In the standard Keynesian business cycle model, consumption is driven by changes in disposable income. This underlies the famous “multiplier” concept. But the Keynesian model doesn’t fit this particular business cycle (nor does the monetarist model.)

The current condition of the US economy is very weird. Housing is booming and many retailers are doing OK. Meanwhile, many services that involve human interaction are still deeply depressed, and likely to remain so until there is a vaccine or cure (or herd immunity.) Fiscal stimulus can’t fix that, although I believe there is a humanitarian argument for additional unemployment compensation during an unusual crisis like this one.

This graph shows the unusual and “unKeynesian” nature of the current business cycle:

Those are supposed to be positively correlated.  Disposable income took another dive in August, but consumption actually increased.  The economy is not being held back by a lack of income.  Where people feel they can spend safely, they are doing so.  To get back to full employment we need to address the pandemic.  If we do so, the labor market will recover very quickly (assuming any sort of half decent monetary policy.)

Today’s jobs report highlights the weird nature of this “business cycle”.  In October 2009, unemployment peaked at 10.0%.  It took 35 months for the unemployment rate to fall below 8%.  In July, the unemployment rate was 10.2%.  It took two months for the rate to fall below 8%.  And those two months were a period of severe “fiscal austerity” when Keynesian economists told us we could expect the recovery to stall. In fairness to the Keynesians, if the pandemic continues then I expect the unemployment rate to level off soon, as certain service sectors will remain severely depressed.

Whatever you want to call this, it isn’t you granddad’s recession.

PS.  I agree with Jim Bullard, whose views are discussed in an excellent Tim Duy post.