Anybody who has recently picked up a newspaper now knows that the U.S. economy ended a 10-year period when, through that period of time, it continually grew.
This all came to an abrupt halt in the first three months of 2020, when the GDP contracted by 4.8 percent on an annualized basis. This economic news is not good; more sobering is the prediction, by most economists and other experts, that this contraction will be followed by an even more severe downturn in the following three months, when the fuller effects of the shutdown due to COVID-19 are manifested.
It is good to know that the Federal Reserve is actively pursuing steps that can be used to bolster the economy. It has initiated policies to keep interest rates near zero, and pledged to use monetary policy tools to support the economy.
Among those tools is the continued buying of bonds, the result of which would be the provision of many funds to the banks so that they can continue to loan funds to ordinary customers and businesses. It is a bitter irony that in order to deal effectively with the coronavirus, U.S. policymakers have been forced to take steps that result in the shutting down of the economy. Keeping social distance, avoiding crowds, shutting schools and discouraging people from leaving their homes have helped to keep people safer.
Unfortunately, these steps have not been enough to fully prevent the transmission of COVID-19. The Wall Street Journal described the economic slowdown in specific terms:
“Nearly everything in the private economy contracted. Personal spending subtracted 5.3 percentage points from GDP, with most of that coming from the shutdown in restaurants, retail, non-COVID-19 healthcare, and the rest of the service economy. Spending on goods held up better subtracting 0.27 points, but expected a much bigger decline this quarter. Private investment took away nearly a percentage point from growth. Overall, the economy shrank by $234 billion to a little under $19 trillion. The second quarter could see GDP fall below $18 trillion.”
It is obvious that the economy is suffering; that suffering will continue and grow worse as the economy continues to be partially shut down. Various economists and analysts can see a future where, for a while, the U.S. government will have a bigger say in what is produced, and it is a bigger factor in the running of the economy than usual. The important thing is that the federal government and the Federal Reserve are already trying to forge fiscal and monetary policies that will eventually lead to an economy that will allow markets to operate with some measure of freedom and encouragement of innovation. This will not be done quickly.
Author and educator Dave Kaplan writes from his home in Santa Barbara, Calif.