The COVID-19 public health crisis, the downturn triggered by the pandemic, and government, business, and individual responses to the pandemic have all provoked the sharpest and fastest economic downturn in U.S. history.
At the depth of the downturn, the U.S. economy experienced its greatest job losses since the Great Depression, with the unemployment rate and unemployment filings rising faster than they ever have in such a short span of time. Even if the health emergency were to recede quickly and if public health policy were to be effective, the U.S. will face challenges for years.
The swift and unprecedented downturn in combination with protracted closures will have long-lasting economic consequences.
- Widespread bankruptcies could fundamentally change the business landscape, leaving some sectors with greater concentration.
- Changes in how and where people work and an acceleration in automation could mean that the labor market itself will be different.
- Stark reductions in labor force participation among older people, younger people, and those with young children could also lead to persistent changes in the labor force.
For this recession, it is a public health crisis rather than an obvious imbalance triggering the downturn. That could mean that this downturn leaves fewer long-term scars than a typical recession. On the other hand, the shock is so large that it could upend many sectors and practices in the economy. So, the essential evidence to watch will not be monthly or quarterly growth rates because after a huge decline there can be sizable gains for months or quarters even if the economy is still depressed. Instead, it is important to watch the unemployment rate, the labor force participation rate, the number of new firms compared to years prior, and other indicators that can be compared to prior levels to determine whether the economy is back to prior activity.
Potentially Persistent Effects of the Crisis
The unprecedented contraction in economic activity and the continued weakness in aggregate demand have had a seismic effect on the business sector. Already, the monthly rate of large corporate bankruptcy filings is approaching the peak levels last seen following the 2008 financial crisis. There has been a rapid decrease in start-ups and as some firms fail and fewer are created, the surviving firms will have a bigger share of the market and thus more market power.
The labor market may also experience longer-term changes. Of the roughly 18 million who reported being unemployed in June, roughly 3 million reported that their jobs were permanently lost. And recent research suggests that a third of job losses will eventually turn into permanent layoffs. Labor force participation rates have plummeted across many demographic groups.
Many of the policy responses taken in March assumed a short, temporary shutdown. Unemployment insurance and the Paycheck Protection Program were initially made more generous in anticipation of massive job loss, but the increased support was limited to a few months.
The direct economic effects of the pandemic will be long-lasting and the indirect effects, including persistent economic weakness, will likely last long after the public health crisis has been resolved.
Policy needs to focus on pushing the economy back to its full potential and cushioning those most directly harmed by the downturn. But policymakers also need to prepare for the fact that the economy will not go back to exactly what it was before.