The U.S. economy entered 2020 after its longest recorded expansion, then suffered an abrupt collapse in activity and employment as COVID-19 spread. Reopening and adaptation produced a strong rebound from the spring trough, but the recovery was incomplete by December and uneven across industries and workers. The key annual measure: real GDP fell 3.5% from its 2019 annual level to its 2020 annual level, according to the Bureau of Economic Analysis’ third estimate.
How much did the U.S. economy shrink in 2020?
BEA’s third estimate, released in 2021, found that real gross domestic product (GDP) declined 3.5% from the 2019 annual level to the 2020 annual level. In 2019, real GDP had grown 2.2%. The 3.5% figure is a full-year comparison, not the change in a single quarter.
Measured from the fourth quarter of 2019 to the fourth quarter of 2020, real GDP fell 2.4%. A different figure often cited for the crisis is the 31% annualized decline in second-quarter GDP; Federal Reserve Chair Jerome Powell used that rate in an October 2020 speech to describe the collapse during shutdowns. Annualized quarterly rates project a quarter’s pace over a full year, so they should not be mistaken for the actual full-year decline.
GDP estimates can change as BEA receives and incorporates improved source data. The figures here use BEA’s third estimate; that release revised fourth-quarter annualized growth to 4.3%, from 4.1% in its second estimate. BEA’s third estimate of fourth-quarter and annual 2020 GDP provides the underlying figures.
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What caused the contraction—and what held up?
The sudden drop in spending reflected both public-health restrictions and people’s voluntary changes in behavior as the virus spread. The annual GDP decline included lower consumer spending, exports, private inventory investment, nonresidential business investment, and state and local government spending. Imports also fell. Increased federal government spending and residential investment partly offset those decreases, but not enough to prevent an overall contraction.
Services faced the sharpest pressure
Services accounted for more than the entire decline in consumer spending: increases elsewhere did not make up for reduced spending on services. BEA identified food services and accommodations, health care, and recreation services among the largest contributors to that drop. In its industry estimates, private services-producing industries fell 3.9%, compared with a 2.7% decline in private goods-producing industries and a 2.1% decline in government. Sixteen of 22 industry groups contributed to the overall decline.
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Accommodation and food services, arts and recreation, health care, and transportation and warehousing were among the leading industry contributors to the downturn. Information and finance and insurance partly offset declines in other industries. Exports also weakened: service exports fell, led by travel, while goods exports declined mainly in non-automotive capital goods.
How high did unemployment rise?
The labor-market shock was concentrated in the spring. The Bureau of Labor Statistics’ employer survey recorded payroll employment declines of 1.7 million in March and 20.7 million in April. The April loss was one of the two largest monthly declines in the payroll series, which dates to 1939. The four largest monthly payroll gains in that series followed as businesses reopened, but December employment was still nearly 10 million below February.
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1Scan for outdated or missing drivers - takes under a minute2Repair Windows errors before they cause bigger problems3Fix the driver behind crashes, sound loss and screen glitchesThe unemployment rate, measured by a separate household survey, rose from 3.5% in January and February to 14.8% in April. BLS described 14.8% as the highest rate and largest one-month increase in its series dating to January 1948. The quarterly average unemployment rate was 13.0% in the second quarter and had eased to 6.7% in the fourth quarter.
Payroll jobs and employed people are different measures
The payroll figures count nonfarm jobs reported by employers in the Current Employment Statistics survey (CES). The household figures come from the Current Population Survey (CPS), which counts employed people and includes some workers and work arrangements outside CES coverage. CES may count several jobs held by one person separately; CPS counts that person once. The surveys also differ in reference periods and estimation methods, so their figures are related but not interchangeable.
On the CPS measure, civilian employment in the fourth quarter of 2020 was 8.8 million, or 5.5%, below its level a year earlier. This is a year-over-year comparison for employed people, not the payroll estimate of jobs lost since February. BLS explains the survey distinctions and year-end measures in its review of the coronavirus pandemic’s impact on the labor market.
The impact varied across worker groups
The April unemployment rate for Hispanic workers reached 18.9%, a record for that group in the BLS series. It was the first time since comparable data for Hispanic and African American workers became available in 1973 that the Hispanic rate exceeded the African American rate. The Federal Reserve also highlighted particularly severe job losses among Hispanic, African American, and lower-wage workers.
What happened to prices in 2020?
On BEA’s annual personal consumption expenditures (PCE) price measure, prices rose 1.2% in 2020; the core PCE index, which excludes food and energy, rose 1.4%. These annual rates do not describe every month or every household expense.
For example, the separate Consumer Price Index (CPI) fell 0.8% in April, its largest monthly decline since December 2008. Within that month, gasoline prices fell 20.6%, while food-at-home prices rose 2.6%. The figures are monthly CPI changes, not annual PCE inflation: the indexes and comparison periods differ. BEA’s annual GDP release reports the PCE measures, while BLS summarizes the monthly price and labor-market movements in its labor-market review.
How did the Federal Reserve respond?
The Federal Reserve held its policy interest rate near zero and continued purchases of Treasury securities and agency mortgage-backed securities. It also established emergency lending facilities and took other steps intended to support credit flows and market functioning. In August 2020, the Federal Open Market Committee issued a revised Statement on Longer-Run Goals and Monetary Policy Strategy.
In an October 6, 2020 speech, Chair Jerome Powell described the economy as entering the crisis in its 128th month of expansion and generally in a strong position. He also noted that shutdowns began in March and that many sectors were closed or operating well below capacity. His remarks offer a contemporaneous account of the policy challenge; they are distinct from the later annual GDP estimates. Powell’s October 2020 speech on economic developments and challenges and the Fed’s November 2020 Monetary Policy Report summary describe the response.
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