The stats are now out on the performance of the American economy for quarter one of 2020, and it’s not good news.
According to the US Bureau of Economic Analysis, the world’s largest economy contracted for the first time in six years, with GDP falling by 4.8%. It is also the worst decline since the height of the global financial crisis in 2008 when a contraction of over -8% was recorded.
Whilst the number may not be as high as that of 2008, there are many reasons for concern, and a real worry that this is only the beginning of a deep economic crisis.
The sharp decrease in GDP can be attributed to both a demand-side and supply-side shock.
The demand-side shock has been caused by millions of American consumers ordered to stay at home, resulting in consumer spending falling by 7.6% for the first three months of the year. Whilst we know that everyone is going mad for toilet paper and ramen, the purchase of many other goods, especially consumer durables, has been put on hold. Investment, another large contributor to American GDP, has also declined with investor confidence at a low in these incredibly uncertain times.
From the supply-side, businesses have shut up shop, unemployment has gone through the roof, and planes are grounded, all resulting in a total breakdown of domestic and global supply chains.
The largest concern for the American economy is that the impact of Covid-19 did not really hit until the beginning of March. Within four weeks of the country going into lockdown, over 26 million people had filed for unemployment benefits. This suggests that the dramatic impact on GDP was mainly felt from March alone.
With the economy still on lockdown throughout the whole of April, and states unsure on how and when to reopen, it seems like the US is many months away from a return to normality. In addition, with over 30 million now unemployed, this will put a huge dent into household’s income, meaning that consumption in the economy will be unable to return to the pre-coronavirus levels for a long time.
One final consideration must also be given to the way we live our lives once the danger has passed. It is likely that after months of social distancing, the return to normality will be slow, with many consumers wary of going to public places, meaning that demand for many goods and services will remain dampened for a long-time to come.
Q1. What is meant by a contraction in economic growth?
Q2. For the US economy, explain how each component of aggregate demand (AD) has been affected by Covid-19.
Q3. Analyse the reasons why American unemployment has increased to over 30 million people since the start of March.
Q4. Evaluate the view that the US economy is ‘only at the beginning of a deep economic crisis’.
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