It is no question that COVID-19 brought challenges to the world that we haven’t experienced in modern times. Not only did COVID-19 bring severe health challenges and concerns to the surface, but COVID-19 also created incredibly challenging economic times.
With high unemployment rates, frequent layoffs, and businesses that were closing nearly every single day, the United States realized they needed to react. The federal government did something unprecedented by issuing $1,200 stimulus checks to millions of Americans in April 2020.
Let’s take a look at the effect this had on the economy. We’ll also look into whether or not we should expect another stimulus check.
What was the federal government’s reasoning?
Before addressing the impact that the $1,200 stimulus check had on the economy, let’s first visit why the government chose to react in this fashion.
The first stimulus check was issued in April of 2020, which was right at the start of the strict COVID-19 lockdowns. In April of 2020, the United States saw an unemployment rate of 14.8% which was the highest unemployment rate the U.S. has seen in a long time. The United States needed to address both the health risks that COVID-19 posed and the economic risks that were unfolding as a result of the pandemic.
The United States believed a stimulus check for qualifying taxpayers would offer two main benefits:
- Provide a financial cushion for those who have lost their jobs
- Provide an incentive for people to spend money, which would stimulate the economy
The added benefit of this would be fewer businesses would need to close, so fewer people would be laid off.
Did the $1,200 check help?
The $1,200 stimulus check had a big impact on the economy. Despite rising COVID-19 cases, the unemployment rate in the United States started to decline as well. In May of 2020, the U.S. unemployment rate was 13.3%, down from its high of 14.8% in April. In June of 2020, that figure continued to decline, ultimately reaching 11.1% at its lowest.
The additional money that Americans had was being put to use. The increase in consumer demand created the need to keep people employed in plenty of industries and allowed businesses to survive. There is without question, the $1,200 stimulus check immediately stimulated the economy, but it wasn’t the only driving force.
Interest rates were slashed
In addition to the stimulus check the United States government slashed the interest rates on loans. This was another driving force to keep the economy up and running during unprecedented times.
Lowering the interest rate means it’s cheaper for a consumer to borrow money. This further led to an increase in consumer demand, which led to numerous industries seeing a dramatic increase in their volume of orders. Some of the industries that saw the highest surge in volume included the automobile industry, the housing market, and the furniture industry.
The automobile industry
With the money from the stimulus check and reduced interest rates, more and more people started purchasing new and pre-owned vehicles. Not only did this industry see a boom because of the reaction from the Federal Government, but people were less willing to take public transportation due to the health risks that it presented. In turn, many found themselves in need of a car.
The housing market
The housing market also saw a massive surge as a result of the pandemic. More and more people were leaving heavily-populated cities in search of the suburbs. This resulted in housing prices skyrocketing as a result of the basic economic principle, which is supply and demand. In addition to the fire that was already started due to people flocking from cities, the lower interest rates on mortgages only further incentivized people to purchase a home.
The furniture industry
Free money from the stimulus check, low-interest rates, and a new home is a great recipe for the furniture industry to see an uptick in demand. Big box furniture stores had a tough time when it came to keeping furniture in the showroom, considering the demand they saw shortly following the initial stimulus check.
Potential side effects of the stimulus check
Despite the tremendous benefits the stimulus check had on the United States economy in 2020, many are questioning if there are lingering side effects. After all, this was essentially free money that the government provided, but as the saying goes, there’s no such thing as a free lunch.
In the months that followed the various stimulus checks, we’ve seen inflation grow at a rapid rate. According to the CPI, some expenses were raised by more than 30% year over year (YOY).
Correlation does not mean causation. However, there are many reasons why someone might believe that the stimulus check payments played a role in the seemingly subsequent increase in consumer prices. However, there is more to it than what meets the eye initially.
Behind the scenes, supply chains were crippled. This made importing or exporting products significantly more challenging, and those challenges brought additional expenses. Combining severe supply chain disruptions with the stimulus check were two driving factors to the increased prices the consumer base has seen.
Should we expect a stimulus check in 2022?
If you’ve been following the news, you’ve likely heard talks about a 4th stimulus check being issued, or a stimulus check for 2022. As of right now, there is no guarantee that a stimulus check in 2022 will happen.
However, there are many reasons why this may make sense. The new COVID-19 variant, Omicron, is spreading rapidly. According to Johns Hopkins, the country is experiencing an infection rate of 20% and more.
If history repeats itself, this is what we saw in April of 2020, and shortly following this staggering statistic came the first stimulus check. There are many politicians who are encouraging another round of stimulus checks.