The Covid-19 pandemic has led to a serious recession of the U.S. economy. It is not a usual recession because unlike previous recessions, it was not caused by economic developments such as bubbles on housing or asset markets, or oil price shocks. The recession in the first half of 2020 was unprecedented in its magnitude. After gross domestic product (GDP) dropped by 1.3 percent in the first quarter (a severe fall), the contraction of the U.S. economy was more dramatic in the second quarter (at 9.5 percent). We will probably see a relative strong rebound in the third quarter (perhaps 3 to 6 percent) despite the recent rise in Covid-19 cases and additional lockdown measures in some states. In the fourth quarter, we could still see a relatively high growth rate (compared to growth rates observed between 2010 and 2019), but the rebound of the economy will probably take a lot of time. For the whole year 2020, economic forecasts from different economists suggest that the contraction of the economy could lie between minus five and minus eight percent (of course, forecasts are were uncertain at the moment. My personal forecast is minus seven percent).
How does this compare with other recession? The deepest recession in the history of the United States was the so-called Great Depression. Between 1929 and 1933, GDP dropped by more 26 percent according to data from the Bureau of Economic Analysis. The largest contractions in single years were observed in 1930 (minus 8.5 percent) and 1932 (minus 12.9 percent). Of course, then and now, GDP measures may not accurately capture what is going on in the economy, but they give us at least some sense of the magnitude. Probably, we are not going to see such as huge contraction this year as in 1932. As mentioned above, current forecasts for 2020 suggest a contraction of a similar size as in 1930.
In 1946, there was a contraction of the economy that was related to the end of the World War II (minus 11 percent). But since then, recessions were mild compared to what one observed in the Great Depression. Even the recessions in the 1970s and early 1980s look mild when compared to the Great Depression. The biggest drop in GDP since 1946 was observed in 2009, when GDP contracted by 2.5 percent during the financial crisis (the recession already started in 2008 with the fall of Lehman Brothers and many other problems in the financial system). Thus, the fall in GDP observed in the first half of 2020 is only comparable to the Great Depression. One can only hope that at least some recovery will be observed in the second half of this year. I am cautiously optimistic that s considerable rebound will occur. However, full recovery will take much more time and will be associated with pains for many people and businesses.
Updated on July 30, 2020.
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