Introduction
2020 was a period of instability for the entire global economy due to the COVID-19 pandemic, which brought severe human and financial losses to most countries in the world. The United States was no exception as the virus quickly spread throughout the country and took the lives of thousands of people. The Covid-19 pandemic resulted in an unprecedented economic decline in the first two quarters of 2020 (Fig.1). In general, GDP for the year decreased by 3.5%, which is significantly higher than the 2008 crisis (0.1%) (Bureau of Economic Analysis, 2021). However, government measures and stimuli set the economy on the path to recovery in the second half of 2020, although a full economic recovery has not yet been achieved.
Recession
The covid-19 pandemic reached large scales as early as February 2020; however, the impact on the economy was most evident in the second quarter of the year. The President of the United States announced a lockdown in March 2020; hence, the consequences of the two-week closure of the retail trade, the restaurant, and tourism business, and the reduction in production were manifested in a GDP decrease of 5% (Bureau of Economic Analysis, 2020). However, the next three months of continued lockdown resulted in a 31.4% decline in GDP for the US economy (Fig.2). According to the definition of The National Bureau of Economic Research, such a significant decline in economic activity over several months is an economic recession. As can be seen in the table, the lockdown led to a considerable decrease in the gross domestic income, personal income, and personal consumption expenditure price index, since all public places, except for the essential ones, were closed.
Recovery and Growth
Nevertheless, the government measures taken at the time allowed the United States to restore economic growth in the third quarter of 2020 (Fig. 3). Part of the payments aimed to improve medical services, develop vaccines, and provide Americans with medical care. The other part was used to increase the personal income of Americans who were left unemployed or in financial difficulty. The government also provided financial incentives for businesses and lowered the fed funds rate to provide loan opportunities for businesses (Amadeo, 2021). Thus, GDP in the third quarter grew by 33.4% and continued to grow by 4.3% in the fourth quarter (Bureau of Economic Analysis, 2021). However, while growth continues, it takes longer for the US to return to previous levels of economic development.
Reasons for Recession: Pandemic
The covid-19 pandemic came as a surprise to most countries in the world and health systems. Borders have been closed, and public places are prohibited from working to prevent the spread of disease and the collapse of an unprepared health care system in the United States. Consequently, many employers in the tourism, resourcing, and other sectors had to fire their employees due to a lack of profit. This factor was reflected in the personal earnings of the population. The lack of funds due to unemployment and the closure of most public places has led to a decrease in consumer spending and, consequently, companies’ profits. Thus, the US GDP fell due to the bankruptcy of many companies, and a reduction in tax revenues, which caused a recession in the economy.
Reasons for Recession: Unemployment Surge
A more detailed examination of all factors demonstrates the depth of the crisis faced by the United States. The shutdown of many companies resulted in the loss of 20.6 million jobs, which raised the unemployment rate to 14.8% (U.S. Bureau of Labor Statistics, n.d.). Simultaneously, most businesses implemented new security measures or sent employees to work remotely, making it even more challenging to find a job. The industries most affected by restrictions were tourism, restaurants and bars, and places of entertainment. At the same time, although today the unemployment rate has dropped to the normal rate (6%), these areas still face the most significant difficulties in work (U.S. Bureau of Labor Statistics, n.d.).
Unemployment, in turn, has impacted the personal income of many Americans and the purchasing power of the population in general (Fig. 4). The data shows that citizens’ personal income fell 4% in May and remained low over the following months, although government aid helped to reduce this trend (“Personal income,” 2020). In addition, the lockdown also reduced the ability to spend money on a range of services, such as a movie or gym, which, together with low income, decreased consumer waste. Nevertheless, this indicator began to grow rather quickly as consumers became less afraid of a deepening crisis and began to use online commerce more actively.
However, the decline in customers’ spending resulted in a significant decrease in retail sales. People spent much less money on clothing and sports equipment as they spent most of their time at home. The closures of bars and restaurants also led to lower sales, although the provision of delivery helped maintain their activity. At the same time, local brands and small businesses that did not have the funds to organize online sales or were not well-known enough to compete with such platforms as Amazon, eBay, or Uber Food, suffered the most.
The instability of the economy and the ambiguity of the development of the pandemic also affected the US stock market (Fig.5). In fact, stock markets crashed in March 2020 and only managed to recover in November 2020. In March 2020, the fall of the Dow Jones Industrial Average (DJIA) set four records and the DJIA closed at 23,553.22 points (Amadeo, 2021). The Dow Jones Industrial Average (DJIA) is a stock market index that tracks the economic performance of 30 large national companies with stable profit, such as the Walt Disney Company. Therefore, it is a benchmark of the economy, since if the most stable and largest companies lose their profits, this means instability and problems of the national economy.
Reasons for Recovery
Despite the significant negative impact of the lockdown on the US economy, this measure still had a positive effect, which helped restore economic activity in the third quarter of 2020. The lockdown slowed the spread of the virus and gave the healthcare system time to prepare for patient admission and organize preventive measures. For this reason, most states have eased restrictions on how businesses operate, while other parts of the business have shifted their focus to online shopping. At the same time, the government created supportive programs for citizens and businesses to stimulate the economy. Consequently, consumer spending has increased, as have corporate profits.
Support of American Citizens
Support of citizens by the government was essential for the subsequent economic recovery. The Families First Coronavirus Response Act provided Americans with paid sick leaves, free testing, and unemployment benefits. The CARES Act in March 2020 provided $ 293billion in stimulus checks to taxpayers who needed help and expanded unemployment insurance (Amadeo, 2021). In December 2020, Americans in need also received up to $ 600 in new stimulus checks (Amadeo, 2021). This assistance stimulated consumer spending, which helped keep business activities, and also allowed people to receive timely treatment, which reduced the burden on the health care provider and saved labor resources.
Growth of Customers’ Spending
Government incentives and a modest decrease in the rate of spread of the virus have increased Americans’ spending. In addition, some categories of goods such as insurance, household items, food, and beverages for home consumption have grown due to the inaccessibility of public places (Mitterling et al., 2020). Other categories, such as food services, transportation, and recreation, recovered quite quickly as some of the services became available online, while others became available with a partial lifting of restrictions (Fig.6). However, complete restoration of the pre-pandemic level of consumer spending requires time and the removal of all restrictions.
Improvement of Health Care System and Situation
The ban on public places’ work and other restrictions were mainly related to the unpreparedness of the health care system to cope with large numbers of patients. For this reason, the government has made several rounds of investment in equipment, patient admission, testing, and isolation structures to avoid collapse. This preparation has allowed governments to partially lift restrictions, although the threat of the coronavirus remains relevant. Nevertheless, preventive measures and the organization of the treatment procedures allow some public places to work and stimulate business activity.
Stimulation of Business
The state has also encouraged businesses to operate by providing financial assistance to entrepreneurs and companies. Some of the incentives were provided as low or zero interest rate loans. The other part was intended for small businesses as an aid. These incentives have allowed companies to pay rent for premises, retain employees, or change the delivery of goods and services, for example, arrange delivery. Consequently, these incentives made it possible to maintain and restructure the work of small and medium-sized businesses, which in the third and fourth quarters led to an increase in their activity.
The government has taken steps to cut interest rates to make sure banks have enough funds to lend. In March 2020, The Federal Reserve lowered the fed funds rate from 1.0% to 0%, which allowed banks to lend 100% of their deposits (Amadeo, 2021). Consequently, these steps helped companies and individuals to receive money for their spending. In this way, companies were able to use the funds to modernize or maintain their businesses, and users were able to use the money to buy essential goods and items. For example, in Q3 and Q4, spending on houses and furniture remained quite high (Torry, 2021). Thus, the decrease in interest rates contributed to preserving and recovering economic activity in the country.
The shift of Business to E-Commerce
The lockdown and the closure of public spaces have been a strong incentive for businesses to switch to e-commerce and online service delivery. Financial assistance from the state and the possibility of loans, in turn, made this transformation possible. Consequently, a significant proportion of retail, food and entertainment companies have partially or completely switched to e-commerce. This shift is most noticeable in user online shopping rates, which grew by about 30% from March 2020 to January 2021 (Drenik, 2021). Consequently, the availability and development of technology reduced the impact of the lockdown and allowed the economy to start recovering after a relatively short period.
Decrease in Unemployment Rate
The described financial incentives, the partial lifting of restrictions, and the transition of businesses to online sales and services also affected the unemployment rate. These changes allowed companies to call some of their employees from temporary layoffs, as well as restore jobs lost at the beginning of the pandemic. In addition, companies have also transferred some of their employees to remote work or provided a safe working environment for workers to return to their offices. Consequently, by early 2021, the unemployment rate fell to 6% after a peak of 14.8% (Fig. 7). This decline also led to higher personal incomes for Americans and higher spending, which enhanced business activities( Fig. 7). Thus, business activity increases the number of jobs and reduces the unemployment rate, which, in turn, contributes to the operation of the business and the growth of GDP.
Prognosis: Importance of Vaccination
Although mass vaccination of the population against COVID-19 became available only in 2021, it is essential to discuss this factor as a contributor to economic growth. Vaccine availability means accelerating the movement towards economic recovery because it prevents new waves of an increased infection rate. Although the vaccine is not 100% effective, it significantly reduces the risks of coronavirus. Consequently, acquiring herd immunity by the population will allow companies to return to work, increase the number of jobs, and the possibility of spending money on customers. However, this process is quite lengthy due to the size of the US population.
Optimistic Prognosis
Current trends show that the US economy is on the path to recovery, although many indicators have not yet reached pandemic levels. For example, retail and manufacturing levels rose, especially real estate sales, due to low-interest rates (Pickert, 2021). According to the expert’s forecasts, a full economic recovery will be achieved by mid-2021 (Ghosh & Sarkar, 2021). Other positive forecasts include a decline in unemployment to 4.1%, and an increase in household income and customer spending (Cox, 2021). These changes are possible thanks to a new round of incentive checks for 1.9 trillion, as well as vaccinations that reduce the incidence of disease.
Pessimistic Prognosis
There are also pessimistic forecasts, although their probability is rather low. The main weakness and threat is the repeated growth of coronavirus cases, which will neutralize a significant part of the efforts to maintain the economy and increase the budget deficit. The reasons for this situation can be the lifting of restrictions, the ineffectiveness of the vaccine, or the mutation of the virus resistant to the vaccine. However, since most preventive measures are still in place and vaccinations show positive results, this scenario is unlikely. In addition, some experts fear inflation due to significant government spending on stimulating the economy and rapid GDP growth (Cox, 2021). However, the US needs to return to its pre-pandemic level of GDP before taking action to regulate inflation.
Conclusion
Thus, an analysis of the state of the US economy in 2020 shows that the country has gone through a period of recession and recovery in 12 months. The COVID-19 pandemic, which came as a surprise to the global economy and healthcare, has led to the temporary closure of many companies, a decrease in profits and GDP. However, timely government stimulus allowed economic growth to be achieved as early as the third quarter of 2020. The preservation of these incentives simultaneously with the population’s vaccination makes it possible to forecast an increase in GDP in 2021, economic recovery to a pre-pandemic level, and further GDP growth.
References
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