For guidance, instructions, rubric, and sample formatting go to Modules > Research Paper

Surname 1

Name

Tutor

Course

Date

COVID-19 on the U.S. Economy

In January this year, the IMF estimated that the world economy would grow by 3.3% in 2020 (FAO 1). However, the situation has been the opposite as the global economy fights the ongoing outbreak of COVOD-19 disease. A predicted growth has now turned to a recession as most economies enforce lockdowns to contain the virus. Domestic productions have dramatically decreased to the lowest point in modern history. President Trump had suggested that the American economy would be on track again by April this year, but the situation has not materialized. Even as economies try to open up, they are faced with a resurgence of the outbreak, and the U.S is not unexceptional. The virus has disrupted the supply chain for U.S manufacturers and increased the cost of production. The impacts have been felt heavily in the U.S. labor force as millions of employee file for unemployment insurance. In response to these disruptions, the U.S. government has borrowed about $3tr to cushion both consumers and producers. However, this high debt may have negative implications in future economic growth. In the following discussion, the economic impacts of COVID-19 are analyzed in detail. The discussion hypothesizes that the virus has negatively impacted domestic production, causing a severe economic recession in the U.S.

The outbreak of COVID-19 disrupted the global supply and demand. The U.S is among the global leaders in the market has been impacted negatively. The containment measures in the country have disrupted the mobility of people and goods, which is estimated to reduce 30% in foreign direct investment. Between mid- March and mid-June, 46 million Americans had filed for unemployment insurance (Jackson et al. 2). In May, 20 million people had already lost their jobs to join more than 23 million unemployed people. The country is now faced with acute unemployment of 14.7%, which is considered as the highest since the Great Depression. These statistics satisfy the Okun's law that provides that annual GDP growth of 4% is required to minimize unemployment by 1% (Jackson et al. 2). This implies that even after the U.S economy opens, unemployment will remain high for a long time. Unemployment tends to rise exponentially when the GDP is triggered negatively. Currently, most companies in the U.S are under recession as they face stagnation, falling revenue, and heightened pressure to service debts. The companies have been responding to these challenges by laying off the workers as a cost-cutting strategy. The percentage of unemployed workers spikes across most of the industries simultaneously. New unemployed people find challenges finding jobs, and the average length of unemployment for the nation increases.

In the U.S., consumption makes up to 70% of the GDP (Vinelli et al. n.p). The advert of the virus has decreased the purchasing power for households as well as companies. Businesses are holding investments in speculations for better times of investment. Industries such as restaurants, recreation, and entertainment amount to 4.2% of the GDP (Miller n.p). These industries have remained closed until quarantine will be lifted. The manufacturing industry contributes to 11% of the GDP, although most companies in this industry have shut their operations due to the disruptions in global supply chains and reduced demand. When the return on investment in the business is not more than the cost of that investment, companies are left with no choices but to stop their operations. It implies that they do not have adequate revenue to cover their variable costs. Stopping activities is a strategic move that includes businesses from losing more revenue. When large companies take such a move, the effects can be felt in the economy. For example, General Motors and Ford have not been operational in the U.S since the outbreak of COVID-19. The result has been massive retrenchment, loss of revenue to the government, and reduced circulation of money in the economy.

The U.S has suffered tremendous shipping costs due to the outbreak. The U.S. and China are great trade allies with the bulk of goods demanded and supplied between the two economies. The shipping industry between the two countries started to feel the impact of the virus in late 2019, and both exports and imports of the U.S have ever since experienced dramatic declines. For example, Wuhan is an epicenter for many U.S. manufacturing firms, including Apple. The lockdown translates to halted manufacturing and disruption of the global supply chain, with the U.S being impacted disproportionally. The shipping from China has decreased by 22% in 2019, the lowest level in four years. The problem has had ripple effects that are projected to persist past 2021 (Vinelli et al. n.p). The decrease is approximated at 17 million twenty-foot equivalents (TEU). The challenge has reduced the volume of shipment, especially for companies. A few firms that have been operating in the U.S have experienced strained business environment. For example, the country imports various goods and materials for production from China. Some of the imports include telecommunication devices and appliances for assembling these devices. The increased cost of shipping translated to additional expenses for the company, which is not supported by the high demand (Vinelli et al. n.p). The results have been a lack of profitability in the production and low return on investments. These challenges can explain the pressure that has been pushing businesses to close their operations temporarily.

COVID-19 has impacted negatively on corporation savings. Since the outbreak, the U.S nonfinancial corporate debt stands at $10 trillion (BBC n.p). The figure is a historic increase from $4.8 trillion in 2003. Statistics show that the world's major economies, including the U.S, have the highest debts in the past century and a half. The country approved a debt of $3 trillion to fund curbing the virus in aspects such as health funding and direct payouts. The debt places the U.S as among the world’s largest borrower with a total debt of $25tn (BBC n.p). By 15 of April, the country had spent 14% of its annual budget on programs that are directly related to COVID-19. High debt is associated with increased taxation to service these loans. It is expected that after the crisis, the U.S. may revise its taxation policy upwards to cater for its expenditure and finance the loans simultaneously. The heavy service payment reduces government expenditure and retards economic growth (Ejigayehu and Persson 15). It implies that the economic impacts of COVID-19 will be long term. Even after the economy opens and business operations resume, the U.S. may experience retarded economic growth since significant resources and efforts will be channeled towards servicing the debts.

In the initial phase of the health crisis, most households did not experience significant economic challenges, such as those encountered in the 2008-2009 economic recession (Jackson et al. 15). However, a chain of issues has been experienced as the virus's impacts continue to hit the country. The purchasing power of households has decreased dramatically due to unemployment and poor business performance for small and medium-sized enterprises (SMEs). The economy now is characterized by delinquencies in rent payment and default on mortgages. These problems have spilled over to the equity market that has lost value.

In March this year, the Federal Reserve reduced key interest rates to almost zero in response to the damage that the pandemic is causing the GDP (Jackson et al. 20). The interest rates aimed to cushion communities and businesses that had been affected. The government also demonstrated its commitment to using all the available tools (monetary and fiscal) to cushion the economy from the intensity of COVID-19 disruptions. The move included using $700 billion to purchase Treasury securities and extend repurchase operations (Jackson et al. 21). The monetary and fiscal policies laid out by the U.S government are expected to have an overlapping goal. They will create an economic environment for stimulating and sustaining growth. These measures will steer the economy and prevent a scenario of a boom that is followed by another recession with a long term goal of stabilizing the economy.

Conclusion

COVID-19 is continuing to disrupt the stability of the U.S economy. The longer the virus will persist, the greater the damages are likely to be experienced. Almost every industry is impacted negatively, with companies suffering decreased productivity. The U.S is currently undergoing a historical unemployment rate that may persist even post COVID-19. However, the government has been cushioning the economy from extreme disruptions through fiscal and monetary policies.

Works Cited

BBC. “Coronavirus: US to borrow record $3tn as spending soars.” BBC, 4 May 2020.bbc.com/news/business-52537938

Ejigayehu Dereje. A and Persson Joakim. “The Effect of External Debt on Economic Growth: A Panel Data Analysis on the Relationship between External Debt and Economic Growth.” 2013. diva-portal.org/smash/get/diva2:664110/FULLTEXT01.pdf

Food and Agriculture Organization (FAO). “COVID-19 Global Economic Recession: Avoiding Hunger Must be at the Center of the Economic Stimulus.” 2020.fao.org/3/ca8800en/ca8800en.pdf

Jackson James. K, Weiss Martin. A, Schwarzenber Andres. B and Nelson Rebecca, M. “Global Economic Effects of COVID-19.” Congressional Research Services. 2020. fas.org/sgp/crs/row/R46270.pdf

Miller Chris. “The effect of COVID-19 on the U.S. Economy.” Foreign Policy Research Institute.fpri.org/article/2020/03/the-effect-of-covid-19-on-the-u-s-economy/

Vinelli Andres, Weller Christian. E and Vijay Divya. “The Economic Impact of Coronavirus in the U.S. and Possible Economic Policy Responses. Center for American Progress. 6 March, 2020. americanprogress.org/issues/economy/news/2020/03/06/481394/economic-impact-coronavirus-united-states-possible-economic-policy-responses/