The coronavirus pandemic is certainly frightening. Though almost all Americans have learned to live with the looming threat of the virus, most are psychologically affected — and as many as one-third have experienced financial hardship as a result of COVID-19. The closure of many workplaces, including almost all retail spaces, has caused widespread unemployment and plunged many business owners and households into the red.
The state of the economy isn’t a perfect measure of a population’s financial health. For example, before the 2008 Housing Crisis, the economy was booming, but millions of Americans were filing for bankruptcy, facing home foreclosure and overall experiencing rough financial times. Yet, understanding the economy’s activity during the COVID crisis can provide greater insight into how the virus has affected individuals, both financially and psychologically — and how its effects are likely to continue into the coming months.
COVID-19 Has Caused the Most Significant Economic Blow Since the Great Depression
The first reports of a new disease reached American shores as early as November 2019, but few Americans recognized the threat until March 2020, when the pandemic began to spread in the U.S. in earnest. By April, many cities and states had imposed strict quarantine, shutting down businesses and keeping people indoors as much as possible.
Widespread lockdown coupled with general fear and anxiety spurred the economy into freefall — experiencing the deepest economic contraction in 73 years, the biggest blow to the U.S. economy since the Great Depression.
In less than a week, five years of economic growth were wiped out, and gross domestic product collapsed at a 32.9 annualized rate, triple the previous deepest decline in American history. Though economic activity resumed in May, the momentum was slowed in June as cities and states slowed and reversed their progress toward reopening amidst explosions of new infections.
Even now, at the beginning of October, the economy has slowly and begrudgingly become stronger, but its progress is not nearly as rapid as it was before the fall.
Economic Growth Affects Government Spending, Which Impacts Public Services
Economic activity during the COVID crisis matters not because it directly determines who lives and who dies. Rather, the economy is much more closely tied to how the government functions, and the government in turn can affect the success and/or failure of its citizens. This is because economic growth leads to greater income for the government, through business taxes, tariffs and more.
When governments have more money coming in, they have greater agency to spend on public programs and services. In contrast, when the economy is receding, the government is incentivized to restrict spending to reduce deficits. Unfortunately, when this happens, quality of life for populations can decline as public services like health care, public transport and infrastructure deteriorate.
When government support wanes during times of economic crisis, the quality of life declines for the members of the citizenry most dependent on government programs — which for the most part includes those toward the lower end of the socioeconomic scale: the poor, women, and racial minorities.
These people depend on public transit to get to work; they rely on state-sponsored health providers to avoid disease, and many live in public housing that require regular maintenance. When the government spending dries up, it is those already at risk who suffer the greatest.
The Economy Can Also Affect the Cost of Living and the Value of Currency
Others on the socioeconomic scale might experience an economic downturn via the cost of living. As stated above, economic health has a much greater impact on businesses, which tend to react to a spiraling economy by increasing the prices of their goods to make up for losses in sales.
Unfortunately, the high prices disincentivize consumers from purchasing, creating a snowball effect of increasing prices for goods and fewer consumers who can afford them. Hyperinflation develops as a result, and currency begins to lose some of its previous value.
This isn’t to say that all people live quality lives at the whim of economic success. Consumers have some degree of financial agency through their career choices and spending and saving behaviors. Those who accurately utilize a budget calculator, for example, might be better insulated against economic threats. However, those households unable to budget or invest will be the once faced with the most severe economic costs.
With Historic Job Losses, COVID-19 Hit Americans Hard — Economically and Financially
COVID-19 has been devastating to America, both because America has not responded adequately to the virus as a significant health threat, resulting in hundreds of thousands of deaths, and because the current administration has already slashed government funding for public programs and largely refused to reinvest in programs that could help Americans regain their financial footing.
Economists believe that the economic decline would have been much worse without the $3 trillion fiscal package offered by Congress, which boosted unemployment checks and provided a stimulus check to every American of a certain age.
However, we might imagine an alternate timeline where the government supplied even more support to its neediest citizens long before the crisis began, creating greater stability and opportunities for growth even as a global pandemic raged.
Never Bet Against America
While it certainly is a dark time for America, (and the entire world) this certainly is not the end of the American economy. In just over the past 100 years, the economy has survived an entirely different global pandemic, a great depression, and two world wars. This isn’t even counting the 1970’s oil crisis, the housing/dot.com bubble, or even the entire conflict in Vietnam. America, and the world, will survive.
In the 2020 Berkshire Hathaway annual meeting, (during the height of the COVID-19 pandemic) Warren Buffett espoused his never-ending optimism for the American economy. While we are far from a perfect society, Warren did say: “Never, ever bet against America.”
The 90 year old super-investor has lived through his fair share of economic disasters. As value investors, the best thing we can do is heed his advice, remain steadfast in our optimism of the US economy. It will take time and discipline, but good things are worth waiting for.