Your Guide to the 2020 Recession

Why It Won’t Become a Depression

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The 2020 recession began in the first quarter of the year when the economy contracted 5% as a result of the coronavirus pandemic. The recession was largely caused by government-ordered shutdowns to slow the spread of COVID-19. It ended the longest economic expansion in history.

The National Bureau of Economic Research (NBER) defines a recession as a significant decline in economic activity, lasting more than a few months. The NBER announced on June 8 that "the unprecedented magnitude of the decline in employment and production, and its broad reach across the entire economy, warrants the designation of this episode as a recession, even if it turns out to be briefer than earlier contractions."

The 2020 Recession

The 2020 recession is expected to be the worst recession since the Great Depression. In April 2020, it was already worse than the 2008 recession in its initial ferocity. As of November 2020, stock markets have recovered, and jobs have been added back into the economy, but lockdowns in the winter could impact them again. Here are the key statistics surrounding economic growth, unemployment, retail sales, and the stock market and how they've played a role in the 2020 recession.

Economic Growth

The U.S. economy contracted 5% in the first quarter of 2020 and then it contracted a record 31.4% in the second quarter. That’s worse than the drop seen during the Great Depression when the economy contracted from $1.1 trillion in 1929 to $817 billion in 1933.

The 2020 decline happened in just three months instead of the four years it took during the Depression.

The economy grew 33.1% in the third quarter, but it was not enough to make up for earlier losses. The Federal Reserve expects the economy to contract by 3.7% for 2020 on the whole. The Fed also predicts growth will improve to a robust 4.0% in 2021 once a vaccine is widely distributed. On the other hand, the Congressional Budget Office (CBO) predicts the effects will linger until the fourth quarter of 2021, with slightly lower economic output and higher unemployment.

The World Bank predicts that the pandemic could contract the global economy by 5.2% in 2020, creating the worst global recession since the Great Depression. It expects a 4.2% recovery in 2021.

Unemployment Surge

In April 2020, the U.S. economy lost an astonishing 20.5 million jobs. Many states required non-essential businesses to shut down. Bars, restaurants, and hotels suffered the most, as people stopped traveling and restaurants could only offer take-out and delivery. Hospitals lost jobs as they stopped elective procedures to make way for COVID-19 patients. Retail also suffered as shoppers moved online.

Prior to the shutdown, the economy was adding around 200,000 jobs a month. It needs about 150,000 new jobs each month to keep expanding.

Job losses sent the April unemployment rate skyrocketing to 14.7%. It remained in the double-digits until August.

The Fed projects that unemployment will average 7.6% in 2020. It will fall to a healthy 5.5% in 2021.

Retail Sales Wipeout

U.S. retail sales plummeted 16.4% in April 2020. Clothing stores were hit the hardest, as sales dropped 78.8% month on month. Electronics and appliance stores were down 60.6%. Furniture store sales were next, falling 58.7%. Sporting goods and hobby store sales fell by 38%.

Restaurant and bar sales dropped 29.5% in a month, while department stores were down about 29%. Many well-known retailers declared bankruptcy due to their high debt levels entering the pandemic.

Stock Market Crash

Uncertainty over the pandemic’s impact caused the 2020 stock market crash

  • On March 9, 2020, the Dow Jones Industrial Average (DJIA) fell 2,013.76 points. It was the worst point loss up to that date.  
  • On March 12, the Dow set another new record, falling 2,352.60 points. It was a 9.99% drop, almost a 10% correction in a single day. 
  • On March 16, the Dow set another new record, dropping 2,997.10 points. Its 12.93% drop that day was the third-worst in history.
  • On March 11, the Dow closed at 23,553.22. It was down 20.3% from the record level of 29,551.42 seen on February 12. That decline signaled the start of a bear market. It also ended the 11-year bull market that began in March 2009.  

The stock market signaled it had recovered by November 2020. On November 16, the Dow set a new high, closing at 29,950.44. By November 24, it had set another closing record, breaking 30,000 when it closed at 30,046.24. These new records may be tied to the news about Moderna's vaccine being up to 94.5% effective, as well as more news surrounding the transition to a Biden administration.

What Caused the 2020 Recession?

On March 13, 2020, President Donald Trump declared a national emergency in response to the COVID-19 pandemic. People in the U.S. were told to shelter in place. Schools were shut down and non-essential businesses were closed. This was done to keep people from spreading the virus and overwhelming hospitals.

The closest parallel in history to 2020’s health crisis is the 1918 flu pandemic. It lasted from the spring of 1918 through the spring of 1919. One out of three people around the world got sick, and, of those, approximately 10% died. Ironically, many U.S. communities experienced higher wage growth following the 1918 pandemic. The high mortality rates, along with World War I casualties, reduced the number of healthy workers. Employers paid higher wages to attract workers who were left.

Other recessions throughout history were natural downturns following peaks in the business cycle

Government Stimulus Efforts

Congress passed several acts early in the COVID-19 crisis to provide financial aid to families and businesses. 

March 6, 2020: H.R. 6074

The Coronavirus Preparedness and Response Supplemental Appropriations Act provided $8.3 billion to federal agencies to respond to the pandemic. Of that, $6.2 billion went to the Department of Health and Human Services for vaccine research.

March 18, 2020: H.R. 6201

The Families First Coronavirus Response Act provided $3.5 billion in paid sick leave, insurance coverage of coronavirus testing, and unemployment benefits.

March 27, 2020: H.R. 748

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was a $2 trillion aid package that included:

  • $293 billion in stimulus checks to eligible taxpayers
  • $268 billion in expanded unemployment insurance
  • $150 billion for state and local governments
  • $510 billion in expanded lending for businesses and local governments
  • $377 billion in new loans and grants for small businesses
  • $127 billion to hospitals for ventilators and other equipment

April 24, 2020: H.R. 266

The Paycheck Protection Program and Health Care Enhancement Act allocated $483.4 billion for small businesses, hospitals, and testing.

Interest Rates

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 1.0% to 0%. It took the unprecedented move of reducing the reserve requirement to zero, allowing banks to lend 100% of their deposits without keeping any in reserve. On September 16, it promised to keep its benchmark rate at 0% until 2023.

2020 Recession vs. 2008 Recession

The 2020 recession was much deeper than the 2008 recession. If the economy doesn't contract in the fourth quarter, then the NBER could declare the 2020 recession to be over, but we won't know that until the start of 2021. If so, it will have been much shorter than the 2008 recession, which ended in the third quarter of 2009.

GDP Growth Rate
2008 2020
Q1 -2.3% -5.0%
Q2 2.1% -31.4%
Q3 -2.1%    33.1%
Q4 -8.4%        N/A
Annual -0.1% -3.7% (Fed estimate)

The 2008 recession was caused by a collapse in the financial markets. Credit dried up, banks stopped lending, and housing prices collapsed. It took years for these markets to heal. The Dodd-Frank Wall Street Reform Act and the Federal Reserve imposed new regulations on banks. In part because of that, it took longer for banks to begin lending again. It also made them stronger for the recovery from the 2020 recession. 

Recession vs. Depression

The 2020 recession won’t cause a depression because the difference is that a recession lasts 18 months, on average, while a depression lasts years.

There have been over 30 recessions since 1854. There's only been one depression—the Great Depression. The Fed helped turn the 1929 recession into a depression by raising the fed funds rate to protect the gold standard. In addition, Congress cut back on the New Deal too soon. That made the Depression return in 1937. It didn't end until Congress started spending again to build up the military for World War II.

By contrast, in 2020, the Fed lowered the fed funds rate to 0%. Congress pumped trillions into the economy in just a few months.