The United States began the new century with a variety of bumps to the economy. The dot.com bubble was over, with overhyped tech and internet stocks crashing back to reality. The technology heavy Nasdaq index declined over 75% between March 2000 and October 2002. The September 11, 2001 terrorist attacks contributed to the economic decline, as uncertainty and fear gripped the economy. In addition, the financial markets were plagued by accounting scandals (Enron). Although GDP growth was positive for the entire 2001 year at 1.0%, economic growth was negative for two quarters resulting in a minor recession. Percent Change from Quarter One Year Ago - Real GDP (Source: Bureau of Economic Analysis) 2018/Q1 2018/Q2 2018/Q3 2018/Q4 2019/Q1 2019/Q2 2019/Q3 2019/Q4 2020/Q1 2020/Q2 2020/Q3 3.1 3.3 3.1 2.5 2.3 2.0 2.1 2.3 0.3 9.0 2.9 The Bureau of Economic Analysis (BEA) began tracking quarterly GDP growth data in 1947. The 2020 second quarter drop was the worst on record, and much greater than the worst quarterly decline during the financial crisis. When comparing economic growth to the previous quarter of a year ago, the 2020 second quarter decline of -9.0% was significantly worse than the largest financial crisis quarterly decline, which was -3.9% in the second quarter of 2009. Third quarter 2020 GDP was still 2.9% lower than a year ago. Once again, a combination of fiscal and monetary policy was used to combat the effects of an economic shock. The Federal Reserve had already reduced interest rates 3 times in 2019 as the economy slowed due to trade wars and the effects of the tax cuts subsiding. However, in 2020, the fed funds rate was once again reduced to a historical low of 0.00-0.25% to counter the effects of COVID-19. In March, a $2 trillion fiscal stimulus package was passed that more than doubled the $800 billion stimulus package that was implemented in 2009 to overcome the financial crisis. The fiscal and monetary measures would help combat the problem, but they couldn’t solve the problem. COVID-19 put the brakes on consumer spending, resulting in an economic downturn in 2020. Unfortunately, COVID-19 also became political. There became an illusion of an economic choice: 1) limit the growth of the pandemic by closing the economy down and minimizing economic growth, or 2) maximize economic growth by completely opening-up the economy and accepting the spread of COVID-19. In reality, COVID-19 was going to impact to impact the economy, whether the economy was closed down or opened-up. The primary factor to future economic growth and minimizing any economic downturn was not about re-opening the economy, but getting the virus under control. If Americans felt safe shopping, traveling, and spending at retail businesses, consistent economic growth would return. The promising vaccine news in November will hopefully lead to a quick return to more normal conditions; however, even distribution of the vaccine will take some time. In the meantime, appropriate policy planning could allow fiscal policy to be used preemptively to offset the damaging economic effects of the virus on individuals and businesses, especially small business. The greater the unity of Americans in fighting the virus, the faster the virus will be controlled and the faster consistent economic growth returns. That’s the key for this pandemic, and any future pandemic. COVID-19 was going to impact the economy; the question was how much and how long it would impact the economy. The quicker the virus was controlled then the quicker consistent economic growth would return. Exactly when that happens is the big question for 2021.
Central Wisconsin Report - Fall 2020
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