After a sudden and severe contraction driven by many state government-mandated shutdowns, the U.S. economy rebounded sharply in the second quarter. Amid a race to contain the spread of the coronavirus, the economy nearly ground to a halt beginning in March and is forecast to contract 12.8% from the start of the year through the end of June. Compared to the two prior recessions of 4.0% during the Financial Crisis of 2008/2009 and less than a 1% decline during the technology bubble burst of 2000, March saw the second largest post-war decline in economic output, as shown in the accompanying chart. There are several important differences between then and now. The two prior recessions resulted from periods of speculative investment. In contrast, there was no “boom and bust” cycle leading up to this recession. We began the year with generally strong economic conditions, marked by record low unemployment, low inflation and modest but steady growth. Indeed, this recession was self-inflicted, driven by a political response to a global pandemic. While consumer and business spending retrenched, the government stepped in to largely fill the void, providing an enormous backstop to the economy.
Because of the severe impact of theshutdown, both the Federal Reserve and Congress unveiled sweeping measures to stabilize the economy and prevent further collapse. Congressional measures signed into law included rebate checks, expanded unemployment benefits, and forgivable loans to small businesses. Taken together, the result was an estimated $2.4 trillion in government support, which is about 11.8% of GDP. Monetary policy has also helped to stabilize markets and the economy, with the Federal Reserve cutting its short-term policy rate to zero, and pledging to keep it there for an extended period, at the same time expanding the size of its balance sheet.
Thankfully, the economy seems to have turned the corner. The recession likely troughed in May, and has been followed by a sharp rebound as businesses reopen. Signs of improvement are starting to emerge. According to IHS Markit, monthly real GDP increased 4.1% sequentially in May and the labor market added 4.8 million jobs in June. The path forward will likely be bumpy as many uncertainties remain regarding the pace of recovery, and will vary by geography, industry, and demographics. Much depends on the growth curve of the virus; it may continue to flatten for the country as a whole, even as various regions experience their first spike in new cases, or a second wave of cases may occur later this year. Consumers, however, will have the greatest impact on future economic growth and changes in consumer behavior are already evident. Some behavior may be permanent, such as a propensity to travel less or buy more goods online, and others may be temporary adjustments, such as changes in dining out and sports and entertainment. Consumers are choosing to save more, opting to rebuild their own safety nets during the crisis, and spending may take time to return to pre-covid levels. These changes will inevitably lead to a slowing of the pace of the current rebound, as the economy levels off to a new normal rate of trend growth (i.e. the long-run underlying rate of growth in the economy). We expect it could take two to three years before the U.S. economy returns to the same level of output as before the pandemic. Still, history shows that the U.S. economy has proven to be extraordinarily resilient through time and we remain optimistic that this episode will prove to be no different, even if the path to recovery remains bumpy at times.