Higher Rock Education - Economics Blog

Wednesday, January 13, 2021

State of The US Economy - December 2020

2020 has been an extraordinary year for the US economy. Failure to contain COVID-19 caused a record 31.4% contraction in the second quarter, followed by the largest recorded recovery of 34.4% in the third quarter. Unemployment began in 2020 at 3.5%, a historical low, but soon peaked at 14.8%, the highest level since the Great Depression. Nearly seven million people were laid off in one week, the week ending March 28th. Many have since returned to work, but at years-end nearly 10 million fewer people were employed than before the pandemic.  

Household incomes increased, mainly because Congress provided $5 trillion in aid. Government spending prevented even greater hardship. Yet there is a price – government spending doubled, and the budget deficit tripled in 2020. Through it all, the stock markets rose to record levels. 

Higher Rock Education’s 2020 predictions proved too optimistic, but we did not anticipate COVID-19. We provide our scorecard and 2021 forecasts in the summary section, but first, four key reports published in December and early January are summarized.

Real Gross Domestic Product (RGDP)

According to the Bureau of Economic Analysis’s third estimate, the US economy rebounded in record fashion during the third quarter. Readers can access the full report Gross Domestic Product, Third Quarter 2020, Third Estimate. The BEA will release its advance estimate for the fourth quarter on January 28th. 

  • The US economy grew at an annual rate of 33.4% in the third quarter. This follows a contraction of 31.4% in the second quarter. 
  • RGDP remained approximately 3.5% less than just prior to the pandemic. 
  • Private goods-producing industries grew by 47.2%. 
  • Private service industries grew by 35.1%.
  • The government grew by 10.1%.

Personal Income and Outlays

In November, income and consumer spending fell for the first time since March. Wages and salaries had increased every month since April but remained below pre-pandemic levels. However, many businesses and families remain very dependent on government assistance, which decreased by more than $100 billion between November and October. Businesses were impacted by a reduction in the Paycheck Protection Program. Households received less in lost wages and supplemental payments. Even after considering November’s decrease, household income was $377 billion more in November than in February because of the $3 trillion support from the CARES Act and other government assistance programs paid between March and November. 

The increase in household income had sustained consumer spending until November. But, rising COVID-19 cases and smaller income deterred households from spending. Unlike prior months spending for services dropped less than for durable goods and nondurable goods, reflecting the reopening of many restaurants and bars in November (many of which closed again in December). Read the full report Personal Income and Outlays – November 2020. The highlights are listed below. 

  • Personal income decreased by 1.1% in November. However, income has increased by 6.2% since the first quarter.
  • Personal consumption expenditures fell 0.4% in November. The first drop since April, shortly after the pandemic started.
  • November’s personal consumption expenditures price index increased 1.1% over the prior 12 months, while the core price index rose 1.4%.
  • The personal savings rate equaled 12.9%, which is down significantly from the 20%+ rates early in the pandemic, but still higher than the typical 7% range.

Consumer Price Index (CPI)

The inflation news is mixed. The CPI-U, which covers all items, is gaining strength. Since October, prices have increased at an accelerated rate, but the core index, which excludes energy and food prices, fell in December. Higher gasoline prices contributed the most to December’s CPI-U. Emerging from the pandemic has increased the demand for many goods and services and contributed to modest inflation. Read the full report Consumer Price Index – December 2020. The highlights of the report are listed below. 

  • The consumer price index for all urban consumers, CPI – U, increased 0.4% in December, twice as much as in November. Prices increased by 1.4% over the prior 12 months.
  • Gasoline prices jumped 8.4% and accounted for 60% of the increase in the CPI.
  • The core index, which excludes food and energy, increased by 0.1% following a 0.2% in November. Over the prior 12 months, core prices have increased by 1.6%, as it did in November. 
  • Energy prices fell 7.0%, while food prices increased 3.9% during 2020.


The jobless rate was unchanged in December, but more people were cut from payrolls because a surge in COVID-19 cases forced many communities to reestablish containment measures for restaurants, bars, and hotels. These industries lost 498,000 jobs. State and local governments cut workers as they continued their struggles in balancing their budgets following a drop in tax revenues and increased expenses. Fortunately, industries with less personal contact continued to add jobs, reducing the net loss to 140,000 people. The highlights from The Employment Situation – December 2020. are listed below. 

  • The unemployment rate remained at 6.7 % in December.
  • 140,000 people were subtracted from payrolls in December, marking the first time since March that employment decreased.
  • The leisure and hospitality industries lost 498,000 jobs. Employment in private education and government dropped 63,000 and 45,000 respectively.
  • The industries with the largest increase in employment included professional business services (+161,000), retail (+121,000), construction (+51,000), and transportation and warehousing (+47,000)
  • 10.7 million people remain unemployed.
  • U-6, the broader measure of unemployment, fell from 12.0% in November to 11.7% in December. The U-6 rate includes part-time workers who would prefer to work full-time and discouraged people who would like a job but gave up looking.  

Summary and Analysis

COVID-19 was 2020’s most important story and will continue to be so for as long as the number of cases continues to rise.

Source: Center For Disease Control And Prevention 1-10-2021

The failure to contain COVID-19 has prolonged the economy’s recovery and will determine 2021’s direction. Higher Rock Education’s 2021 predictions assume COVID-19’s influence continues in the first quarter. Vaccinations of most of the general population will boost public confidence and spur renewed economic activity in the second half of 2021. The vaccinations are also successful at deterring the spread of the most recent mutated COVID strain. Continued fiscal stimulus under the Biden administration and the new Congress has been assumed for our 2021 predictions. 

2020 Scorecard and 2021 Predictions:

The US economy contracted approximately 2% in 2020 but increased at a record clip in the third quarter. Most economists expect little or no growth in the fourth quarter. (The BEA will release its advance estimate of growth in the fourth quarter on January 28th.) Growth will be modest in the first half of 2021. Household income has decreased in four of the past seven months, but it remains higher than before the pandemic because of the $3 trillion government assistance payments in March. Higher incomes helped sustain consumer spending until December when it fell for the first time since April. A sustainable recovery depends on growth in consumer spending. The recent $600 checks and additional fiscal stimuli will bolster consumer spending into 2021. President-elect Joe Biden and the new Congress are likely to increase the stimuli further.

Service industries will continue to struggle because people will remain reticent about dining out and traveling. Households have money to spend when the pandemic ends. Rising incomes and being constrained have combined to increase savings. Americans have over $2 trillion in savings, nearly double the amount they had when the pandemic began, according to the Federal Reserve (FRED Personal Savings). Vaccinations will release a pent-up demand. People will venture out, resulting in a sustained increase in leisure activities and the revival of service industries. Americans will celebrate the end of the pandemic and spend some of their savings! Higher Rock Education predicts the US economy will grow 3.5% in 2021, but by the end of the year, the economy will be booming at an annual rate of 5%.  

The US economy lost 9.4 million jobs in 2020, and at the end of the year, five million more people were unemployed than in February, when the pandemic began. Payrolls shrunk in December for the first time since March. But the cuts were limited to service industries, which continue to suffer the most from pandemic-related shutdowns. Companies in industries less impacted by COVID-19 hired, including manufacturing, retail, professional and business services, and construction. Many businesses had trouble finding employees. Why? Because the pandemic prevented approximately 4.6 million people from looking for a job. They had to remain home with a child who could not attend school or daycare or feared getting sick.

Fortunately, the employment situation will improve in 2021, mainly because service workers will return to their jobs. Schools and daycares will reopen so that many workers will return to work. Yet, many of the long-term unemployed will remain unemployed. Over 100,000 businesses have closed permanently. (Bloomberg reported that included 100,000 restaurants.) It will take time to replace those businesses. In December, 15.8 million people reported that they lost their jobs or worked fewer hours because their employer closed or cut back.

Inflation will once again become a concern in 2021. A growing aggregate demand will pull prices higher. The rate of inflation increased in the second half of 2020. A large reason for the low annual rate is prices declined between March and May. Prices rose 2.1% in the second half of 2020.

Fiscal and monetary policies will remain accommodative during the first half of 2021. Expect additional stimulus checks and continued supplemental unemployment insurance. Congress will also add measures to assist states who suffered a drop in tax revenues while dealing with escalating costs associated with health care. The Federal Reserve has repeatedly reported that it will maintain interest rates near zero until unemployment returns to acceptable levels. Many businesses will take advantage of the lower rates by investing in expanding operations, anticipating a rebound. However, fiscal policy will become less accommodative as 2021 progresses. Congress will grapple with the unsustainable growth in the budget deficit once the economy recovers. The impact of these measures will be felt immediately in the stock markets, but they will not slow the pace of growth until the second quarter of 2022.

The health care community and scientists have done their part by developing a vaccine, which will save lives and shorten the pandemic-driven recession. As more people are vaccinated, a pent-up demand will be released. People will celebrate and begin to travel, visit their friends and family, dine at their favorite restaurants, attend movies, and other events. Workers will return to their offices. Employment will increase. As mentioned above, by 2021’s third quarter, the US economy will be booming!

That mask looks good on you!

Stay Healthy 

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