Savannah Chamber

7 1 The National Outlook By Jeffrey M. Humphreys Terry College of Business, University of Georgia www.selig.uga.edu Absent another lockdown of the population and broad shutdown of the economy, the COVID-19 recession is over. It lasted three months – March through May – making it the shortest US recession. It was short because the fiscal and monetary policy responses were truly massive. The fiscal policy responses authorized in spring 2020 equaled almost 13 percent of pre-pandemic GDP. In addition, the initial fiscal policy responses were very timely. For example, government assistance payments were quickly distributed to households and businesses. The monetary policy response also was timely and very aggressive. The Federal Reserve quickly cut policy interest rates to zero, engaged in massive quantitative easing, and set up a wide range of credit facilities to support the credit markets thereby preventing the economic crisis created by COVID-19 from morphing into a financial crisis. Credit markets – the lifeblood of any modern economy – continued to function. In addition, the broad "stay-at-home" orders issued by many states in March and April were partially lifted in May and June. It helped tremendously that the US economy was in very good shape when the pandemic began without many large imbalances that needed to be corrected. The US- China trade war, paradoxically, hardened businesses' supply chains against the logistics problems that accompanied the global lockdowns. Therefore, once government stimulus hit the streets and restrictions on mobility and business were lifted people emerged and many types of businesses partially or fully reopened. Although brief, the COVID-19 recession was very steep and is without a historical precedent. Inflation-adjusted (real) GDP fell at an annualized rate of 32 percent in the second quarter of 2020, following a 5 percent (annual rate) drop in the first quarter. The annualized rate of decline shows how much economic activity would have plunged if drop in GDP in that quarter were sustained for an entire year. It is a good way to gauge the intensity a downturn. By this measure, the second quarter drop was the steepest contraction ever recorded for the US economy, reflected the unique nature of a recession characterized by the deliberate shutdown of large swaths of the economy to contain a pandemic. The peak-to-trough drop in GDP over the entire course of the COVID-19 recession provides a better measure of the cumulative effect of the recession on the overall economy (as opposed to the intensity of the downturn within a single quarter). The peak-to-trough plunge in real GDP was 10 percent. The peak-to-trough decline was two and one half times larger than the 4 percent drop experienced during the Great Recession – December 2007 through June 2009. Of course, the 26 percent peak-to-trough decline in GDP during the Great Depression was much larger, but that drop was spread over many years rather than just a few months and therefore less surreal. The labor market was severely impacted by the COVID-19 lockdowns. In just two months, 22 million jobs – one out of every seven – were lost. The unemployment rate soared from 3.5 percent in February to 14.7 percent in April. Many of those layoffs were initially classified as temporary, but became permanent. The COVID-19 recession is unique in the US experience because its duration and depth were largely the result of deliberate actions by government to shut-down the economy in order to flatten the curve of the pandemic to prevent overburdening the healthcare system. In prior pandemics – the Spanish flu (1917-18) and the deadly 1957 flu, the economic repercussions were relatively minor because the economy was not deliberately shut down. The "stay-at- home' orders and business shutdowns flattened the curve of the COVID- 19 pandemic and saved lives, but lockdowns of the entire population and the shutdown of large economic sectors are inefficient, inflict tremendous economic damage, and therefore in practice cannot be maintained for very long. The imposition of broad lockdowns and shutdowns dramatically steepened COVID-19 downturn. A more limited use of population lockdowns and business shutdowns that targeted the most vulnerable subsets of the population as well as high-contact industries (especially those where economic losses are relatively minor) probably would have reduced virus transmission while simultaneously limiting the economic damage wrought by COVID-19. In addition, a more targeted approach is more sustainable. Ideally, business shutdowns should be based on a rigorous evaluation of the tradeoffs between the risk of virus transmission and the size of the economic losses. Moreover, there's no doubt that a nationwide mandate to use face masks would have reduced the toll of the pandemic on human health and on the US economy. The Terry College expects the economic recovery from the COVID-19 recession to occur in three distinct phases: an initial "bounce" in economic activity due to the lifting of "stay-at-home" restrictions and business re-openings; followed by an extended period of "choppy" economic growth that lingers until either a medical solution to the virus is widely

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