The national economy suffered its worst freefall last year since the end of World War II as the effects of a worldwide pandemic hit the nation’s business and industry.

While Washington and the Spokane area fared better, local economists predict the area’s reliance on service-sector jobs translates into an uncertain path to recovery.

U.S. gross domestic product, or GDP – the nation’s total output of goods and services – declined 3.5% last year, the government reported Thursday. That economic damage and the deep recession it triggered left tens of millions of Americans jobless.

While the economy, especially locally, rebounded somewhat last summer, it mostly stalled again as the virus surged toward the end the year.

Still, the national GDP numbers exceeded what economists predicted only months ago, said Patrick Jones, executive director of the Institute for Public Policy & Economic Analysis at Eastern Washington University.

“My general sense is that Spokane did a little better in terms of the response to the recession caused by COVID than the state as a whole,” Jones said. “And the state as a whole has done better than the country.”

But a quick return to the number of jobs and economic activity in the Spokane region to 2019 levels will be challenging, Jones said.

“We’ve had growth in a lot of sectors in the service economy in the last 10 years,” Jones said. “Spokane has always had a strong retail sector and growing hospitality businesses. That includes restaurants, bars, hotels and motels.

“Of course, those are the worst-hit segments in any economy due to the pandemic,” Jones continued. “From the jobs point of view, I’m not terribly optimistic that we are going to gain the jobs we had in 2019 by 2021. It’s more like 2022.”

Nationally, economists warn that a sustained recovery won’t likely take hold until vaccines are distributed and administered and government-enacted rescue aid spreads through the economy – a process likely to take months. In the meantime, millions of Americans continue to struggle.

On Thursday, for example, the government reported that while applications for unemployment benefits declined last week, they remained at a historically high 847,000, evidence that companies keep cutting jobs as the pandemic continues to rage.

Before the pandemic erupted in the United States in March, weekly applications for jobless aid had never topped 700,000, even during the Great Recession.

Even as the economy shrank last year, the stock market managed to increase sharply, with the S&P 500 index gaining 16%. The disparity between the two reflected a time-tested adage: The stock market is a forward-looking indicator, with investors focused on prospects for future corporate profits and economic health rather than on the current state of the economy.

The government’s report Thursday indicates that the nation’s economy in the last quarter of 2020 was driven in part by business investment and housing, which has been a star performer during the past year. Record-low mortgage rates have fueled demand for more housing.

That sector of the economy grew at a sizzling 33.5% annual rate and business investment grew at a 13.8% rate. Government spending, though, shrank 1.2% last quarter, which reflects state and local governments cutting staffs in response to falling tax revenue.

Grant Forsyth, chief economist for Avista Corp., said the Spokane region saw similar surges in housing demand, which pushed the cost of homes to record levels.

“I think we follow pretty closely with what the U.S. (economy) does as a whole,” Forsyth said. “We might, as a region, lead or lag a little bit, but we tend to follow pretty closely the activity in the U.S.”

However, the Spokane region had something driving housing prices that the nation did not: a growing number of people.

“Population growth in 2020 in our region was well over 1%. It was closer to 1.5% … which is almost entirely due to people moving to the area,” he said.

The nation’s population growth was more in the area of 0.3%, Forsyth said.

“That’s one of the reasons we have historically low inventories of houses for sale,” Forsyth said. “A lot of people are looking to buy a house. That places a lot of demand pressure on, particularly, single-family housing. The home price growth here has definitely been higher than the U.S. as a whole.”

However, higher housing prices have caused other problems, he said.

“If you are looking to buy your first home and don’t necessarily have a lot to put down, it definitely affects affordability,” Forsyth said.

Looking ahead

While the booming housing market and historically low interest rates have fueled a surge of refinancing and banking activity, Spokane-area homeowners still need jobs to pay for them.

Like EWU’s Jones, Forsyth said the region’s reliance on service-sector jobs will make a full recovery difficult anytime soon. About 7 in 10 local jobs fall into the service category.

“Any of those industries that thrive on social interactions are still way, way down from where we were in February 2020,” Forsyth said. “So, if you don’t see a recovery in services, it’s hard to see a recovery overall in employment.”

Just like elsewhere in the country, the local region saw a bounce back of economic activity last summer, Forsyth said.

“It’s clear that regionally and in the U.S. that there has not been significant employment growth in the last six months,” he said. “And that’s a problem.”

Jones agreed, saying consumers must again feel comfortable with personal interactions before a meaningful recovery can occur.

“This recession has been an unusual recession,” he said. “Those who could work remotely have been able to do so. However, those in the service industries that are implicitly personal and face-to-face have lost a lot.”

Nationally, the economic devastation is staggering. The pandemic’s blow to the economy early last spring ended the longest U.S. expansion on record – nearly 11 years.

The estimated drop in GDP for 2020 was the first such decline since a 2.5% fall in 2009, during the recession that followed the 2008 financial crisis. That was the deepest annual setback since the economy shrank 11.6% in 1946, when the economy was demobilizing after World War II.

The GDP report showed that President Donald Trump ended his presidency with GDP averaging annual gains of 1% during his four years. That was lower than the 1.6% annual GDP gains during the Obama administration, a period that also included a recession.

Vaccine rescue

As vaccines become widely distributed and administered in the coming months, economic growth is expected to return.

Until then, many Americans will struggle as consumers and businesses hunker down and hold back on spending even though the economy will likely keep growing.

Gregory Daco, chief economist at Oxford Economics, said he expects growth to weaken in the current quarter to a roughly 2% annual rate.

But Daco foresees a brightening outlook for the rest of this year. His view assumes a widespread use of vaccines, increased government aid from Congress’ approval of at least part of President Joe Biden’s $1.9 trillion relief package and pent-up spending from a savings buildup among higher-income families during the pandemic.

A $900 billion rescue aid package that the government enacted late last year is also providing some support.

“The vaccine rollout is essential,” Daco said. “Without an improving health situation, we are not going to get any improvement in the economic situation.”

Daco said he thinks an economic rebound will produce annual growth this year of 5%. Earlier this week, the International Monetary Fund forecast that the U.S. economy will grow 5.1% this year and 2.5% in 2022.

Mark Zandi, chief economist at Moody’s Analytics, predicts that about 5 million lost U.S. jobs will never return, forcing the unemployed in such industries as restaurants and bars to find work in other sectors.

And many economists warn that without further government financial support, the economy risks succumbing to another recession.

Avista’s Forsyth agrees that government intervention will be a key factor in restoring Spokane’s economy.

“At this point, my expectation is we should see much better GDP growth in 2021,” he said. “The first quarter won’t look good, so the growth will have to come in the last three quarters. Part of that is directly related to the slower-than-expected rollout of vaccines.”

One wild card in the predictions will be how newly surfacing variants of COVID-19, which appear to be more contagious, respond to inoculations.

“The good news is that Congress passed a second round of fiscal stimulus,” Forsyth said. “That’s going to be very important getting us through the first quarter of 2021.”

Any further government aid funding will depend on the success of renewed efforts to distribute the vaccines, he said.

“It’s ultimately that vaccine and that immunity that will allow people to get back to a normal economic life,” Forsyth said.

The Associated Press contributed to this story.