It was the worst of times but also the best of times.
With the release of fourth quarter and full-year gross domestic product numbers this week, the full picture of what the coronavirus did to the economy in 2020 is now clear.
COVID-19 devastated the economy in the spring, sending the unemployment rate soaring to 14.7% in April. Entire industries were set back years, with more than 670,000 hotel industry operation jobs and nearly 4 million hospitality jobs lost alone. Not to mention more than 431,000 lives lost in America due to the virus.
The U.S. economy contracted 3.5% on an annual basis in 2020, which is the sharpest annual decline since the end of World War II.
But – and it is a big but – the overall economic damage was less than experts had predicted early on in the pandemic, and now forecasters are looking for a pretty good rebound in 2021.
“While the economic contraction in 2020 was among the largest on record, in the early part of the pandemic, forecasters expected the decline to be about twice as large,” says Jason Furman, who served as chairman of the Council of Economic Advisers under former President Barack Obama. “As the year progressed and the speed of the initial recovery and the effects of the policy response became apparent, forecasters became less pessimistic.”
That policy of massive fiscal and monetary stimulus is continuing. Indeed, Federal Reserve Chairman Jerome Powell on Wednesday reiterated the central bank’s commitment to continue purchasing Treasury and mortgage-backed securities at a combined rate of $120 billion a month. But Powell also stressed that the economic recovery is highly dependent on getting the virus under control.
“There’s nothing more important to the economy right now than people getting vaccinated,” Powell said at a news conference following the Fed’s regular policy meeting. “That is really the main thing about the economy, is getting the pandemic under control, getting everyone vaccinated, getting people wearing masks and all that,” Powell added.
Furman put together a summary of the 2020 economy for the Peterson Institute for International Economics, where he is a nonresident senior fellow. In it, Furman and former institute colleague Wilson Powell III point out the highs and lows of 2020.
Among the key takeaways:
- Despite the record contraction in GDP, disposable personal income grew at the fastest annual rate since 1984, driven largely by the stimulus package of enhanced unemployment insurance, one-time payments to working families and direct aid to businesses.
- American households ended the year with about $1.6 trillion of excess savings, the result of the increased personal income and the decline in consumption. That could provide a huge lift to the economy in 2021 once consumers feel more comfortable going back to work, dining at restaurants and traveling again.
- Among the major economies, the U.S. fared better than most, eclipsed only by Japan where the coronavirus has been better controlled and the economy did not face as severe a shutdown as in other countries.
- The pandemic drove large shifts in spending patterns. Spending on durable goods like cars, furniture and recreational goods rose by about 12% while spending on services fell nearly 7%. Health care spending fell 4.5% as people put off doctor visits and elective surgeries.
The record low interest rates brought on by the Fed’s aggressively accommodative monetary policy juiced the housing sector perhaps more than any other. The National Association of Realtors reported that existing home sales reached 5.64 million in 2020, up 5.6% from 2019 and the highest level since before the Great Recession. The median price, meanwhile, rose 12.9% from a year ago. Sales of new homes in 2020 were up almost 19%, according to census data released Thursday.
Together, this means 2020 will go down as the best year for home sales since 2006.
“Historically low mortgage rates and an ongoing shortage of existing homes for sale stoked demand for new homes in 2020, and it’s likely that the continued spread of COVID-19 also added to the allure of a brand new, never-lived-in home for many buyers,” said Zillow economist Matthew Speakman.
With Americans sitting on a mound of cash, interest rates likely to remain at historic lows for some time to come and the promise of vaccines reaching ever more people, the economic glass might appear just a little more half full than half empty.
“People who have kept their jobs have considerable money to spend once the fear of the pandemic lessens,” said Dean Baker, senior economist at the Center for Economic and Policy Research. “Many sectors of the economy are doing fine, or even booming, as they are shielded from the worst effects of the pandemic and benefitted by extraordinarily low interest rates. If we can contain the pandemic, we should see a healthy economic recovery.”
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