Introduction: The COVID-19 Economy

By Kevin L. Kliesen and Christopher J. Neely

In early January 2020, U.S. and world health organizations began to sound the alarm about a novel coronavirus that originated in Wuhan, China, in late 2019. At the time, there were few signs of the subsequent pandemic that was about to throttle the world economy.

For example, the U.S. unemployment rate in January and February was effectively at a 50-year low of 3.5%. As Federal Reserve Chair Jerome Powell and other Fed officials have pointed out, the strong job market was especially beneficial for low-income workers.See Powell’s Aug. 27, 2020, speech “New Economic Challenges and the Fed’s Monetary Policy Review.” The consensus of economic forecasters—surveyed by the Federal Reserve Bank of Philadelphia in early February—was that “the U.S. economy in 2020 looks stronger now than it did three months ago.”See the Philadelphia Fed’s “First Quarter 2020 Survey of Professional Forecasters,” released Feb. 14, 2020.

This optimism ended up being misplaced, though it shouldn’t be surprising, given the impossibility of predicting pandemics.

COVID-19’s Effects on the Economy

The effects of the pandemic spread through the economy in late winter and early spring. By the end of February, global stock markets had plunged; in March and April, payroll employment likewise fell sharply. The National Bureau of Economic Research’s Business Cycle Dating Committee would later declare that the nation’s record-long business expansion ended sometime in February.

The COVID-19 pandemic was the second major shock to throttle the nation’s economy in the past dozen years. However, it was unique in that it resulted partially from the policies enacted intentionally, albeit with the expectation they would be temporary. These measures triggered massive job losses and the shuttering of businesses—some briefly, some permanently.

With virus case counts and fatalities rising, federal COVID-19 guidelines issued on March 16 urged the public to, among other things, work from home if possible, avoid social gatherings of more than 10 people—including outside-the-home activity (e.g., dining out)—and avoid discretionary travel.FRASER’s Timeline of Events Related to the COVID-19 Pandemic contains links to announcements such as this one. State and local governments followed suit with various measures to curb the pandemic, including many that reduced economic activity. In addition, many people voluntarily chose to avoid restaurants, gyms and travel.

Some 22 million jobs were lost in March and April. To put this in perspective, the number almost matched the total number of jobs the U.S. gained over the previous 10 years. The official unemployment rate more than tripled to 14.8% in April, but this rate likely significantly understated the true rate. The Bureau of Labor Statistics (BLS) reported that the official unemployment rate likely would have peaked at about 20% if many survey respondents had correctly classified themselves as unemployed but on temporary layoff because of COVID-19-related business closures.The BLS offers a more detailed explanation on its webpage discussing frequently asked questions about the impact of the pandemic on the April 2020 employment situation.

The decline in national output and income was as staggering as the job losses: Real gross domestic product (GDP) fell at a 5% annual rate in the first quarter of 2020 and at an unprecedented 31.4% rate in the second quarter. The decline in real GDP was worse in other countries. In the United Kingdom, for example, real GDP fell at a nearly 60% rate during the second quarter.

With the U.S. economy weakening at a rapid pace, the Federal Open Market Committee cut its federal funds rate target to zero and expanded its purchases of Treasury and mortgage-backed securities. Meanwhile, the Board of Governors, with the approval of the U.S. Treasury secretary, restarted several special lending facilities from the 2007-09 financial crisis and devised five new facilities. Four pandemic-specific pieces of legislation were signed into law during the spring, including the CARES Act. The total amount allocated by Congress exceeded $2.7 trillion, including a little more than $450 billion to fund the five new Federal Reserve lending facilities.

Some weekly indicators suggest that the economy bottomed out in late April/early May. As the initial pandemic wave eased and social distancing protocols were relaxed, key monthly indicators—such as payroll employment, personal consumption expenditures, new home sales and industrial production—rose sharply in May and continued to rise during summer. Real GDP rose at an unprecedented 33.4% annual rate in the third quarter, erasing much of the declines of the previous two quarters. Large increases in expenditures and production and the rehiring of furloughed workers suggested that the worst had passed.

The pace of U.S. economic activity continued to increase over the last three months of the year, although a resurgence of the virus during the fall of 2020 spurred some economists to dramatically dial back their expectations for the economy’s late 2020 and early 2021 performance.

To insure against the possibility of much weaker growth, an additional fiscal support package totaling a little more than $900 billion was signed into law in late December. This fiscal package spurred many forecasters to expect positive real GDP growth in the first quarter of 2021; prior to passage of the legislation, some forecasters had expected negative growth in the first quarter.The consensus of professional forecasters in early 2021 was that the development and distribution of vaccines would help trigger a vibrant rebound in economic activity over the final six to nine months of 2021, perhaps extending into 2022.

The pandemic-spawned economic contraction and recovery is one for the record books. Economists have begun to focus on the potential longer-run effects of the pandemic, and three questions stand out.

1. Will the large number of bankruptcies, permanent business closures and the possible erosion of job skills due to long-term spells of unemployment (all of which contribute to what economists call “economic scarring”For more about economic scarring, see Julian Kozlowski’s 2020 Economic Synopses article “COVID-19: Scarring Body and Mind.”) lower long-term GDP growth?
2. Will the shift to e-commerce and a corresponding greater propensity to work from home permanently reduce the number of retail establishments and lower the demand for commercial office space?
3. Will global supply chains need to be reconfigured to mitigate future disruptions to the production and distribution process for manufacturers?

Transitioning Leadership, Maintaining Strong Research

Christopher Waller: A Decade of Leading the St. Louis Fed’s Research Division

After more than a decade serving as the St. Louis Fed’s research director, Chris Waller was confirmed by the U.S. Senate as a member of the Board of Governors of the Federal Reserve System and was officially sworn into his role in December 2020. Waller is the second St. Louis Fed economist to be elevated to the Board, following Susan Bies, who served as a Fed governor from 2001 to 2007.

Following a distinguished career in academia, Waller joined the St. Louis Fed in 2009. He is a highly respected scholar, professor and expert in central banking and monetary policy. In 2020, he directed the Research Division’s intensive study of the economic impact of the COVID-19 pandemic at a time when very little was known about the virus.

“Given the significant challenges the pandemic imposed on the global macroeconomy, we began an intensive effort at the St. Louis Fed to research all aspects of this health shock to better understand the differing outcomes on certain segments of society in hopes that policy could be directed to those most impacted,” Waller noted. “This rigor in macroeconomic research and real-time data analysis underscores the St. Louis Fed tradition of being a pioneer on the frontier of macroeconomic research. It’s a tradition that I carried on during my tenure as research director and makes me proud to be a St. Louis Fed alum.”

Waller’s impact on the St. Louis Fed was indelible, and his colleagues expect he will have a positive and lasting influence in his term on the Board of Governors.

Meet the St. Louis Fed’s New Research Director: Carlos Garriga

Carlos Garriga succeeded Chris Waller as research director of the St. Louis Fed, continuing its tradition of world-class thought leadership in economic research. Garriga oversees a department within the St. Louis Fed that ranks among the top of all research institutions in central banking and academic research worldwide.

Garriga joined the St. Louis Fed in 2007 and advises Bank President Jim Bullard on monetary policy issues. Garriga’s research focuses on macroeconomics and housing, household finance, monetary economics and asset pricing, and public economics. His work has been widely published in leading economic academic journals.

“I’m honored to carry on the St. Louis Fed tradition in using academic-style research to help shape the debate in the economics profession,” Garriga said. “The diversity of experience among our research staff, including the depth and breadth of research coverage and innovative thinking, allows the Bank to do work that can help address the economic challenges of the day. In fact, this report highlights our economists’ ground-breaking study of the emerging pandemic on the U.S. and world economies.”

Garriga, who previously was an assistant professor of economics at Florida State University and the Universitat de Barcelona in Spain, is eager to continue the Research Division’s investigations and de novo research into the effects of COVID-19 on the nation’s economy.

St. Louis Fed Pandemic Research

To better understand how the pandemic and the various policy responses to it have affected the U.S. economy, the St. Louis Fed’s Research Division undertook a remarkable amount of research and analysis on the pandemic economy. From mid-March through December 2020, our economists produced scores of articles, blog posts and working papers on pandemic-related topics. In addition, they maintained and updated various data series related to the pandemic on our websites.

The essays contained in this report describe a portion of our pandemic-focused work in 2020—highlighting the effects of the pandemic on financial and labor markets, fiscal policy, international trade and designing policies to address pandemics with the lowest economic costs.

Notes and References

1. See Powell’s Aug. 27, 2020, speech, “New Economic Challenges and the Fed’s Monetary Policy Review.”
2. See the Philadelphia Fed’s “First Quarter 2020 Survey of Professional Forecasters,” released Feb. 14, 2020.
3. FRASER’s Timeline of Events Related to the COVID-19 Pandemic contains links to announcements such as this one.
4. The BLS offers a more detailed explanation on its webpage discussing frequently asked questions about the impact of the pandemic on the April 2020 employment situation.
5. The consensus of professional forecasters in early 2021 was that the development and distribution of vaccines would help trigger a vibrant rebound in economic activity over the final six to nine months of 2021, perhaps extending into 2022.
6. For more about economic scarring, see Julian Kozlowski’s 2020 Economic Synopses article “COVID-19: Scarring Body and Mind.”