The U.S. economy contracted 3.5 per cent in 2020, the Commerce Department reported Thursday, the worst economic freeze since the end of the Second World War.
The report estimated that the nation’s gross domestic product — its total output of goods and services — slowed sharply in the October-December quarter after a record 33.4 per cent surge in the July-September quarter. That gain had followed a record-shattering annual plunge of 31.4 per cent in the April-June quarter.
The economy grew at a four per cent annual rate in the final three months of 2020.
The pandemic’s blow to the economy early last spring ended the longest U.S. economic expansion on record — nearly 11 years. The damage from the coronavirus caused GDP to contract at a five per cent annual rate in last year’s January-March quarter. Since then, thousands of businesses have closed, nearly 10 million people remain out of work and more than 425,000 Americans have died from the virus.
The estimated drop in GDP for 2020 was the first such decline since a 2.5 per cent fall in 2009, during the recession that followed the 2008 financial crisis.
That was the deepest annual setback since the economy shrank 11.6 per cent in 1946, when it was demobilizing after the Second World War. The most catastrophic annual contraction in records dating to 1930 was a 12.9 per cent fall in 1932, during the Great Depression.
Vaccines offer promises for better 2021
The government’s report Thursday was its first of three estimates of growth last quarter. The figure will be revised twice in the coming weeks.
The outlook for the 2021 economy remains hazy. Economists warn that a sustained recovery won’t likely take hold until vaccines are distributed and administered nationwide and government-enacted rescue aid spreads through the economy — a process likely to take months.
On Wednesday, the Federal Reserve took note of the economic threats. It kept its benchmark interest rate at a record low near zero and stressed that it would keep pursuing its low-rate policies until a recovery is well underway.
The Fed acknowledged that the economy has faltered in recent months, with hiring weakening, especially in industries affected by the raging pandemic, notably restaurants, bars, hotels and others involved in face-to-face public contact.
Hiring in the United States has slowed for six straight months, and employers shed jobs in December for the first time since April. The job market has sputtered as the pandemic and colder weather have discouraged Americans from traveling, shopping, dining out or visiting entertainment venues. Retail sales have declined for three straight months.
Last month, the government enacted a $900 billion US rescue aid package, and President Joe Biden is pushing for lawmakers to follow up by approving his $1.9 trillion plan for further economic help. Biden’s proposal has met resistance, though, from many Republicans who contend that the cost is too high and some of its benefits misplaced.
Many economists warn that without further support, the economy risks succumbing to another recession. They note that much of the aid for individuals from the $900 billion package is set to expire in mid-March.
“The economy is still struggling,” said Mark Zandi, chief economist at Moody’s Analytics. “How strong the economy is later this year will depend on how the virus evolves and the effectiveness of the vaccines and mitigation efforts.”
Permanent service job losses predicted
Zandi predicted that the economy will expand at a 4.4 per cent annual rate in the current quarter and achieve annual growth rates later this year above 5 per cent. But he cautioned that his forecast is based on the enactment of further federal economic relief, and he expects Biden initially to win congressional approval for only about half his $1.9 trillion proposal.
About five million jobs, Zandi estimates, will never return, forcing the unemployed in such industries as restaurants and bars to find work in other sectors.
“We have lost so many low-paying service jobs at restaurants, hotels and in transportation,” said Sung Won Sohn, an economics and business professor at Loyola Marymount University in Los Angeles.
The number of Americans applying for unemployment benefits fell but remained at a historically high 847,000 last week, it was announced Thursday, a sign that layoffs keep coming as the coronavirus pandemic continues to rage.
Last week’s claims dropped by 67,000, from 914,000 the week before, the Labor Department said. Before the virus hit the United States last March, weekly applications for jobless aid had never topped 700,000.
Overall, nearly 4.8 million Americans are continuing to receive traditional state unemployment benefits.
The U.S. is now recording just under 150,000 new coronavirus cases a day. That is down from nearly 250,000 a day earlier this month, but still more than twice the levels seen in March, until a resurgence in cases in late October.