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. To stop the spread of the disease, most states ordered nonessential businesses to shut down. As a result, supply chains were disrupted, workers were furloughed and then laid off, and demand plummeted.
- The COVID-19 pandemic created a devastating recession as the economy shrunk 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 $2 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 5% in the first quarter of 2020.
As it became clear that the coronavirus was a national emergency, most businesses shut down as stay-at-home orders were put in place. As a result, the economy contracted a record 31.4% in the second quarter of 2020. 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 33.4% in the third quarter of 2020, 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 forecast in December 2020 that GDP would average -2.4% in 2020 but rise by a robust 4.2% in 2021. In the first quarter of 2021, the GDP ended up increasing by 6.4%.
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 6.9 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.
In April, the unemployment rate peaked at 14.8%. 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.
By December 2020, the unemployment rate decreased to around 6%, where it remained in June 2021.
In early April 2020, 43% of businesses had temporarily closed. Almost all 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) suggested. The worst impact was felt by retail, entertainment, bars, restaurants, and personal services, such as hairdressers. Meanwhile, industries that didn’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 expected to see an increase in filings in early 2021 as well, 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
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. The remaining 33% were not working as a result of the impact of the lockdown and layoffs.
Almost overnight, America became a work-from-home economy. Almost twice as many employees worked from home rather than on business premises.
While those working from home sustained economic activity, there were many 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 a third of them had such poor internet connection that they couldn't effectively participate in video conference calls. However, even with its challenges, Bloom noted that many corporations were looking to make work from home a more permanent aspect of company policy.
By June 2021, only 14.4% of workers were working remotely.
As it became clear the pandemic would have a lasting economic effect, the Federal Reserve moved quickly to make sure banks and businesses had enough money to continue lending. On March 15, 2020, the Fed lowered the target range for the fed funds rate by a full point. It went from a range of between 1.00% and 1.25% to a range of between 0% to 0.25%. It also took the unprecedented move of reducing the reserve requirement to zero. That enabled banks to lend all their deposits without keeping any in reserve.
On September 16, 2020, 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 2020, the lowest in almost 50 years. By April 2021, it had risen slightly, reaching 3.18%, but the increase was short-lived; as of July 2021, rates are still below 3%.
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 was only enough to last 10 weeks, the shortest time span in 20 years.
At the other end of the spectrum, millions of American families were at risk of losing their homes. By the end of summer 2020, more than 20 million renters had lost their jobs and were no longer covered by unemployment insurance benefits. Plus, government-mandated eviction moratoriums only covered 30% of renters. The federal moratorium was extended several times. When it expires on July 31, 2021, all back rent will be due.
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, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act 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 would skyrocket to a record $3.3 trillion, more than three times the 2019 deficit. The CBO also predicted that the 2021 budget deficit will be $2.3 trillion, the second-largest since 1945.
On December 27, 2020, the Consolidated Appropriations Act was signed. The $900 billion aid package sent up to $600 in stimulus payments to eligible taxpayers.
After President Joe Biden took office, Congress passed the American Rescue Plan Act on March 11, 2021. It 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
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 February 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 November 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. Eight days later, it broke the milestone of 30,000 points for the first time. Since then, it has only continued rising.
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.
By July 2021, oil prices had recovered, even reaching beyond pre-pandemic levels.