There is widespread agreement that the $1.8-trillion economic recovery package that went into effect in March — the Cares Act — averted economic disaster after the coronavirus pandemic began. But even that conventional view understates its true success.
With each passing month, the evidence mounts that the Cares Act performed better than even its strongest advocates thought it would. Perversely, its success is undermining the perceived need for Congress to provide additional support. Households, workers and small businesses will bear the brunt of the lethargy among both Democratic and Republican congressional leaders.
One way to see how strikingly the Cares Act exceeded expectations is to look at evolving professional forecasts of future economic performance. On May 15, about six weeks after the Cares Act was signed, the Survey of Professional Forecasters’ median prediction for third-quarter gross domestic product growth was an annual rate of 10.6%, and forecasters expected a 12.9% unemployment rate. On Aug. 14, forecasters expected even faster improvement. The median prediction for third-quarter GDP growth was 19.1%, with a 10% unemployment rate.
What actually happened was far more impressive. Third-quarter growth clocked in at a 33.1% annual rate, and the unemployment rate fell to 7.9%.
Or consider all the talk last spring of a “second Great Depression.” That was a reasonable concern in April and even in May. But now that level of anxiety has largely evaporated from the public discourse, replaced by headlines this fall touting the economy’s surprising strength.
When the Cares Act passed in March, the conventional view was that the economy would incur damage that would take years to work through. In March and April, 22 million workers lost their jobs, threatening to create a prolonged period of labor market distress. A wave of bankruptcies was expected that would wipe out healthy businesses, with the economy wastefully losing their networks, relationships and knowledge. Fewer businesses would mean fewer job openings, making it harder for unemployed people to find work, deepening the labor market’s challenges and reducing household income. The Cares Act was expected to mitigate the damage, but not to stop it.
Remarkably, the extent of this type of deeper, longer-term damage is limited so far. The unemployment rate is much lower than was expected this spring, and temporary layoffs do not seem to be turning into permanent separations. Business continuity suggests that labor demand will be strong in 2021. Small-business closings largely proved temporary. New businesses are forming at a surprising rate. Commercial bankruptcy filings are below pre-virus levels.
With the benefit of hindsight, the Cares Act’s impact is remarkable. The economy was producing over $2 trillion less in the second quarter than its underlying fundamentals suggest it should, but that gap fell to less than $1 trillion in the third quarter. Economic output shrank by 9% in the second quarter relative to the first quarter. But over the same period, as the economy was violently contracting, disposable household income increased by 10%. The personal savings rate shot up to 34% in April, creating a cushion for households that is paying dividends today.