The coronavirus crisis upended large swaths of the U.S. economy last year. But it did so in unusual ways, crushing some sectors far worse than ever before, even as a few select industries prospered.
Here is a look back at a year of economic extremes, in 10 charts:
With the exception of the post-World War II demobilization, previous downturns were driven by cuts in home building and business investment alongside drops in consumer spending on big-ticket items like cars and furniture. Those categories accounted for roughly 3.1 percentage points of the total 2.5% decline in GDP in 2009, for example, with the impact partly offset by higher government spending and a shrinking trade deficit.
The coronavirus crisis was radically different because household spending on services fell by an unprecedented degree even as many other categories of economic activity held up reasonably well. Overall, the drop in everything from flights to dinners out to trips to the dentist subtracted almost 4 percentage points from GDP. In many categories—including hotels, restaurants, transportation, health care, and recreation—the crisis of 2020 was far more severe than anything on record, including the Great Depression.
By contrast, lower business capital spending subtracted just 0.5 percentage point from annual GDP growth—about half the damage wrought by the tech-stock bust in 2002—while home building contributed about a quarter of a percentage point to growth and household purchases of durable goods contributed almost half a percentage point. It was a terrible time to own a concert venue, but it was a great time to be selling exercise equipment.
The yearly numbers conceal just how remarkable the recent housing boomlet has been. Many Americans were no longer able to go out for avocado toast, had just received massive stimulus checks from the federal government, and were keen on moving to a bigger space to work from home—all at a time when mortgage interest rates dropped from 3.5% before the pandemic to less than 3% by July and just 2.7% now. The uptick was particularly striking in the market for single-family homes, where monthly sales of new homes and the rate of construction starts has soared almost to bubble-era levels.
The rapid surge in demand has led to an unprecedented gap between the number of new single-family homes that builders have finished and the number of new homes getting started. That in turn helps explain why prices have skyrocketed in select metro areas, even at a time when overall shelter costs and rents are rising far more slowly than normal.
Another surprising growth category was “final consumption expenditures of nonprofit institutions,” which added 0.4 percentage point to GDP in 2020—more than ever before, by far. The measure tracks the difference between the value of the services the nonprofits provide to the public and however much they charge people for those services.
If, for example, someone bought a $100 ticket to see a play that cost $200 per audience member to produce, the Bureau of Economic Analysis would count $100 as household spending on entertainment and $100 as consumption spending by the theater itself. That consumption spending in practice is covered by some combination of volunteer labor, donations, government grants, and endowment income, with the mix varying widely depending on the specific nonprofit sector.
The reported surge in nonprofit consumption in 2020 reflected an 8% drop in revenues from selling goods and services even as total output remained essentially flat. In other words, there was a big uptick in donations, volunteerism, and government support that offset the loss of other sources of income. The biggest driver of this shift was the nonprofit hospital sector, which provided 0.4% more services in 2020 despite collecting 8% less from patients and insurers.
The difference was covered by tens of billions of dollars of government aid in the form of forgivable Paycheck Protection Program loans, higher reimbursement rates for Medicare, and direct payments through the Provider Relief Fund. Put another way, the implied operating margin of the nonprofit hospital sector dropped from its stable pre-pandemic level of minus 5% to minus 12%.
Also noteworthy, however, was the “professional advocacy” sector. Donations to this category of nonprofit follow a predictable pattern, with spikes in the third and fourth quarters of even-numbered years. In other words, it’s a reasonable proxy for election campaign spending. The most recent year was unlike any other, with campaign spending in 2020 up by roughly 56% compared to 2018 and up 81% compared to 2016.
All these stories get at one of the most important economic dynamics of 2020: federal government income support was massive, and it made a big difference. Disposable personal income was up more than 7% in 2020—even with massive job losses and business closures—because the government made up the difference.
This support helped power the recovery in the face of a devastating pandemic. It’s why aggregate small-business income was more than 2% higher in 2020 than in 2019 after accounting for government subsidies, but more than 8% lower without those subsidies.
This support has helped power a rapid recovery this is totally unlike the past few downturns. Total wages, salaries, and benefits paid in December were actually higher than in any month before the pandemic emerged, on a seasonally adjusted basis. By this point in the financial crisis, employment income was running 4.5% below the peak.
Even though the U.S. is still short roughly 10 million jobs compared to February, those jobs generally paid very little. In other words, decent wage gains for everyone else have been enough to offset the impact on the aggregate, even as the jobless have benefited from a generous set of enhancements to the unemployment insurance system.
The net effect of higher incomes and lower consumer spending has been a surge in the household saving rate comparable only to WWII rationing.
Assuming vaccinations do their job and American society returns to normalcy, the saving rate should drop and support a consumption boom—just like in the late 1940s.
Write to Matthew c. Klein at matthew.klein@barrons.com
