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MARK-TO-MARKET: Putting the 2020 economy into perspective

MARK-TO-MARKET: Putting the 2020 economy into perspective

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On Thursday, the Department of Commerce released its final report on economic growth in the October-December fourth quarter. In the last three months of the year, the U.S. economy grew at an annualized rate of 4.3%. For the full-year 2020, the report showed that economic growth declined by just 3.5% from 2019.

2020’s decline of 3.5% was the largest since 1946, when the economy shrank by 11.6%. But let’s put that -3.5% rate in perspective. Last year, the pandemic delivered the most sudden, disruptive blow to the U.S. and global economies in history. Around the world, economies were shut down, borders were closed and citizens were placed on lockdown. Here in the U.S., in a matter of days, entire swaths of the American economy were shuttered or severely restricted by government decree. For comparison, in 2009, economic growth was reported at -2.5%.

As we entered 2020, many economists projected an annual growth rate as high as 3.5%, vastly exceeding 2019’s steady pace of 2.2%. The U.S. had just struck new trade deals with China, Canada and Mexico, easing geopolitical tensions and de-escalating economic uncertainty. The global economy was expected to recover after a punishing two-year decline. Expectations were indeed high.

But COVID-19 quickly crushed these lofty expectations. In the first and second quarters of 2020, economic growth fell at an annualized rate of -5% and -31.4%, respectively.

The economic recovery in the second half of 2020, however, was a record-setting resurgence. As Frank Costanza once proudly bellowed on Seinfeld: “I feel reborn. I’m like a phoenix, rising from Arizona!” Economic growth in the third quarter was 33.4%, followed by the fourth quarter’s rate of 4.3%.

Without question, the post-pandemic’s record-setting pace of government stimulus spending, combined with the U.S. Federal Reserve providing near-limitless liquidity and backing to the capital markets, greatly enhanced the odds of economic recovery. But this alone does not fully explain the meteoric rise in economic growth since the second quarter of last year.

Over the last half century, we’ve had many sizable economic downturns: the global financial crisis, the dot-com bubble, the savings and loan crisis and the oil and energy crises of the 1970s and 1980s, among others. If we take a closer look, each was preceded by a period of economic weakness. And each downturn was triggered by a sudden external shock that exposed these structural weaknesses within the economy. The end result was a very long, slow economic recovery.

But the economic fallout from the pandemic is different. We entered 2020 with a very strong economy. No, this decline came not from some structural deficiency within the economy, but from a virus. More specifically, by our government’s response to this virus that shut down or impaired entire sections of the American economy.

This year, the U.S. economy should fully complete its V-shaped recovery and return to its pre-pandemic levels. The greatest factor in this recovery has been the reopening of the American economy. And that continued reopening should make for a very strong pace of economic growth in 2021.

Mark Grywacheski is an expert in financial markets and economic analysis and is an investment adviser with Quad-Cities Investment Group, Davenport.

Disclaimer: Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Quad-Cities Investment Group LLC is a registered investment adviser with the U.S. Securities Exchange Commission.


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