The US economy tumbled at an alarming annual rate of 32.9% from April through June. It is the worst economic decline on record, the Bureau of Economic Analysis said on Thursday. The major reason is considered to be the ongoing lockdown due to the COVID-19 pandemic across the country. America was pushed into its first recession period in the past 11 years. This has put an end to the longest economic expansion in US history thereby wiping out five years of economic gains in just a few months.
A recession is commonly defined as a period of temporary economic decline during which industrial activity and trade are reduced. It is generally identified by a fall in GDP in two consecutive quarters where the gross domestic product is gradually reduced which is the broadest measure of the economy. And between January and March, the GDP of the United States declined by an annualized rate of 5%.
Although this is no ordinary recession. The amalgamation of public health and economic crises is unprecedented. The numbers or figures cannot fully convey the hardships millions of Americans are facing right now. In April, more than 20 million Americans lost their jobs as businesses closed and most of the country was under completely stay at home orders. By far it was the biggest decline in jobs since record-keeping began more than 80 years ago. People’s claims for more employment generation skyrocketed and have still not recovered to pre-pandemic levels.
While the labor market is still rebounding since the country began to slowly reopen, bringing millions of people back to work. But the country is still down with nearly 15 million jobs since February 2020. And next week’s July jobs report is expected to show another 2.3 million jobs added. This entire scenario would bring the unemployment rate down to nearly 10.3%. This is still higher than during the worst period of the financial crisis.
The worst crisis ever
The pandemic pushed the economy of the United States off a cliff. The huge drop in second-quarter GDP was nearly four times worse as compared to the peak of the financial crisis when the economy shrunk at an annual rate of 8.4% in the fourth quarter of 2008, the crisis year.GDP numbers per quarter are expressed as an annualized rate. This signifies that the economy didn’t shrink by one-third from the first quarter to the second. The annualized GDP rate measures how much the economy would grow or decline if conditions were to remain the same for at least 12 months. Not considering annualized, GDP declined by 9.5% from April to June, which is by $1.8 trillion. But if we measure, it is still the worst quarter on record. The US began keeping quarterly GDP records in 1947, so it’s very difficult to compare the current downturn in the economy to the Great Depression. Subsequently, in 1932 the US economy contracted 12.9%. But the previous quarterly declines are pale in comparison to this year.
At one point in time, between April and June of 1980, the economy declined at an annual rate of 8% due to the rising oil prices and restrictive monetary policy which was introduced to control inflation. Also in the first three months of 1958, GDP reduced by an annualized 10%, as production slowed down and high-interest rates put an end to the post-World War II expansion. The economic downturn followed the Asian flu pandemic of the previous year, which had killed around 116,000 people in the United States, according to the Center for Disease Control.
Impact on America’s small businesses
The implementation of COVID-19 pandemic lockdown during the past few months hasn’t left anyone in America untouched. Due to this businesses were prompted to send their employees home, shops shut down and schools closed. Overall Americans spent less money during the lockdown, mainly because so many people lost their jobs. Consumer spending, which is the biggest driver of the US economy, declined drastically at an annual rate of 34.6% during the second quarter — which is by far the sharpest decline ever recorded. Now that the economy is embarking on the long and challenging road to recovery, some companies are much more prepared than others. While big corporations might have a diversified portfolio with multiple income streams, with bigger capital markets at their fingertips, America’s small business owners are still struggling.
Brian Karnofsky’s environmental consultancy firm called the Environmental Resource Center, survived two recessions before the onset of COVID-19 pandemic, but the pandemic is still taking its toll and the company’s savings are drying up, he told recently to a business channel. Now talking about the hard-hit hospitality sector, which lives off the face-to-face interactions with people is hard hit by COVID-19 which has made sustainability even harder.
Don Zelek, a businessman who owns the 1825 Inn Bed and Breakfast in Pennsylvania, strongly believes that the things will go back to normal only until spring 2021. A huge lack of tourists amid quarantine restrictions on travel is highly affecting the local economies.
Meanwhile, many people dependent on in-person contact, including those working in events and functions are at a loss about and are not able to figure out how they will make it through the summer. As a result, many small business owners feel neglected by the government, while larger companies have more options to survive through this crisis. So the Trump Government needs to put in more effort to save small businesses in the country. And while many businesses have shifted to online sales and e-commerce platforms, local, smaller companies have realized that these steps didn’t help them make enough money to survive in the market.
According to the government sources, the recovery won’t come easily and
Washington has deployed trillions of dollars in monetary and fiscal schemes to stimulate the country through the recession. Loan schemes for companies, expanded the unemployment benefits and checks which were sent directly to many Americans were solely designed to get the economy back on track as quickly as possible According to economists the current, that is the third quarter of the year will witness a sharp upswing. This is according to reports like the Federal Reserve Bank of New York, forecasting an annualized 13.3% increase between July and September. This might be good news, but it doesn’t mean the crisis is entirely over. Earlier this week, the Federal Reserve Bank extended its various lending schemes through the end of 2020 to help businesses and markets to function appropriately. The Central Bank’s main street lending facility that is focused at small and medium-sized businesses became operational only in mid-June, three months after the lockdown began.
During Wednesday’s monetary policy update, Federal Reserve Chairman Jerome Powell once again said more needed to be done in terms of monetary and fiscal policy. Many lawmakers in Congress also agreed that America needs more help. But the current proposals from Democrats and Republicans are more than $2 trillion apart in spending.