It is the first time the economy has contracted for the year since 2009, when Gross Domestic Product shrank by 2.5 percent during the depths of the Great Recession. It is also the worst year for economic growth since 1946, when the economy shrank by 11.6 percent as the nation demobilized from its wartime footing.
Overall, the economy was mostly on the mend in the latter half of 2020, and the recession may even be technically over. However, the economy has a long way to go before it heals entirely. More than 15 million Americans are on unemployment, and jobs that depend heavily on person-to-person contact — like those at hotels, bars and restaurants — may not return until the pandemic ends. On Wednesday, Federal Reserve Chair Jerome H. Powell said there is “nothing more important to the economy right now than people getting vaccinated.”
“There has been a broad recovery, but economically speaking, we’re not out of the woods yet,” said Ben Herzon, executive director at IHS Markit.
Personal income continued to fall between October and December, likely driven by a drop in social benefits as relief programs under the Cares Act wound down. Congress approved a $900 billion stimulus package last month, but Trump did not sign the deal until the final days of 2020, as millions of unemployed Americans risked losing unemployment benefits, housing assistance and other critical aid.
“The package enacted at the end of December was completely welcome, but we’re clearly seeing that it took some time to roll out and get that aid to folks,” said Wendy Edelberg, director of The Hamilton Project and former chief economist at the Congressional Budget Office. “That’s going to take some time. And [the package] was too small.”
This is the last GDP report from former president Donald Trump’s tenure. Until the pandemic, Trump was on track for an economic record that put him near the middle of the pack among recent presidents. But the covid-19 crisis ensured Trump oversaw the slowest economic growth of any president in the period since the Second World War.
Economic chaos reigned in 2020. In the second quarter, gross domestic product contracted at the fastest quarterly rate ever for the United States, as the pandemic walloped workers and businesses and kept millions from leaving their homes. Then, in the third quarter, GDP soared at a record pace as parts of the economy reopened and businesses brought workers back onto their payrolls.
The economy was buoyed by a rebound of sales of automobiles and household goods such as furniture, and in renovations and supplies for home offices. Consumer spending — which accounts for more than two-thirds of U.S. economic activity — used to be driven by an ever-growing demand for services, including leisure and hospitality, and restaurants and bars.
But as the pandemic warped tried-and-true shopping habits, economists watched consumers move their spending from services to goods. Purchases of computers, home office equipment and fire pits quickly overtook those of hotel rooms and movie tickets.
In fact, 2020 was the best year ever for Bedford Fields Home & Garden Center in the forested hills of Bedford, a suburb of Manchester, N.H.
When the pandemic hit, “literally everybody became gardeners,” said office manager Tracey Auger. The GDP category that includes nurseries and garden-supply stores was one of fastest-growing in 2020.
“So many people were home, and we were deemed essential and one of the few places people could go to shop,” Auger said. “They needed somewhere to go; a project to do.”
Auger, who has worked at Bedford Fields for nine years, said the shop has based its 2021 orders on the assumption that this year will be somewhere between a normal year, like 2019, and the housebound plant madness of 2020. Bedford Fields has doubled its seed order for 2021 and has secured a full order of plants; after months of shortages, growers have finally caught up to surging demand.
But for every business that has thrived in the era of social distancing, dozens of others have continued to suffer as customers stay home and governments restrict activity at high-contact businesses such as bars, restaurants and event centers.
Powell said the pace of the recovery in economic activity and employment has moderated in recent months, with service-sector workers — mainly women and people of color — struggling to regain a foothold in the workforce.
“That is really the main thing about the economy, is getting the pandemic under control, getting everyone vaccinated, getting people wearing masks and all that,” Powell said. “That’s the single most important economic growth policy that we can have.”
The businesses that are hit hardest disproportionately employ women, people of color and workers without college educations. Americans in those groups are suffering. Economists call it the K-shaped recovery: the top end of the economy continues to improve, even as lower earners fall farther behind.
Constance Hunter, chief economist at KPMG, pointed to different slices of the economy that have their own versions of the K-shaped recovery. Among corporations, tech companies such as Zoom and Netflix are soaring. Airlines, less so.
For workers, Hunter said that among Americans who can work from home, the unemployment rate is 3.9 percent. The rate is 8.5 percent for people who have to report to a job site.
“In general, the GDP number is informative about the economy,” Hunter said. But “because of this corporate K, a household K, a geographic K, we have to dig under the hood in a different way.”
Cristal Farrington, 48, was laid off in May after more than two decades of climbing the corporate ladder at New York City firms that buy and distribute specialty foods and restaurant equipment.
Farrington is looking for whatever work she can get but said she was not optimistic that business would pick up in 2021, since the timelines for vaccine rollout and reopening remain fuzzy. And even if things turn around, it will be years before Black women like her are welcomed back into the workforce, Farrington said.
“People of color, we’ve always been on the edge, teetering,” Farrington said. “Because we always know we’re going to be the first ones let go and the last ones hired.”
Economists surveyed by the Wall Street Journal predict a strong rebound in 2021, with the economy growing by 4.3 percent. That would be the best year since the late 1990s, as high earners unleash the billions they have saved during the pandemic.
One bright spot in 2020 is that the personal saving rate hit the highest on record, and some businesses are betting that — combined with a vaccine rollout, the December stimulus and any future Biden stimulus — all that saving will power a swift rebound.
The online review site Yelp this week reported that more businesses reopened in December than in any month since June. It also augurs well for this year that, in December, interest in wedding planning soared 22 percent above its 2019 level — a sign of hope for the battered live-events industry.