Pandemic Destabilizes U.S. Economy
ECO 312 Students: Evan Bergemanm, Ryan Febus, Daniel Jensen, Julian Lapour, Lacey Mcdonald, Mark Munoa, Lucas Niezelski, Brooke OQuinn, Keo Robin, Alexander Stonick, Anthony Sylvester and Joshua Thompson
2020 has seen an intense economic contraction following the ongoing COVID-19 pandemic. Due to lockdown requirements, many businesses have halted operations and millions of workers have been forced to stay home – or have been laid off entirely. An 11-year period of economic expansion has come to an end. Unemployment has experienced a significant rise while income and consumer spending have declined. To combat this, the government has implemented aggressive and expansionary monetary and fiscal policies. These have allowed the economy to partially recover, but it is still falling far behind pre-pandemic levels.
The onset of COVID-19 had an immediate and damaging effect on the U.S. economy. According to the U.S. Bureau of Economic Analysis, over the first few months of the pandemic, national income declined by over $2 trillion, dipping an unprecedented 31%. This is the worst recorded reduction in real GDP, which measures national output adjusted for inflation, since World War II. To put this deep decline into perspective, during the Great Recession of 2008 – 09, considered one of the worst recessions of our time, real GDP declined by 8%.
Unemployment statistics fared similarly, as documented by the Bureau of Labor Statistics (BLS). As the economy began to spiral downwards, many businesses were forever to close their doors, causing unemployment to skyrocket from 4% to a peak of 15%. This means that every seventh person in the labor force was unemployed. This is the highest unemployment rate in the U.S. since 1947.
The BLS indicates that layoffs differed by location, with some states being more heavily impacted than others. For example, in April the unemployment rate in Minnesota was 8.7% while in Michigan it was 24% and 30.1% in Nevada. This means that, in Nevada, almost every third person in the labor force was unemployed.
According to the BLS, 16-24-year-olds were the most affected by layoffs, with a 33.8% unemployment rate. Mike Patton at Forbes attributed this to younger people usually having “fewer marketable skills, less work experience, and less seniority.” With this statistic in mind, it can be inferred that many of the students here at Augsburg University deeply felt the unemployment effects of the pandemic.
Heather Long at the Washington Post notes that if the federal administration had given stimulus packages in response to the rapid increase in unemployment sooner, the economic effects may not have been as severe. With a timelier stimulus package, Americans may have been more financially equipped to handle the economic crisis.
Recently, there have been promising improvements to the economy. Since September, businesses have been reopening as the lockdowns eased up and there has been an increase in employment by 610,000 jobs, which resulted in the unemployment rate decreasing to 7.9%. Jeff Cox, the finance editor at CNN, indicates that payrolls also increased in September by $661,000, though still lower than Wall Street’s expectation of $800,000. However, if the job numbers weaken and the stock market struggles, that may change. In the fourth quarter we may see more companies reporting closure and job cuts, especially without any additional fiscal stimulus.
Consumer spending, another important indicator of economic health, has also declined dramatically. In the U.S., consumer spending is a major component of the country’s GDP, and even a minor downturn can seriously hinder economic performance. Consumer spending dropped from $15 trillion to $12 trillion. In a few months, retail sales dropped by 16.5%. In addition, consumption shifted towards purchasing the necessities, such as groceries, paper products, cleaning supplies and personal protective equipment. After the initial few months of the pandemic as quarantine measures slowly got less restrictive, consumer spending rebounded to $14.6 trillion.
Economic policy response
In response to the economic decline following the pandemic, the Federal government implemented an expansionary fiscal policy. From the information provided by the International Monetary Fund (IMF), first, $44 billion was diverted from the disaster relief fund to provide unemployment benefits to millions of Americans. Other items in the initial response were student loan forbearance, deferment of payroll taxes and options to renters and homeowners to avoid evictions and foreclosure.
Later in the year, a few more major pieces of legislation were passed to help deal with economic fallout from COVID-19. The first piece of legislation included a $483 billion paycheck protection program meant to ensure businesses continued to pay their employees. The largest item of this first bill was $321 billion in forgivable small business loans and guarantees to help small businesses retain workers. Hospitals and expanding virus testing received $100 billion.
The largest fiscal legislation signed was the Coronavirus Aid, Relief and Economy Security Act (CARES), which allocated $2.3 trillion of relief and security. The largest items in the CARES Act included: $510 billion to prevent corporate bankruptcy; $349 billion to small businesses, $293 billion in tax rebates, and $268 billion to expand unemployment benefits. Other policies included $8.3 billion in the Coronavirus Preparedness and Response Supplemental Appropriation Act.
A second relief package, which many consider to be greatly needed, has unfortunately died in Congress several times. As a potential vaccine develops, the ongoing fiscal debate is whether more aid is needed and then whether to apply that aid through tax cuts or direct-to-consumer relief programs.
In a coordinated effort with the fiscal policy, the Federal Reserve implemented expansionary monetary policy, cutting the federal funds rate, which is the base interest rate in the economy, from 2.5% to near zero. A lower interest rate allowed banks to lend more to businesses and allowed individuals to draw more on their personal line of credit, increasing money supply and consumption expenditure. Following the reductions in the federal funds rate, fixed mortgage rates decreased to an all-time low 2.7%.
2020 has been a difficult year. The COVID-19 pandemic has claimed thousands of lives and overwhelmed healthcare systems. Sporadic lockdowns and general uncertainty have led to hundreds of small businesses closing their doors and left many Americans without jobs, experiencing food insecurity and economic uncertainty. Many would argue that government response has been not enough at best and ineffectual at worst. As a new administration prepares to move into the White House while COVID-19 cases continue to rise, only time will tell how the U.S. will recover from this unprecedented experience.