The first months of the coronavirus pandemic saw the U.S. economy plunge at its fastest pace in history. Over a two-month period, the unemployment rate fell from 3.5% in February 2020 to 14.7% in April– its highest level since 1940 – while Second-quarter GDP fell 32.9% on an annualized basis. During this period, the Congressional Budget Office forecasts that the unemployment rate would remain above double digits for more than six quarters, ending 2021 at 10.1%. All signs point to the United States falling into the worst recession since the Great Depression, or maybe even another depression.
But the darker prospects did not come true. Despite a persistent pandemic and massive unemployment, the recent economic recovery on paper is among the fastest in American history – at least on paper. Since its peak in April, the unemployment rate has fallen every month, and it now stands at 6.7%. During this crisis, the unemployment rate was above 7% for six months. By comparison, the Great Recession that followed the financial crisis saw unemployment surpass 7% for 59 consecutive months, from December 2008 to October 2013. This means that after the Great Recession, the economy took almost 10%. times longer than in what we will call the COVID-19 recession to bring the unemployment rate below 7%. [See the chart below.]
“We view the coronavirus recession as much more V-shaped than previous post-war cycles, which were mainly due to financial shocks to asset markets and income,” Goldman Sachs researchers wrote in a November 2020 report. In financial crashes, like the one in 2008, loans dry up and businesses find it difficult to borrow: Cue slows growth. Fortunately, that was not a problem during this recent recession.
This does not mean that the current economy is strong or that we are close to a full recovery. Look no further than the fact 10.7 million Americans are unemployed and looking for work. While the country appears to have avoided the darkest scenario of a multi-year depression, full economic recovery is still far away.
In part, the economy recovered so quickly in the spring and summer because many of the job cuts that occurred during the spring lockdowns were temporary. Employers like barbershops and dental offices that laid off or downsized workers during the start of the shutdowns were able to bring them back after their states eased restrictions. In June 2020 alone, 4.8 million workers were hired or rehired. But those easy job recoveries dried up months ago, and as a result, the economic recovery is slowing. In November, the economy created just 245,000 jobs, enough to lower the unemployment rate from 6.9% to 6.7%.
The sustained decline in the unemployment rate is a sign of a growing economy. However, this figure also seriously underestimates unemployment. The Bureau of Labor Statistics (BLS) official unemployment rate the calculation only includes “jobless” jobless Americans looking for new jobs. If unemployed people don’t look, they are abandoned civilian workforce statistics in total. (The unemployment rate is calculated by dividing the number of unemployed Americans by civilian labor force).
This method of calculation makes the unemployment rate unsuitable for measuring periods when masses of workers leave the labor force. This is exactly what happened in the first months of the deadly pandemic. Health concerns have led some workers, including many seniors and immunocompromised Americans, to stop looking for work until the virus is tamed. Meanwhile, many parents – usually moms – have been forced to stop working to attend school-aged children from distant or hybrid schools. This is why the civilian workforce fell from 164.5 million in February 2020 to 156.5 million in April 2020. It has since rebounded to 160.5 million, but it is still down by 4 million per year. compared to pre-crisis levels.
If the BLS were to include those 4 million jobless Americans who have not yet returned to the workforce in its unemployment rate, the “real” unemployment rate would stand at 9% for November. This is well above the current rate of 6.7%. Yet even that real unemployment rate is declining: it peaked at 18.9% in April, when the official unemployment rate was 14.7%.
Regardless of how you measure the US economy, the trend shows that the country is growing while seeing its growth rate slowing. In the third quarter of 2020, from July to September, GDP grew 33.1% on an annualized basis. But we are not maintaining this rate. Goldman Sachs expects fourth quarter 2020 GDP growth to be released soon to show an economy that grew by 5%.
Why is growth slowing down? Economists point to the ongoing pandemic, which is keeping businesses like airlines and hotels under stress and preventing a full economic rebound. This is why a successful deployment of a vaccine is so essential.
“In the United States, we expect the resurgence of the virus to weigh on business through January, although service activity has proven to be more resilient than expected. We foresee a significant rebound in the first half of 2021 thanks to generalized vaccination – 50% of the population to be vaccinated by April – and expect growth above the consensus of 5.3% in 2021 ”. Goldman Sachs researchers wrote in a December report.
In this scenario, Goldman Sachs predicts 5.2% unemployment rate by end of 2021. If that comes to pass, it would mark a historic economic rebound after one of the worst crashes in US history. By way of comparison, following the Great Recession of 2007-2009, the unemployment rate did not drop to 5.2% until July 2015.
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