, you would be left with $80. A subsequent gain of 20% would only bring the value of the investment to $96. To get back to the $100 you started with would require a 25% gain—and that only brings you back to breakeven. Depending on market conditions, it can take weeks, months or even years to recoup stock market losses. So the goal is to avoid unnecessary losses in the first place.
4. Working with an independent advisor made a difference.
According to InvestmentNews, virtually across the board, the financial planning industry has experienced a flood of inquiries from potential clients over the past 12-months that are either shopping for a new advisor or shopping for an advisor for the first time, with many advisors comparing consumer’s increased desire for advice to what the industry experienced during the 2008-2009 financial crisis. The publication notes that according to an outside survey of more than 2,000 adults, conducted during the first week of April 2020, 24% of respondents engaged a financial advisor for the first time ever. The survey also found 80% of respondents feel they had lost control of their ability to manage their investments and finances since the COVID-19 pandemic emerged.
Similarly, an April 2020 survey conducted by the CFP Board to assess the impact of the pandemic on CFP® professionals and their clients, found that 78% of those surveyed reported seeing an increase in client inquiries over the past 30 days, with 34% reporting an increase in inquiries from prospective clients. The CFP Board concluded that these findings demonstrate how crucial it is for people in all walks of life to have access to sound advice in the face of economic uncertainty. That is particularly important, given that more than 64% of CFP® professionals surveyed reported that their clients were experiencing high or very high levels of stress as a result of the COVID-19 pandemic.
Preparing for the opportunities ahead
It’s important to remember that we had a strong and robust economy prior to March 2020, when the virus forced closings and other restrictions. So it makes sense that we’re in a relatively strong position to continue to climb out of it now. Fewer households are overleveraged, more people have saved more in the past several years, and we’ve seen a quick and sustained recovery in the financial markets, as compared to 2008. American consumers have both the means and the desire to spend more money, which was not the case coming out of the previous recession.
Yet, while the economy continues to move forward and accelerate, we’re not at full speed yet. Unemployment still remains high. Even as states give the green light for businesses to reopen at full capacity, stories of labor shortages continue to grow, especially in the restaurant and retail industries, with some workers expressing hesitancy to return due to lingering health concerns or the inability to find adequate childcare solutions. Others plan to wait until increased unemployment benefits end later this year.
Nonetheless, the successful vaccine rollout, which has led to the current downward trend in COVID-19 cases in the U.S., provides every reason to expect the recovery to continue to gain steam in the weeks ahead and life to transition to something resembling our pre-pandemic lives. That’s good news any way you cut it.
If you’re not currently working with an advisor, or if you’re not sure if you’re receiving the level of guidance you require to transition through the economic recovery with confidence, download our complimentary e-book: 10 Questions to Determine if Your Advisor Meets Standards.
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