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Does it even have to? Prior bubbles or periods of economic excess have featured too much hiring and investing like we saw during the late 1990s boom. Or we’ve had excessive credit creation and construction, as we confronted during the mid-2000s. The downturns that followed those periods involved unwinding some of that activity, which led to declines in employment and investment.
But the excess we had in 2020 and 2021 at the national level wasn't about too much hiring or investing — it was mainly about the mistaken belief that interest rates would remain low. That’s the excess now being unwound. And while it’s painful for those making the adjustment, it doesn't need to lead to the kinds of job losses we’ve had in the past.
Think about what happened in the technology sector, which has experienced some of the most high-profile job losses over the past year. One big reason for the cuts was that some companies over-hired during the pandemic based on business trends that turned out to be unsustainable. A second reason is that rising interest rates have shifted investor priorities to expanding profit instead of just revenue, which has forced unprofitable tech companies to curtail their spending.
The website layoffs.fyi, which tracks layoff announcements in the tech sector, has recorded 317,000 job cuts from January 2022 through March 2023. Compare that with the 4.3 million jobs the US economy has added over the past year. The layoffs appear to have peaked in January, suggesting most of the rightsizing is behind us. So we made it through a tech employment correction with unemployment remaining low and the national labor market still strong.
The bank crisis of the past month had nothing to do with bad loans or excess credit creation. During the pandemic, banks like Silicon Valley Bank took in a ton of deposits and used them to buy Treasury bonds. Those Treasuries fell in value as rates rose in the past year, resulting in losses for SVB. Depositors rushed to claim their money, SVB was overwhelmed and regulators stepped in. The crisis called attention to similar weakness in other banks, leading to broader concerns about the stability of the system.
And now those problems have put a spotlight on the commercial real estate sector. It was already struggling because of falling property values, but now it faces the added risk that banks will tighten credit to commercial borrowers. The office market’s problems are unique, but for commercial real estate more broadly the issue is that many properties were financed at very low interest rates, and because funding costs were so low they were bought at elevated valuations. Then as interest rates rose, valuations declined. That means any loans coming due will have to be refinanced at higher interest rates, which may not be workable relative to the cash flow produced by the assets.
But it's not like the commercial real estate business has been propping up the US economy. Investment in nonresidential structures as a percentage of GDP is at its lowest level in 20 years, down 40% from where it was in 2007.
And the kinds of buildings most in distress — such as older office buildings — generate very little economic activity. It can even be argued that when some of them default, go dark and get redeveloped, it will have a positive impact on economic growth because new construction is so much more resource-intensive than the day-to-day operations of a 40-year-old office building.
The unusual thing about this downturn is that the excess being unwound reflects more than a decade of low interest rates, an era that cemented the belief that fast growth and high inflation were relics of the past. If the late 1990s boom was defined by the phrase "irrational exuberance," then the low-interest-rate era has been emblematic of irrational pessimism. You generally don’t get too much hiring and investment across the whole economy when people are pessimistic about the future. And that’s why we aren’t likely to see the sort of downturn — including a collapse in the labor market — that we’ve had after cycles of excess in the past.
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Previously:
• 02/15/23 Higher mortgage rates is what the housing market needs now
• 01/06/23 The January inflation bump Americans should welcome
• 01/04/23 Why millennials are following boomers to the South
• 10/24/22 Two bright spots in a cooling housing market
• 08/18/22 Future remote workers need to network more --- in college
• 06/17/22 Housing market cooldown will only lead to more dysfunction
• 05/27/22 Welcome to our be-careful-what-you-wish-for economy
• 05/04/22 The Amazon economic indicator says inflation is easing
• 01/20/22 Don't call me on Friday. That's my 'me time'
• 01/06/22 2022 is the year to buy your first luxury electric car
• 06/03/21 The post-pandemic boom will have a sequel in 2022
• 05/31/21 Florida may lose some of its boomer shine
• 01/11/21 Colleges bet on football in their own K-shaped recovery
• 12/31/20 Just send the bigger bucks already
• 08/24/20 Young people can't buy homes until older owners . . . move on
• 08/18/20 Our pandemic love affair with e-commerce could soon sour
• 08/10/20 Booming 'zoom towns' should ease city housing costs
• 07/11/20 With a Biden economy, will America be condemned to relive the '70s?
• 07/14/20 Renting and homebuying swap roles in the covid-19 market
• 07/13/20 Markets may have a reason to rise along with covid-19 cases
• 04/27/20 U.S. economy may have hit the coronavirus bottom
• 11/12/19 The 2020 economy should feel a lot better: What to, realistically, expect
• 04/23/19: Gen Z is likely to temper aging socialist millennials
• 03/25/19: All signs point to a housing boom ahead
• 02/19/19: Trump's economic gamble might make sense
• 02/15/19: Scaring off Amazon will backfire for the Left
• 01/29/19: The 2020 election will shred the Obama coalition
• 11/15/18: Amazon proving the 'rich get richer'?
• 11/13/18: How gerrymandering can reduce the partisan divide
• 10/22/18: The politics of the next recession will be a disaster
• 08/02/18: The future of the US looks a lot like ...
• 05/05/18: Brick-and-mortar stores may start to make sense again
• 05/05/18: College admissions season is about to get much easier
• 05/03/18: Changing housing needs of millennials will change economic development
• 02/13/18: The big idea for Middle America is to think small
• 02/07/18: Dems are caught in a tax bill trap this year
• 10/25/17: Good times have come to Trump-leaning states
Sen is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.