The economy's gone from strength to strength after the pandemic — but no one quite knows why, or what comes next

• America has gone from a pandemic crash and recession fears to stocks at record highs and an economic boom.
• Lockdowns, wars, shortages, inflation, interest rates, day trading, and AI have all played a role.
• Here's a look at how we got here — and what might be coming next.

We've been on a strange journey over the past four years.

First there was a deadly pandemic that crashed financial markets and tanked the economy, then spiraling inflation and surging interest rates that squeezed households and roiled industries, and now stock markets at record highs and no recession in sight.

So how did we get here — and what lies ahead in 2024 for the US economy?

Going viral

The COVID-19 pandemic struck in early 2020, spurring widespread lockdowns, travel restrictions, and shuttering businesses.

Global supply chains quickly became snarled by mass closures in countries like China, shipping delays, clogged ports, labor shortages, and other headaches caused by the virus and measures to stem its spread.

Frightened investors dumped stocks in droves, sending the S&P 500 down by a third in just over a month. The shutdown of large swathes of the economy meant GDP contracted by 8% in a single quarter. Unemployment surged from 3.5% to nearly 15%, and remained above 10% for four consecutive months.

The Federal Reserve rushed to shore up the economy by slashing its benchmark interest rate from upwards of 1.5% to between zero and 0.25%. It also ramped up its bond purchases to inject more cash into the economy.

Similarly, the US government scrambled to help by mailing stimulus checks to households, offering generous loans and grants to ailing businesses, and rolling out a raft of emergency-spending programs.

The panic quickly faded on Wall Street, and institutions raced to scoop up bargains. There was also an explosion in day trading that continued throughout 2021, fueled by people being stuck at home with limited leisure options but stimulus checks to spend, along with the rise of zero-commission trading apps such as Robinhood and forums including WallStreetBets that encouraged risky trading for the entertainment value.

The upshot was that casual investors flooded into meme stocks, cryptocurrencies, special-purpose acquisition companies (SPACs), and other highly speculative assets.

Some wanted to make a quick buck. Others were eager to thumb their noses at hedge funds and the like, or ride to the rescue of GameStop, AMC Entertainment, and other heavily shorted companies they remembered fondly from their childhoods.

Many Americans also socked away money during the pandemic, as they saved on expenses like travel and live entertainment.

War, prices, and rates

Fast forward to the spring of 2022, and Russia's invasion of Ukraine delivered a fresh shock to global supply chains, causing essentials like food and energy to surge in price.

Stimulus-fueled demand, combined with pandemic and war-related supply disruptions, caused inflation to spike to a 40-year high of 9.1% in June that year.

The Fed swiftly raised interest rates to rein in the price growth, lifting them from virtually zero to upward of 5% in under 18 months, and hasn't touched them since.

Higher rates typically curb spending, investing, and hiring, which can lead to unemployment jumping and the economy slowing so much that a recession takes hold.

They also tend to pull down the prices of risky assets like stocks and real estate. That's because they bolster the ultra-safe yields from Treasury bonds and savings accounts, leading investors to swap potential returns for a guaranteed payday.

Financial pain builds

American households faced a double whammy of soaring food, fuel, and housing costs as inflation took off, along with surging monthly payments on their mortgages, car loans, credit cards, and other debts as rates rose.

As a result, they began cracking open their pandemic nest eggs, racking up record amounts of credit-card debt, and putting away less money each month.

That trend threatened to result in consumers running short of cash and spending less on goods and services. At the same time, companies were dealing with larger interest payments on their debts, cost inflation, labor shortages, and other problems.

The housing market also ground to a halt last year after mortgage rates jumped above 7% for the first time in more than two decades. Prospective sellers held off on listing their homes as they didn't want to give up the low rates they'd locked in. Potential buyers balked at paying top dollar for a home and coughing up a much larger monthly payment than they expected.

Silicon Valley Bank was one of several smaller lenders last spring to be caught off-guard by the rate hikes, which triggered large paper losses in its portfolio of bonds and mortgages.

Depositors, spooked by the declines and fearful of losing their money, frantically withdrew their cash, causing the banks to collapse and prompting the federal government to take them over and guarantee their deposits.

Higher rates, combined with the shift to remote work, have also hammered the value of offices and other commercial real estate.

The industry now faces a triple threat of declining property values, a credit crunch as embattled regional banks pull back from financing the sector, and onerous interest payments for debt-reliant developers poised to refinance at much higher rates.

Defying the doomsayers

Despite all those headwinds, the US economy grew by a solid 3.3% last quarter on an annualized basis, unemployment remained at a historically low 3.7% in January, and inflation has dropped below 4% in recent months.

Consumer spending and company profits have also held up, defying concerns of a demand slump and an earnings recession.

There's also widespread excitement about AI's potential to supercharge productivity. In addition, the Fed has signaled it will pivot to cutting rates this year, easing pressure on sectors such as banking and real estate while also reducing the risk of a recession.

Against that rosy backdrop, it's little wonder that the S&P 500 has climbed 5% this year to a record high of over 5,000 points, after soaring 24% in 2023.

It's still unclear why exactly America is seemingly thriving, when other countries like the UK are facing stickier inflation and have slumped into recession.

The surge in prices may truly have been transitory, a product of the pandemic driving up demand for goods at a time when supply chains couldn't deliver them.

Or inflation might be the result of growth in the money supply, and its decline last year has set the stage for an economic downturn.

Massive government outlays in the form of stimulus checks, student-debt relief, and infrastructure and technology programs may have propped up growth and employment, forestalling a recession.

Advances in AI may have multiplied the value of the "Magnificent Seven" stocks and pulled the entire market higher, or the tech might be overblown and a bubble destined to burst.

In short, everything might be hunky-dory and the good times will just keep rolling. Alternatively, years of hype, speculation and irrational exuberance combine with unsustainable amounts of spending and borrowing in both the private and public sectors to doom the stock market and economy to disaster.

While nobody can be certain what's coming, understanding how we got here may help us understand the potential risks ahead.