The COVID-19 pandemic created a public health crisis that began in March 2020, ultimately changing all aspects of everyday life, including education, work-life balance, and most drastically, the economy. The damage was unprecedented in speed and ferocity. Most states ordered nonessential businesses to shut down in an effort to stop the spread of the disease. Supply chains were disrupted as a result. Workers were furloughed then laid off, and demand plummeted.
- The COVID-19 pandemic created a devastating recession as the economy shrank a record 31.4% in the second quarter of 2020.
- Nationwide shutdowns closed businesses.
- Workers who could do so worked from home, creating a demand for more living space.
- Unemployment neared Great Depression levels, causing many to fear eviction.
- The Fed lowered interest rates, which also boosted demand for housing.
- Government stimulus totaled more than $5 trillion, sending the deficit to record levels.
Historic Economic Change
The National Bureau of Economic Research (NBER) declared that a recession had started in early 2020, as U.S. gross domestic product (GDP)—the measure of goods and services output—declined by 5.1% in the first quarter of 2020.
Most businesses shut down as stay-at-home orders were put in place and it became clear that the coronavirus was a national emergency. The economy contracted a record 31.2% in the second quarter of 2020 as a result. Quarterly GDP had never experienced a drop greater than 10% since recordkeeping began in 1947.
The 2020 recession ended the longest economic expansion in U.S. history. The economy grew for 128 months between July 2009 and February 2020 following the 2008 financial crisis. While the economy grew 33.4% in the third quarter of 2020, it was not enough to compensate for the output lost.
Economists warned that the economy would not be able to return to pre-pandemic levels without the widespread distribution of a vaccine.
The Federal Reserve forecast in December 2020 that GDP would average a decline of 2.4% in 2020 but rise by a robust 4.2% in 2021. GDP ended up increasing by 6.3% in the first quarter and 6.5% in the second quarter.
A record 3.3 million Americans filed for unemployment insurance during the week ending March 21, 2020. That record was shattered the following week when almost 6.1 million more individuals filed claims. Businesses shut down in response to the pandemic, and individuals across various industries were let go. According to the U.S. Department of Labor, no previous week in U.S. history had seen more than 695,000 people file for unemployment.
The unemployment rate peaked at 14.8% in April. This was the highest peak since the Great Depression when unemployment reached an estimated 25%. The unemployment rate gradually improved and finally dropped below 10% in August 2020 as businesses learned how to operate safely.
The unemployment rate decreased to around 6% by December 2020. As of August 2021, the unemployment rate is 5.4%.
By early April 2020, 43% of businesses had temporarily closed. Almost all the closures took place due to COVID-19, a survey from the Proceedings of the National Academy of Sciences of the United States of America (PNAS) suggested. Retail, entertainment, bars, restaurants, and personal services, such as hairdressers, felt the worst impact. Meanwhile, industries that didn’t rely on on-site locations to stay in business did better, including professional services and real estate.
An estimated 75% of all businesses surveyed by the PNAS had only enough cash on hand to survive two months or less.
Commercial Chapter 11 bankruptcies—meant to rehabilitate a business through a court-approved reorganization plan—were up 78% over September 2019 by September 2020. The American Bankruptcy Institute expected to see an increase in filings in 2021 as the pandemic dragged on. More than 57% of small businesses were able to reopen by March 2021 as pandemic shutdowns eased.
The Work-from-Home Shift
The U.S. economy shifted to operating as a work-from-home economy almost overnight. In various nationwide surveys conducted through June, Stanford University economist Nicholas Bloom found that 42% of the U.S. labor force worked from home full-time. Another 26% worked in essential businesses such as grocery stores, healthcare, and auto repair facilities. The remaining 33% were not working as a result of the impact of the lockdown and layoffs.
America became a work-from-home economy almost overnight. Almost twice as many employees worked from home rather than on business premises.
Those working from home sustained economic activity, but there were challenges to remote work. According to Bloom’s research, more than half of those working from home were forced to use bedrooms or shared rooms. More than one-third had such poor internet connections that they couldn't participate in video conference calls. Bloom noted that many corporations wanted to make working from home a permanent aspect of company policy, even with its challenges.
Only 14.4% of workers were working remotely by June 2021.
The Federal Reserve moved quickly to make sure banks and businesses had enough money to continue lending as it became clear the pandemic would have a lasting economic effect.
The Fed lowered the target range for the fed funds rate by a full point on March 15, 2020. It went from a range of between 1.00% and 1.25% to between 0% and 0.25%. The Fed also took the unprecedented move of reducing the reserve requirement to zero. This enabled banks to lend all their deposits without keeping any in reserve.
On Sept. 16, 2020, the Fed projected it would keep its benchmark rate (the federal funds rate) near zero until 2023. This historic announcement meant banks and consumers could be assured of low-interest rates until recovery was well underway.
Bank lending rates reached record lows as a result. The fixed rate for a 30-year mortgage fell to 2.71% in early December 2020, the lowest in almost 50 years. It had risen slightly by April 2021, reaching 3.18%, but the increase was short-lived. Rates were still below 3% as of August 2021.
Effects on the Housing Market
Record low-interest rates prompted a boom in the housing market beginning in June 2020. Families began the “race for space” despite high unemployment rates. They sought bigger yards and more indoor space better suited for at-home learning and work.
Builders had kept housing inventory at low levels even before the pandemic, remembering all too well how they were stuck with unsold houses during the 2008 financial crisis. The supply of unsold homes was only enough to last 10 weeks by October 2020, the shortest span of time in 20 years. At the other end of the spectrum, millions of American families were at risk of losing their homes.
More than 20 million renters had lost their jobs and were no longer covered by unemployment insurance by the end of summer 2020. And government-mandated eviction moratoriums covered only about 30% of renters. The federal moratorium was extended several times and expired on July 31, 2021. The Centers for Disease Control and Prevention attempted to extend this deadline, but the Supreme Court ruled on Aug. 26, 2021, that the CDC did not have the authority to do so.
Evicted families have usually exhausted all resources before losing their homes. They are more likely to experience homelessness as a result, increasing the challenges of finding a job. Evictions also hurt property owners because they may struggle to pay mortgages and risk foreclosure or bankruptcy without rental income.
Stimulus Spending and Debt
Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020, to provide financial relief to families and businesses impacted by the pandemic. The $2 trillion aid package was one of four laws passed to provide relief.
The Congressional Budget Office (CBO) said that the 2020 federal budget deficit would skyrocket to a record $3.3 trillion as a result, more than three times the 2019 deficit. The CBO also predicted that the 2021 budget deficit would be $2.3 trillion, the second-largest since 1945.
The Consolidated Appropriations Act was signed on Dec. 27, 2020. The $900 billion aid package sent up to $600 in stimulus payments to eligible taxpayers.
Congress passed the American Rescue Plan Act on March 11, 2021, after President Joe Biden took office. The Act provided $1,400 stimulus checks to eligible individuals, as well as funding for vaccinations, aid, and more. The package is estimated to have added $1.1 trillion to the federal deficit.
Stock Market Crash and Rebound
The stock market was setting records at the start of 2020, with the Dow Jones Industrial Average (DJIA) reaching a pre-pandemic high of 29,551.42 on Feb. 12, 2020. Then panicked investors created the 2020 stock market crash soon after the president declared a national emergency. The three worst single-day point losses in U.S. history occurred in March 2020:
- March 16: down 2,997.1 points
- March 12: down 2,352.6 points
- March 9: down 2,103.76 points
Investors sent the DJIA soaring to a record high of 29,950.44 on Nov. 16, 2020, most likely buoyed by Moderna’s announcement of a coronavirus vaccine that was almost 95% effective. It broke the milestone of 30,000 points for the first time eight days later.
The Oil Price Collapse
Global oil prices started strong in 2020, averaging $64 per barrel in January. However, the pandemic drastically reduced global demand as businesses shut down and governments restricted travel. In April, oil prices plummeted to $19 per barrel. In the U.S., they briefly touched -$40 per barrel due to a technical imbalance affecting the futures market. Prices recovered later in the year, but they didn't close above $64 until March 2021.
Frequently Asked Questions (FAQs)
What is a recession?
A recession is a sustained economic downturn. The National Bureau of Economic Research (NBER) says that recessions last more than a few months, but they also account for the diffusion of the impacts and the depth of the economic decline. The 2020 recession concluded quickly, but its impacts were so profound and widespread that NBER felt that it met the definition criteria.
What is the difference between a recession and a depression?
The Federal Reserve hasn't specifically defined depressions, but they can be broadly thought of as an extended period of decline with multiple recessions. Depressions last longer than recessions, and they are often measured in years instead of months.