The 2020 recession began in the first quarter of the year when the economy contracted 5% as a result of the COVID-19 pandemic.
The recession was largely caused by government-ordered shutdowns to slow the spread of the outbreak. It ended the longest economic expansion in U.S. 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, 2020, 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 entertainment, retail, and hospitality industries were hit the hardest. After the initial outbreak, other businesses began learning how to reopen safely.
The economy improved but not enough to offset prior losses. A second wave of infections occurred in the fall of 2020, threatening further robust recovery. The pandemic caused the U.S. economy to contract by 3.5% for the year.
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, 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.
Aspects of the 2020 Recession
The 2020 recession was the worst recession since the Great Depression. In April 2020, it was already worse than the 2008 recession in its initial ferocity. In November 2020, stock markets recovered, and jobs have been added back into the economy.
Here are the key statistics surrounding economic contraction and growth, unemployment, retail sales, and the stock market and how they played a role in the 2020 recession.
Economic Contraction and Growth
The U.S. economy contracted 5% in the first quarter of 2020 and then contracted a record 31.4% in the second quarter. That was 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 33.4% in the third quarter, but it was not enough to make up for earlier losses. In the fourth quarter, it grew just 4%.
The Federal Reserve predicts that growth will improve to a robust 4.2% in 2021 once a vaccine has been widely distributed. On the other hand, the Congressional Budget Office (CBO) predicts that the effects will linger until the fourth quarter of 2021, with slightly lower economic output and higher unemployment.
In April 2020, the U.S. economy lost an astonishing 20.6 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 merchants also suffered as shoppers moved online.
Prior to the shutdown, the economy was adding around 200,000 jobs each month. It needs about 150,000 new jobs each month to keep expanding.
Job losses sent the April unemployment rate skyrocketing to 14.8%. It remained in the double digits until August, ending the year at. 6.7%.
The Fed projects that unemployment will fall to a healthy 5.0% 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 over month.
Electronics and appliance store sales 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 as they entered the pandemic.
By December, retail sales had improved but were still not back to normal. Sales for the year were just 2.9% higher than the year before.
The holiday season was up a pretty healthy 4.0% compared with the year before. The improvement was driven by a 19.2% increase in online sales.
Stock Market Fluctuations
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 one-day 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 had begun in March 2009.
The stock market signaled that 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 have been 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.
Other recessions throughout history were natural downturns following peaks in the business cycle.
Government Stimulus Efforts
Congress passed several acts early during 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, over $3 billion went to the vaccine research and development.
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.
December 27, 2020: H.R. 133
On Dec. 27, 2020, the Consolidated Appropriations Act was signed. The $900 billion aid package sent up to $600 in new stimulus checks to eligible taxpayers.
March 11, 2021: H.R. 1319
The American Rescue Plan Act of 2021, also called the "American Rescue Plan," was passed by both chambers of Congress and signed by President Joe Biden in March of 2021.
The $1.9 trillion relief bill provided a number of benefits to stimulate the economy and provide economic support, particularly working-class households with lower incomes. These benefits included:
- $1,400 stimulus checks to eligible taxpayers
- Expanded tax credits for seniors, childless households, and lower-income households, including the Child and Dependent Care Tax Credit and the Earned Income Tax Credit
- Expanded and refundable Child Tax Credit
- Extended unemployment benefits
The Federal Reserve moved quickly to make sure banks 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. Because the economy didn't contract in the fourth quarter, the NBER could declare the 2020 recession to be over later in the year.
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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. Consequently, it took longer for banks to begin lending again.
Recession vs. Depression
The 2020 recession didn’t cause a depression. A recession lasts for 18 months, on average, while a depression usually lasts for 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. Also, 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. The economy showed a healthy growth rate in the fourth quarter.
Government action from now on will determine whether this 2020 recession—which appears to be over—could cause a resurgence leading to a depression. Congress cut government spending and increased taxes in 1937, which reignited the recession for another year.
The coronavirus could also reignite another recession and lead to a global depression. There are several variants of the virus that have emerged.
If they prove to be more contagious, more deadly, or resistant to vaccines, the government could shut down the economy again. Increased sickness and mortality rates could also trigger a decrease in demand or even supply.