The US economy shrank by 3.5% in 2020, the worst year for growth since 1946, as the coronavirus pandemic brought the country to a shuddering halt.
In the last three months of the year the economy rose by just 1% compared to the previous quarter, according to the Bureau of Economic Analysis – equivalent to an annualized rate of 4%.
The latest figures represent a significant slowdown in the economy. In the previous quarter the economy rose by 7.5%, an annualized rate of 33.4%.
The reversal comes amid rising rates of Covid 19 infections. More than 429,000 people have now died of Covid 19 in the US and 25.6m cases have been confirmed, according to Johns Hopkins university’s coronavirus tracker.
The economic reversal was the first annual contraction for the year since 2009, the depths of the Great Recession, when gross domestic product (GDP), the broadest measure of economic health, shrank by 2.5%.
Last year was also the worst year for economic growth since the year after the second world war, when the economy shrank by 11.6%.
The US economy has bounced back significantly from the early months of the pandemic. GDP collapsed by an annual rate of 32.9% between April and June. The Biden administration has outlined an ambitious economic recovery program and pledged a significant increase in vaccinations but the coronavirus remains a significant drag on the recovery.
President Joe Biden has drawn up a $1.9tn coronavirus and economic stimulus plan that involves immediate pandemic economic relief and longer term policies aimed at stimulating the economy and tackling the racial and wealth gap inequities that have been exacerbated by the health crisis.
But the situation remains dire. Unemployment has dropped sharply from a record high of 14.7% in April to 6.7% in December but the economy still lost 140,000 jobs in the last month of 2020 and the numbers of people filing for weekly unemployment claims remain over four times as high as they were before the pandemic. Another 847,000 people filed for unemployment last week alone.
From March 2020 to June 2020, 20.4m jobs were lost from closing and contracting private-sector establishments, an increase of 12.6m jobs from the previous quarter, the Bureau of Labor Statistics reported on Thursday.
Federal Reserve chair Jerome Powell warned this week that the US economy was “a long way from a full recovery,” citing the millions of unemployed workers, including the many who have stopped looking for work.
Biden faces a tough fight getting his relief package passed. Republicans, who largely ignored Donald Trump’s free spending ways, have balked at its scale and impact on the national debt.
Powell believes now is not the time to worry about the nation’s $27tn Federal debt debt. “I’m much more worried about falling short of a complete recovery and losing people’s careers and lives that they built because they don’t get back to work in time,” Powell said. “I’m more concerned about that and the damage that will do, not just to their lives but to the United States economy.”
Oxford Economics described the US economy as “chilled, but not frozen”. GDP remains 2.5% below its pre-Covid level and Oxford Economics does not foresee it reclaiming its end of 2019 level until the second quarter of the year.
“Against the risk of excessive winter pessimism, we believe in spring optimism. We foresee record-breaking consumer spending growth in 2021 with households benefiting from a watered-down $1.2tn version of Biden’s American Rescue Plan, vaccine diffusion gradually reaching two-thirds of Americans by July and employment accelerating this spring. After a 3.5% contraction in 2020, we foresee the economy expanding around 5.5% in 2021,” the economists said in a note to investors.