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Chart: Interest Rates Fall Decades After Pandemics

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Real Interest Rates After Pandemics

Real Interest Rates

This infographic is available as a poster.

Chart: Interest Rates Fall Decades After Pandemics

How have interest rates responded to pandemics?

Despite higher interest rates on the horizon, historical data shows that real interest rates fall decades after pandemics end. Real interest rates were shown to decline as much as 1.5% lower, even after an initial rise.

In this Markets in a Minute chart from New York Life Investments, we show how pandemics have impacted real interest rates across 19 pandemics since the 14th century.

Pandemics and Real Interest Rates

According to a working paper from the San Francisco Federal Reserve Bank, pandemics have lasting effects on real interest rates.

Real rates were defined as the level of returns on safe assets issued from global financial powers.

Specifically, interest rates were constructed by weighting real interest rates on long-term debt by each country’s share of GDP. Data was collected over seven centuries for pandemics with over 100,000 deaths across Europe due to available historical records.

To study how interest rates respond to major economic events over the long run, pandemics were compared to wars.

Changes in Real Rate0 Years10 Years20 Years30 Years40 Years
Pandemics-0.1%-0.6%-1.3%-1.0%-0.7%
Wars-0.1%0.3%0.8%0.8%0.5%

Based on their research, interest rates fell slightly after pandemics, but this effect increased over time. What’s more, four decades after pandemics ended, real interest remained lower than pre-pandemic levels. By contrast, interest rates increased after wars, hitting the highest point two to three decades out.

What factors may have impacted a depression in real rates after pandemics?

An abundance of capital per unit of labor was one possible factor. Higher levels of precautionary savings was another, which may be a result of rebuilding lost wealth during the pandemic. According to economic theory, increased savings and a slowing population can lead real interest rates to decline.

In other words, when there is excess capital and people are saving money, there is less demand for credit. This decreased demand, in turn, may lead to lower interest rates.

By contrast, capital is destroyed during wars, which may have caused an upward pressure on rates in the past.

Pandemics vs. Recession Savings

How do savings during pandemics compare to recessions? In April 2020, personal savings rates skyrocketed to over 33%—the highest ever recorded.

In the table below, we show the peak savings rate during the pandemic, and compare it to different recessions.

DatePeak Savings Rate
Apr 202033.8%
May 20097.9%
Sep 20017.0%
Jan 19919.3%
Nov 198113.2%
Jul 198011.2%
Dec 197314.8%
Jul 197013.5%
Jan 196111.1%

Source: U.S. Bureau of Economic Analysis (Jan 2022)

At one point, savings rates during the COVID-19 pandemic were double or triple the rate of past recessions. The average U.S. personal savings rate over the last 60 years is around 9%.

Rise in Real Wages

Like interest rates, real wages showed a meaningful response to pandemics. As labor scarcity increased, real wages rose higher. Overall, pandemics corresponded with a rise in real wages that lasted for decades. For wars, real wages decreased persistently for years.

During the Black Death, for instance, a 25-40% decline in the labor supply corresponded with a 100% rise in real wages.

Changes in Real Wages in Great Britain0 Years10 Years20 Years30 Years40 Years
Pandemics0.5%3.6%8.0%10.2%11.8%
Wars-0.2%-1.3%-2.2%-2.2%0.1%

It’s worth noting that the study was released in June 2020, long before current wage rises began to appear.

Productivity Increases

Pandemics have also positively impacted productivity. While real GDP per capita rose 8.6% four decades after pandemics, for wars, productivity increased just 1.4%.

Changes in Real GDP per Capita in Great Britain0 Years10 Years20 Years30 Years40 Years
Pandemics0.1%1.7%4.6%4.3%8.6%
Wars0.1%-1.0%-0.7%0.5%1.4%

Why did productivity improve? As the number of workers declined, capital per worker increased, raising labor productivity. In other words, there was more capital available for the remaining workers, boosting productivity.

By contrast, wars have hurt productivity due to the destruction of physical capital such as public infrastructure.

What if COVID-19 Is Different?

Two caveats may impact how real interest rates respond to the current pandemic, according to the research.

In the past, pandemics created a significant dent in the labor force. COVID-19, in comparison, has a greater impact on an elderly demographic in terms of deaths, who are less likely to be in the workforce. As a result, the decrease in capital to labor could depress interest rates to a lesser degree.

Secondly, the fiscal response to COVID-19 is much larger than past pandemics. A major fiscal response could lead to higher debt levels, which in turn could push real interest rates higher. As the central bank prints more money, this could lead to inflation, which causes bonds to be worth less. In turn, investors begin selling bonds and yields rise.

World War II: A Modern Day Case Study

However, there is a case to be made for lower rates for longer.

In the aftermath of World War II, the Federal Reserve sustained low borrowing costs in spite of a soaring economy and high inflation. The central bank kept long-term Treasury yields at 2.5% after the war to stabilize markets and keep government debt financing low. Even amid high debt levels, the debt-to-GDP ratio declined without causing damaging effects on the economy.

Overall, if history repeats itself, there could be a low interest rate environment for a significant period of time, with sustained effects on real wages and productivity.

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Markets in a Minute

Charted: Unemployment and Recessions Over 70 Years

Despite market uncertainty, U.S. unemployment is low, at 3.7%. In this infographic, we show unemployment and recessions since 1948.

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Unemployment and Recessions

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Charting Unemployment and Recessions Over 70 Years

As of August 2022, the U.S. unemployment rate sits at 3.7%, below its 74-year average of 5.5%.

Why does this matter today? Employment factors heavily into whether economists determine the country is in a recession. In fact, in the last several decades, employment-related factors have some of the heaviest weightings when a recession determination is made.

In this Markets in a Minute from New York Life Investments, we look at unemployment and recessions since 1948.

Why Is the Unemployment Rate Important?

To start, let’s look at how unemployment affects the economy.

During low unemployment and a strong labor market, wages often increase. This is a central concern to the Federal Reserve as higher wages could spur more spending and notch up inflation.

To curb inflation, the central bank may increase interest rates. As the economy begins to feel the effects of rising interest rates, it may fall into a recession as the cost of capital increases and consumer spending slows.

Who Determines It’s a Recession?

A committee of eight economists at the National Bureau of Economic Research (NBER) in Massachusetts make the call, although often several months after a recession has happened. As a result, employment data often acts as a lagging indicator.

This committee of academics looks at a number of variables beyond two consecutive quarters of negative GDP growth. Other factors include:

  • Nonfarm payroll employment
  • Real personal income less transfers
  • Real personal consumption expenditures
  • Industrial production
  • Wholesale retail sales adjusted for price changes
  • Real GDP

A widespread decline in economic activity across the economy, as opposed to just one sector, is also considered.

Unemployment and Recessions Over History

Over the last 12 business cycles, the unemployment rate averaged 4.7% at the peak and 8.1% during the trough. The below table shows how the unemployment rate changed over various U.S. business cycles, with data from NBER:

Peak Month Unemployment RateTrough Month Unemployment Rate
Nov 19483.8%Oct 19497.9%
Jul 19532.6%May 19545.9%
Aug 19574.1%Apr 19587.4%
Apr 19605.2%Feb 19616.9%
Dec 19693.5%Nov 19705.9%
Nov 19734.8%Mar 19758.6%
Jan 19806.3%Jul 19807.8%
Jul 19817.2%Nov 198210.8%
Jul 19905.5%Mar 19916.8%
Mar 20014.3%Nov 20015.5%
Dec 20075.0%Jun 20099.5%
Feb 20203.5%Apr 202014.7%

In 1953, following post-WWII expansion, the unemployment rate fell to 2.6%, near record lows.

During this time, the economy faced strong consumer demand and high inflation after a period of prolonged low interest rates. To combat price pressures, the Federal Reserve increased interest rates in 1954, and the economy fell into recession. By May 1954, the unemployment rate more than doubled.

In 1981, the unemployment rate was high during both the peak of the cycle (7.2%) and the trough (10.8%) by late 1982. This marked the end of the 1970s stagflationary era, characterized by slow growth and high unemployment.

More recently, at the peak of the business cycle in 2020 the unemployment rate stood at 3.5%, closer to levels seen today.

Unemployment Today: A Double-Edged Sword

As of July 2022, the number of job vacancies is at 11.2 million, near record highs.

To reign in the inflationary pressures of the current job market—which saw year-over-year wage increases of 5.2% in both July and August—the Federal Reserve may take a more aggressive stance on interest rate hikes.

The good news is that labor force participation is increasing. As of August, labor force participation was within 1% of pre-pandemic levels, offering relief to the labor market supply. Higher labor force participation could lessen wage growth without unemployment levels having to rise. Since more people are competing for jobs, there is less leverage for salary negotiation.

Going further, one study shows that since the Great Financial Crisis, labor market participation has had a greater influence on wage growth than unemployment levels or job openings.

Against these opposing forces of higher job vacancies and higher labor market participation, the outlook for unemployment, along with its wider effects on the economy, remain unclear.

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How Closely Related Are Historical Mortgage Rates and Housing Prices?

With mortgage rates climbing, could housing prices drop? We explore the relationship between historical mortgage rates and house prices.

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Scatterplot showing the relationship between historical mortgage rates and house prices

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Are Historical Mortgage Rates and House Prices Related?

Mortgage rates are rising at their fastest pace in at least 30 years. As mortgage rates climb, it becomes more expensive to finance a home purchase. This leaves many homebuyers with lower budgets. Could house prices drop as a result?

In this Markets in a Minute from New York Life Investments, we explore the relationship between historical mortgage rates and housing prices over the last 30 years. It’s the last in a three-part series on house prices.

Historical Mortgage Rates vs Housing Prices

To compare trends in historical mortgage rates and housing prices over time, we calculated year-over-year percentage changes. We used monthly data spanning from January 1992 to June 2022. Here’s a summary of movements over that timeframe.

Scenario# of Months
Mortgage Rate Decline, House Price Growth193
Mortgage Rate Growth, House Price Growth117
Mortgage Rate Decline, House Price Decline49
Mortgage Rate Growth, House Price Decline6

November 2006 has been excluded from the above tally as year-over-year mortgage rate growth was 0.0% at that time.

Mortgage rates and house prices have a weak positive correlation of 0.26. This means that when mortgage rates increase, house prices typically also increase. What could be contributing to this trend? Mortgage rate increases are associated with periods when the Federal Reserve is raising its policy rate in response to inflation that is higher than desired. Often, this coincides with strong economic growth, low unemployment, and rising wages, which can all strengthen home prices.

Over the last 30 years, it was quite rare for mortgage rates to rise while house prices simultaneously dropped. This only occurred in the early stages of the Global Financial Crisis and during the recovery.

DateMortgage Rate YoY ChangeHouse Price YoY Change
Aug 20070.8%-0.6%
Oct 20071.1%-1.9%
Jan 20101.6%-2.9%
Apr 20106.3%-1.5%
May 20103.3%-1.4%
Jul 20110.4%-3.8%

While mortgage rates saw some upward movement in the wake of the Global Financial Crisis, it took the housing market longer to recover. In fact, housing prices didn’t see a positive year-over-year change until March 2012.

Is There a Lag Effect?

A change in mortgage rates may not be immediately reflected in housing prices. To test whether there was a lag effect, we also explored the relationship between historical mortgage rates and housing prices two years later.* For instance, we compared the annual percentage change in mortgage rates in 2020 to housing price growth in 2022.

Here’s what the data looked like with this two year lag of housing price growth.

Scenario# of Months
Mortgage Rate Decline, House Price Growth190
Mortgage Rate Growth, House Price Growth97
Mortgage Rate Decline, House Price Decline37
Mortgage Rate Growth, House Price Decline17

*We tested for a lag effect using house prices six months later, one year later, two years later, and three years later. The data using house prices 6 months later and three years later revealed no correlation between mortgage rates and housing prices. The data using house prices one year later revealed the same correlation as using house price data from two years later. November 2006 has been excluded from the above tally as year-over-year mortgage rate growth was 0.0% at that time.

The pattern was similar, albeit with a slightly negative correlation of -0.15. In other words, mortgage rates and house prices tended to move in opposite directions.

For example, this occurred in 2020 when mortgage rates were dropping and the Federal Reserve had not yet begun to raise its policy rate. Two years later in 2022, house prices were seeing record high levels of growth amid strong demand and low supply.

Compared to our first analysis above, there were also more instances where mortgage rates increased and house prices decreased. This activity all related to mortgage rates rising from 2005-2007 amid inflation concerns, with housing prices crashing in the following years due to subprime mortgages and the Global Financial Crisis.

Historical Mortgage Rates: One Piece of the Puzzle

Could the current rising mortgage rates cause housing prices to drop? In the last 30 years, there is no historical precedent for this apart from the Global Financial Crisis. Of course, subprime mortgages—mortgages to people with impaired credit scores—contributed to the housing market collapse at that time.

While researchers believe it’s unlikely housing price growth will turn negative, the pace of growth is slowing down. We can see this in the below chart showing trends between historical mortgage rates and housing prices over time.

Changes in historical mortgage rates and house prices over time. When the year-over-year mortgage rate changes has been above 20% for more than two months in a row, the pace of house price growth has slowed.

Historically, a slowdown in house price growth has occurred when mortgage rates increase rapidly. Since 1992, there have been four instances when mortgage rates rose over 20% year-over-year for more than two months in a row. Each of them has been accompanied by a deceleration in house price growth.

Time PeriodHouse Price YoY Change at StartHouse Price YoY Change at End
Sep 1994-Feb 19953.1%2.9%
Aug 2013-May 20147.2%4.7%
Sep 2018-Dec 20185.8%5.5%
Jan 2022-Jun 202218.4%16.2%

Note: House price data only available until June 2022 and does not reflect any fluctuations since that time.

In the first half of 2022, house price growth slowed by over two percentage points. However, it’s important to keep in mind that while mortgage rates and affordability can play a role in the housing market, there are other factors at play. The current market is buoyed by high demand as millennials reach their prime home buying years, coupled with a housing supply shortage.

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