By: Kimberly Amadeo
What Caused the 2020 Recession?
The 2020 recession began in the first quarter of the year when the economy contracted by 5% due to the COVID-19 pandemic.
The government shutdowns intended to curb the virus’s spread 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.
NBER announced on June 8, 2020, that the “unprecedented magnitude of job and production declines and their broad reach across the economy justify calling this a recession, even if it turns out to be shorter than previous contractions.”
The entertainment, retail, and hospitality industries were severely impacted. After the initial outbreak of the pandemic, other businesses began learning how to safely reopen their doors.
The economy improved, but it was not enough to offset previous losses. A second wave of infections occurred in the fall of 2020, threatening another strong recovery. The pandemic caused the U.S. economy to contract by 3.5% for the year.
Aspects of the 2020 Recession
The 2020 recession was the worst since the Great Depression. In April 2020, it was worse than the 2008 recession in terms of initial violence. By November 2020, stock markets had recovered and jobs were added to the economy.
Below are the key statistics related to economic contraction, growth, unemployment rates, retail sales, and the stock market, and how they affected the 2020 recession.
Economic Contraction and Growth
The U.S. economy contracted by 5% in the first quarter of 2020, then it shrank at a record 31.4% in the second quarter. This was worse than the decline experienced during the Great Depression when the economy shrank from $1.1 trillion in 1929 to $817 billion in 1933.
The economy grew by 33.4% in the third quarter, but that was not enough to offset prior losses. In the fourth quarter, it grew by only 4%.
The Federal Reserve expects growth to improve to a strong 4.2% in 2021 once the vaccine is widely distributed. On the other hand, the Congressional Budget Office (CBO) expects effects to linger until the fourth quarter of 2021, with slight declines in economic output and rising unemployment rates.
Rising Unemployment Rates
In April 2020, the U.S. economy lost an astonishing 20.6 million jobs. Many states ordered non-essential businesses to close their doors.
Bars, restaurants, and hotels were significantly affected as people stopped traveling, and restaurants could only offer takeout and delivery. Hospitals lost jobs due to the suspension of elective surgeries to make room for COVID-19 patients.
Retail traders were also affected as shoppers moved to online shopping.
Collapse of Retail Sales
Retail sales in the United States fell by 16.4% in April 2020. Clothing stores suffered the most damage, with sales dropping by 78.8% month over month.
Sales at electronics and appliance stores fell by 60.6%. Sales at furniture stores dropped by 58.7%. Sales at sporting goods and hobby stores declined by 38%.
Restaurant and bar sales fell by 29.5% in a month, while sales at department stores dropped by about 29%. Many well-known retailers declared bankruptcy due to high debt levels they had when entering the pandemic.
By December, retail sales had improved but had not returned to normal levels. Sales for the year were up 2.9% from the previous year.
The holiday season saw a solid growth of 4.0% compared to the previous year. This improvement was thanks to a 19.2% increase in online shopping sales.
Stock Market Volatility
Uncertainty about the pandemic’s impact caused a stock market crash in 2020. On March 9, 2020, the Dow Jones Industrial Average dropped by 2013.76 points. It was the worst point loss in one day up to that date. On March 12, the Dow Jones hit another record low, dropping by 2352.60 points. It was a drop of 9.99%, nearly a 10% correction in one day. On March 16, the Dow Jones hit another record low, dropping by 2997.10 points. This was a decline of 12.93% that day, marking the third-worst drop in history. On March 11, the Dow Jones closed at 23,553.22. It was a 20.3% drop from the record high of 29,551.42 set on February 12. This decline indicated the beginning of a bear market. It also ended an 11-year bull market that began in March 2009.
Indicated
the future trajectory of the economy, as the response to the pandemic continues to evolve.
The stock market recovered by November 2020. On November 16, the Dow Jones index set a new record, closing at 29,950.44. By November 24, it achieved another closing, surpassing 30,000 when it closed at 30,046.24.
These new numbers may be linked to news of the Moderna vaccine’s effectiveness of up to 94.5%, along with further news regarding the transition to the Biden administration.
Government Stimulus Efforts
Congress approved several bills early in the COVID-19 crisis to provide financial assistance to families and businesses.
March 6, 2020: H.R. 6074
The Coronavirus Preparedness and Response Supplemental Appropriations Act provided $8.3 billion in funding for federal agencies to respond to the pandemic. Of this amount, over $3 billion went to vaccine research and development.
March 18, 2020: H.R. 6201
The Families First Coronavirus Response Act provided $3.5 billion in funding for paid sick leave and insurance coverage for coronavirus testing and unemployment benefits.
March 27, 2020: H.R. 748
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was a $2 trillion relief package that included:
- $293 billion in stimulus checks for eligible taxpayers
- $268 billion in expanded unemployment insurance
- $150 billion for local and state governments
- $510 billion in expanded loans for businesses and local governments
- $377 billion in new loans and grants for small businesses
- $127 billion for hospitals to purchase ventilators and other equipment
April 24, 2020: H.R. 266
The Paycheck Protection Program and Health Care Enhancement Act provided $483.4 billion in funding for small businesses, hospitals, and testing.
December 27, 2020: H.R. 133
On December 27, 2020, the Consolidated Appropriations Act was signed into law. The $900 billion relief package sent out up to $600 in new stimulus checks to eligible taxpayers.
March 11, 2021: H.R. 1319
The American Rescue Plan Act of 2021, also known as the “American Rescue Plan,” was approved by both chambers of Congress and signed by President Joe Biden in March 2021.
The $1.9 trillion relief package provided a number of benefits to stimulate the economy and provide economic support, especially to low-income families. These benefits include:
- $1,400 stimulus checks for eligible taxpayers
- Expansion of tax credits for seniors, childless families, and low-income families, including the Child Tax Credit, Earned Income Tax Credit, and expanded refundable Child Tax Credit
- Extension of unemployment benefits
2020 Recession vs. 2008 Recession
The 2020 recession was much deeper than the 2008 recession. Due to the economy not contracting in the fourth quarter, the NBER may declare the end of the 2020 recession later in the year.
GDP Growth Rate
| 2008 | 2020 | |
|---|---|---|
| First Quarter | -2.3% | -5.0% |
| Second Quarter | 2.1% | -31.4% |
| Third Quarter | -2.1% | 33.4% |
| Fourth Quarter | -8.4% | 4.0% |
| Annual | -0.1% | -3.5% |
The financial market collapse caused the 2008 recession. Credit dried up, banks stopped lending, and housing prices collapsed. It took years for these markets to recover.
The Dodd-Frank Act imposed new regulations on banks to reform Wall Street and the Federal Reserve. Consequently, it took longer for banks to start lending again.
Recession vs. Depression
The 2020 recession did not cause a depression. A recession lasts an average of 18 months, while a depression lasts for years.
There have been over 30 recessions since 1854. There has been only one depression – the Great Depression.
The Federal Reserve helped turn the 1929 recession into a depression by raising interest rates to protect the gold standard. Additionally, Congress curtailed the New Deal prematurely. This led to a recession returning in 1937.
The depression did not end until Congress began spending again to build the army for World War II.
In contrast, in 2020, the Federal Reserve lowered interest rates to 0%. Congress pumped trillions of dollars into the economy in just a few months. The economy showed healthy growth in the fourth quarter.
The future trajectory of the economy will depend on how these economic measures are received.
The government action from now on, whether the 2020 recession – which seems to be over – could lead to a recovery that results in a depression. Congress reduced government spending and increased taxes in 1937, reigniting the recession for another year.
The coronavirus could also lead to a resurgence of another recession and result in a global depression. There are many strains of the virus that have emerged. If they prove to be more contagious or more deadly or resistant to vaccines, the government may shut down the economy again. Increased rates of illness and mortality may also reduce demand or even supply.
Source: https://www.thebalancemoney.com/recession-2020-4846657
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