The novel coronavirus pandemic has ravaged supply chains, livelihoods, and above all, human life and health. While the best strategy for managing America’s abrupt economic downturn is a subject of controversy, I think we can all agree that the virus has caused unprecedented economic crisis. The most rapid effect of the onset of COVID-19 outbreaks and the accompanying lockdowns was a negative shock to aggregate supply. Most US firms could not continue to produce output at the same level as before, causing a nationwide shortage of goods and services while simultaneously increasing the price level. US consumers were faced with empty shelves as they scrambled to acquire toilet paper and groceries. Goods like face masks and hand sanitizer were suddenly thrust into higher demand in ever before, but supply chains were ill-equipped to produce them.
The threat of price increases for household goods was short-lived, however. As households were placed in quarantine and businesses were forced to shut down, workers were laid off in droves, reducing household income. Reduced consumer spending caused by these layoffs only necessitated more layoffs from firms—retail spending dropped by close to 10% between February and March 2020 (Bauer 2020). A high unemployment rate, declining household income, and reduced consumer spending greatly reduced aggregate demand (see Figure 1), which drove down price level and GDP. While lenient COVID-19 management in the late spring and early summer helped to revive spending, it was nowhere near previous levels and national GDP was still in decline. Still, in December of 2020, unemployment remains high, spending is low, and cases are still out of control.
While shocks to the supply chain are cause for concern, the most pressing crisis is the loss of jobs for the American people and the lack of consumer spending, especially on small business. When the pandemic ends, supply chains will be able to recover as long as the majority of citizens are healthy, employed and can afford to consume goods and services.
References
Bauer, Lauren, et al. “Ten Facts about COVID-19 and the U.S. Economy.” Brookings, 17 Sept. 2020, https://www.brookings.edu/research/ten-facts-about-covid-19-and-the-u-s-economy/.