How COVID-19 Has Affected the U.S. Economy
Impact of the Worst Recession Since the Great Depression
The COVID-19 pandemic created a public health crisis in early March, 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. To stop the spread of the disease, most states ordered non-essential businesses to shut down, and, as a result, supply chains were disrupted, workers were furloughed and then laid off, and demand plummeted.
Historic Economic Change
The National Bureau of Economic Research (NBER) declared a recession had started in February, as U.S. gross domestic product—the measure of goods and services output—declined 5% in the first quarter of 2020.
As it became clear that the coronavirus was a national emergency, most businesses shut down as the stay-at-home order was put in place. As a result, the economy contracted a record 31.4% (annual change) in the second quarter, according to the most recent update from the Bureau of Economic Analysis. To put this decrease into historical context, quarterly GDP had never experienced a drop greater than 10% since record keeping began in 1947.
The 2020 recession ended the longest economic expansion in U.S. history. Following the 2008 financial crisis, the economy grew for 128 months between July 2009 and February 2020. While the economy then grew 33.1% in the third quarter, it was not enough to make up 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 forecasts that GDP will average -3.7% in 2020, but rise by a robust 4% in 2021.
A record 3.3 million Americans filed for unemployment insurance during the week ending March 21, 2020. And, as businesses shut down in response to the pandemic and individuals across various industries were let go, that record was shattered the following week, when almost 6.9 million more individuals filed claims. 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.
In April, the unemployment rate peaked at 14.7%. This was the highest peak since the Great Depression, when unemployment reached an estimated 25%. As businesses learned how to successfully operate safely, the unemployment rate gradually improved, and finally dropped below 10% in August 2020.
The Federal Reserve estimates that the unemployment rate will average 7.6% in 2020, and will improve to a healthy 5.5% in 2021.
In early April, 43% of businesses had temporarily closed, and nearly all of the closures were a result of COVID-19, a survey from the Proceedings of the National Academy of Sciences of the United States of America (PNAS) suggests. The worst impact was felt by retail, entertainment, bars, restaurants, and personal services, such as hairdressers. Meanwhile, industries that don’t rely on an on-site location to stay in business did better, including finance, professional services, and real estate.
An estimated 75% of all businesses surveyed by the PNAS only had enough cash on hand to survive two months or less closed.
By September 2020, commercial Chapter 11 bankruptcies—meant to rehabilitate a business through a court-approved reorganization plan—were up 78% over September 2019. The American Bankruptcy Institute expects to see an increase in filings in early 2021, as well, as the pandemic drags on.
The Work-From-Home Shift
Almost overnight, the U.S. economy shifted to operating as a work-from-home economy. In various nationwide surveys conducted through June, Stanford economist Nicholas Bloom found that 42% of the U.S. labor force was working from home full time. Another 26% worked from essential businesses such as grocery stores, health care, and auto repair facilities, while the remaining 33% were not working, as a result of the impact of the lockdown and layoffs.
The shift to working from home allowed the economy to survive despite the lockdown. Almost twice as many employees are now working from home rather than at work, and these individuals now account for more than 65% of U.S. economic activity.
While those working from home have sustained economic activity, there are many challenges to remote work. According to Bloom’s research, more than half of those who are now working from home are forced to use bedrooms or shared rooms, and more than a third of them have such poor internet connection that they can’t effectively participate in video conference calls. However, even with its challenges, Bloom notes that many corporations are looking to make work from home a more permanent aspect of company policy.
As it became clear the pandemic would have lasting economic effect, the Federal Reserve moved quickly to make sure banks and businesses had enough money to continue lending. On March 15, 2020, it lowered the fed funds rate from 1% to a target range of 0% to 1/4%. The unprecedented move of reducing the reserve requirement to zero enabled banks to lend all of their deposits without keeping any in reserve.
On Sept. 16, the Fed promised to keep its benchmark rate at zero until 2023. This historic announcement meant banks, and consumers, could be assured of low interest rates until recovery was well underway.
As a result, bank lending rates reached record lows. For example, the fixed rate for a 30-year mortgage fell to 2.71% in early December, the lowest in almost 50 years.
Effects on the Housing Market
Record-low interest rates prompted a boom in the housing market starting in June, 2020. Despite high unemployment rates, families began the “race for space.” They sought bigger yards and more indoor space better suited for at-home learning and work.
Even before the pandemic, builders had kept housing inventory at low levels, remembering all too well how they were stuck with unsold houses during the 2008 financial crisis. By October, 2020, the supply of unsold homes would only last two-and-a-half months, the shortest time span in 20 years.
At the other end of the spectrum, millions of American families were (and continue to be) at risk of losing their homes. A study published by the Aspen Institute in August found that, if conditions of the pandemic do not change, 29% to 43% of renters could be at risk of eviction by the end of the year. By summer’s end, more than 20 million renters had lost their jobs and were no longer covered by unemployment insurance benefits. Plus, government-mandated eviction moratoriums only cover 30% of renters, and the federal protections will expire on Dec. 31, 2020.
Evicted families have usually exhausted all resources before losing their homes. As a result, they are more likely to experience homelessness, increasing the challenges associated with finding a job. Evictions also hurt property owners, as without rental income, they may struggle to pay mortgages and risk foreclosure or bankruptcy.
Stimulus Spending and Debt
On March 27, 2020, the U.S. Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), in an effort 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, as a result, the 2020 federal budget deficit will skyrocket to a record $3.3 trillion, more than three times the 2019 deficit. As the year nears its end, and several aid programs for Americans near expiration, lawmakers are working to reach a deal on a new coronavirus relief package.
Stock Market Crash and Rebound
At the start of 2020, the stock market was setting new records, with the Dow Jones Industrial Average (DJIA) reaching a pre-pandemic high of 29,551.42 on Feb. 12, 2020.
Soon after the president declared a national emergency, though, panicked investors created the 2020 stock market crash. 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
On Nov. 16, 2020, investors sent the DJIA soaring to a new record high of 29,950.44, most likely buoyed by Moderna’s announcement of a coronavirus vaccine that was almost 95% effective.
Oil Price Collapse
Global oil prices started strong in 2020, averaging $64 per barrel in January. However, the pandemic drastically reduced global oil demand as businesses shut down and governments restricted travel. On April 14, 2020, air travel hit a low point of 87,534 travelers compared to 2.2 million that same day the year before. Also in April, oil prices plummeted to $19 per barrel globally and -$37 per barrel in the U.S. Prices then recovered later in the year, but never regained their January high.
In December, 2020, the U.S. Energy Administration (EIA) predicted oil prices to average $43 per barrel by year’s end, and rise to $49 per barrel in 2021. U.S. prices would be slightly lower due to greater supply from domestic shale oil production.
- The pandemic created a devastating recession as the economy shrunk a record 31.4%
- The shutdown closed 43% of businesses
- Workers who could do so worked out of their homes, creating a demand for more 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 $2 trillion, sending the deficit to record levels