U.S. outlook for 2021.

• Author: Witte, Willard E.

A year ago, we expected that 2020 would represent another good year for the economy with output growth of about 2%, accompanied by solid employment growth and continuing record-low unemployment. That seemed to be working out early in the year, but then the world was pushed down the rabbit hole by COVID-19. Since then it has become trite to say that we are in uncharted territory. But it is also true --and especially when it comes to the economy.

In the first quarter, state and local governments mandated a shutdown of much of the economy. This resulted in a significant drop in first quarter output, followed in the second quarter by a huge 31.4% decrease (see Figure 1). This is the largest one-quarter drop on record by nearly a factor of four.

In the labor market, 2020 started in a really good place. The first two months of the year saw 465,000 new jobs (see Figure 2). Unemployment came in at just 3.5% in February, a five-decade low (see Figure 3). Declines in unemployment were particularly notable among minority workers and those with lower levels of education. But in March, as the shutdown began, employment fell by over 1.3 million (the largest monthly decrease on record) and unemployment rose by 0.9 points. And then in April things really got cruel. Job loss was over 20.7 million--25 times the highest pre-COVID-19 rate--and unemployment rose to 14.7%. The impact was heaviest for those on the lower rungs of the economic ladder.

Beginning in May, as the artificial constraints began to be lifted (and the government enacted totally unprecedented stimulus), the economy has come back in dramatic fashion. Through October, it has regained 12.1 million jobs and the unemployment rate decreased by 7.8 percentage points. Third quarter growth in output was the largest ever one-quarter increase.

However, as good as these numbers are, they fall well short of a full recovery. The third quarter output level is 3.5% below that in the fourth quarter of 2019. This is nearly equal to the situation at the low point of the 2008-09 Great Recession. Employment is still off by over 10 million. By comparison, at the low point of the Great Recession, the economy had lost 8.7 million jobs.

So where do we go from here? The honest answer is that no one knows. The past six months are in no way a normal recession/recovery. They are a shutdown/restart. Patterns from our history of normal business cycles are essentially irrelevant. This means that ordinary...