A year has passed since the U.S. economy was the victim of a dramatic sudden stop at the hands of the Covid-19 virus. What has transpired since, especially when compared with early consensus expectations, tells us a lot about both the inherent strength of the economy and its Achilles’ heel.
A virtual shutdown during the second quarter of 2020 caused drastic dislocations to every aspect of American society. The impact on the economy was astoundingly bad. Gross domestic product collapsed, contracting 31%; unemployment shot up to more than 14%; and retail sales also fell sharply, by 15%, despite a huge shift from physical to online consumption.
Needless to say, the U.S. economy was not the only one experiencing such a fierce downturn. Global GDP fell sharply and trade contracted 19% around the world.
With such a shock to growth and trade, it is not surprising that many analysts rushed to predict a really dire year as a whole for both the U.S. and the global economies, even before the realization that there would be multiple debilitating spikes in Covid infections, hospitalizations and deaths. Yet, by the end of the year, the economies surprised most analysts to the upside.
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The contraction in U.S. economic growth in 2020 was limited to 3.5%, almost half of what the World Bank and others projected in June. The unemployment rate was halved from its peak. Retail sales surprised even more on the upside, expanding almost 7%. The rebound in manufacturing activities also helped, forming part of a global phenomenon that reduced the contraction in the trade of goods to just 6%, well outperforming the trade in services, which contracted 16%, and limiting the hit to overall trade to 9% and that to global GDP to just more than 3%.
Three factors drove these better-than expected outcomes, the relative importance of which varied among countries.
The first was a remarkable macroeconomic policy response anchored by three powerful principles: whatever it takes, all in and whole of government. It was particularly notable in the U.S. and U.K. where, working together, governments and central banks provided a hitherto unthinkable amount of liquidity to markets, businesses and individuals.
The second was success in overcoming the spread of Covid infections and the dreadful threats to lives, livelihoods and health systems that came with the virus. China was the positive outlier here among the systemically important economies, contributing to its 2% positive growth for 2020 as a whole.
The third was highly responsive private sector ingenuity, entrepreneurship and dynamism — both on a stand-alone basis and in highly effective public-private partnerships, highlighted by the breathtaking speed by which scientists came up with vaccines in the U.K. and U.S. in particular.
The encouraging positive surprises, though, fell short for another early but persistent casualty of Covid: an inclusive recovery underpinning a solid and mutually supportive social fabric.
The early consensus narrative about the virus was that it respects no boundaries, be they geographic, socioeconomic, gender or racial. Yet, as Michael Spence and I warned in June, Covid would prove to be the great unequalizer — and not just for income and wealth but for opportunity as well. Indeed, this has become an even more serious stand-alone problem whose negative implications extend well beyond the economic outlook and require urgent focused policy attention by both the government and corporations.
Data from the Bureau of Labor Statistics shows that white and college-educated Americans experienced a disproportionately better recovery in jobs. Needless to say, this was closely correlated to compensation levels as well. For 2020, employment expanded for those defined as high-wage earners (more than $60,000 a year) by 1.2% while that for middle earners ($27,000-$60,000) fell by 4% and that for low earners (less than $27,000) declined by a distressing 19%.
Because they account for the vast majority of stock and mutual fund holdings (90 percent and 83 percent, respectively, according to Federal Reserve data), white and college-educated Americans also managed to improve their relative and absolute wealth standing thanks in large part to exceptional Fed policy support for financial markets. This also proved lopsided within these two fortunate and overlapping groups as the richest 1% accounts for more than 50% of overall holdings. Indeed, Forbes has estimated that the total wealth of U.S. billionaires increased an eye-popping $1.3 trillion, or 44 percent. Compare that with the 24 million U.S. adults who reported during the year that their household lacked enough food in the previous week.
It is not just income and wealth inequalities that worsened. The opportunity gap also widened. This is vividly highlighted by many educators noting, in the shift from in-class to remote education, both a worrisome disengagement by too many students from disadvantaged backgrounds — because of a lack of proper Wi-Fi, computers, working space, etc. — and a drop in attainment among those still engaged.
Then there is the health angle. Covid has been particularly destructive for the health and lives of minorities and other vulnerable segments of society. This regrettable dispersion has been accentuated by what, at least initially, is a notable difference in vaccination rates.
Looking back a year, we should draw comfort from what did not happen, be it the beginning of an economic depression that would have crippled the well-being of current and future generations or persistent high joblessness that would have ushered in a lost decade of widespread long-term unemployment, mental stress, and what Anne Case and Angus Deaton labeled “deaths of despair.”
We should also react to what did happen, which is a highly concerning increase in the inequalities of income, wealth, opportunity and health. The longer this problem remains unaddressed, the more likely it is to interfere with the positive drivers that surprised many analysts.
The last thing we need as we recover from Covid, a generation-defining shock, is to have the potential continuation of the unanticipated good of a highly challenging 12 months further contaminated by the worrisome ugly.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is president of Queens’ College, Cambridge; chief economic adviser at Allianz SE, the parent company of Pimco where he served as CEO and co-CIO; and chair of Gramercy Fund Management.
His books include "The Only Game in Town" and "When Markets Collide."
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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Mohamed A. El-Erian at melerian@bloomberg.net
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Daniel Niemi at dniemi1@bloomberg.net
