Why It Won’t Become a Depression
The 2020 recession began in February when the economy contracted 5%. It was caused by government-ordered shutdowns to slow the spread of the COVID-19 pandemic. 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."
2020 Recession Facts
The 2020 recession is expected to be the worst recession since the Great Depression. As of April 2020, it is already worse than the 2008 recession in its initial ferocity. Here are the key statistics in economic growth, unemployment, retail sales, and the stock market.
The U.S. economy contracted 5% in the first quarter of 2020. The Conference Board predicts that, in the second quarter, the economy will dive by around 45%. The Federal Reserve Bank of Atlanta has a similar outlook, forecasting a 40.4% plunge in second-quarter growth.
That’s twice as bad as the 26% drop during the Great Depression. The economy contracted from $1.1 trillion in 1929 to $817 billion in 1933. The current decline happened in just two months instead of the four years it took during the Depression.
The expected 45% hit to economic growth in the second quarter is driven by a stunning and unprecedented 50% decline in consumer spending, a 20% drop in business spending, and a 35% fall in exports.
The Conference Board expects a U-shaped recovery. It estimated in the spring that, by June, the economy will have recovered to 87% of what it produced in December 2019. Despite the improvement, the board expects the economy to contract by 7.2% for 2020 on the whole.
The Congressional Budget Office (CBO) predicts the economy will decline by 38%. The number of unemployed will rise to 26 million. The third quarter will improve, but not enough to make up for earlier losses. Effects will linger until the fourth quarter of 2021, with slightly lower economic output and higher unemployment.
The United Nations predicts in a worst-case scenario that the pandemic could slow the world’s growth rates to 0.5% in 2020, narrowly avoiding a global recession. That would cost the global economy $2 trillion. In 2018, world economic output was almost $86 trillion.
In April 2020, the U.S. economy lost an astonishing 20.5 million jobs. That's after losing 881,000 jobs in March.
- Leisure and hospitality lost a staggering 7.65 million jobs. The sector typically adds from 20,000 to 30,000 positions a month. Bars, restaurants, and hotels suffered the most, as people stopped traveling and government orders restricted restaurants to take-out and delivery only.
- Health care and social assistance lost 2.1 million jobs in the month. Hospitals stopped elective procedures to make way for COVID-19 patients. As a result, many non-essential health-care workers were laid off. Normally, this sector adds around 50,000 jobs a month.
- The retail industry lost 2.1 million jobs. Shoppers were told to avoid any stores except for essential services.
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.
The April U.S. unemployment rate was 14.7%. The Federal Reserve Bank of St. Louis forecast that the rate will surge to 32% for the second quarter of 2020. That's worse than the 25% unemployment rate of the Great Depression. Some of the unemployed began returning to work in May, as employers started figuring out how to keep their workers safe and some states started loosening restrictions.
Retail Sales Wipeout
U.S. retail sales plummeted by 16.4% in April 2020. Clothing stores were hit the hardest, as sales dropped 78.8% month on month. 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 28.9%. Many well-known retailers declared bankruptcy due to their high debt levels entering the pandemic. These included J. Crew, JCPenney, and Neiman Marcus. They plan to remain in business during restructuring.
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 a 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 lost 2,997.10 points—a new point-loss record. 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 Feb. 12 record level of 29,551.42. That decline signaled the start of a bear market. It also ended the 11-year bull market that began in March 2009.
Causes of 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 got sick and, of those, 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 the workers who were left.
Other recessions in history were a natural downturn following peaks in the business cycle.
Government Stimulus Efforts
The U.S. Congress passed several acts early in the COVID-19 crisis to provide financial aid to families and businesses.
March 6, 2020: H.R. 6074—Coronavirus Preparedness and Response Supplemental Appropriations Act. It 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—Families First Coronavirus Response Act. It provided $3.5 billion in paid sick leave, insurance coverage of coronavirus testing, and unemployment benefits. It also expanded food assistance for the poor and increased Medicaid funding.
March 27, 2020: H.R. 748—Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The $2 trillion aid package includes:
- $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—Paycheck Protection Program and Health Care Enhancement Act. This act allocated $483.4 billion for small businesses, hospitals, and testing.
2020 Recession Versus 2008 Recession
The 2020 recession is expected to be deeper but shorter than the 2008 recession.
|Economic Growth Rate|
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 Versus Depression
The 2020 recession won’t cause a depression. The difference is that a recession lasts 18 months on average, while a depression lasts years. The CBO predicts that economic activity will begin to recover in the third quarter of 2020.
There have been 33 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, the Fed in 2020 lowered the fed funds rate to zero. Congress has pumped trillions into the economy in just a few months.
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