The Economic Recovery
Finally some good news
When the US economy tanked as a result of the great financial crisis in 2008 it took over a decade for the economy to rebound to pre-crisis levels, only to get hit again hard a few years later by the Covid pandemic, which shut down major parts of the US and global economy. But we are now 15 months on from the dark days of March 2020 and the US economy is roaring back to life. (This is less true other parts of the world, however.) US GDP growth may hit 7% in 2021 (Fed estimates) and the US unemployment rate is rapidly moving toward pre-pandemic levels. (The US unemployment rate in May 2021 was 5.8%, down from 14.9% in April 2020 but still a ways off the low of 3.5% in January 2020.) We are still 7mm jobs short of pre-pandemic employment levels (146mm vs 153mm), but we have to remember that the employment impact of Covid (23mm lost jobs in the US) was much larger than that of the financial crisis (8.5mm jobs lost). And the job losses have not been not limited to the US of course; by some estimates as many as 4x as many work hours were lost globally as a result of Covid compared to the financial crisis. And some measures of US social inequality are also starting to move in a positive direction, including the disparity in black-Hispanic-white unemployment, which was at record lows prior to Covid.
Why the big difference in economic recovery rates following Covid vs the financial crisis? Well a big part the difference in GDP growth rates is due simply to the more favorable base of comparison in 2021 vs 2009/10. US GDP fell 8.4% in Q4 2008; in Q2 2020 it fell 31.4%! So yes, the annual rate of GDP growth may hit 7% in 2021, but this is off a very low base of comparison. It’s great that the US economy is again growing, but let’s not kid ourselves about where we are in absolute terms.
And yet the US economy does seem to be doing well, even in absolute terms So why is this? There are no doubt many reasons, but a big one is that the economic contraction during Covid was to a large extent “manufactured”, that is it was the result of government-mandated shutdowns. I happen to think that some of this narrative is politically skewed and overstated, but this doesn’t mean it is without merit. For much of 2020, few people were prepared to fly, take cruises or eat out in restaurants with Covid spreading rampantly in the face of a disjointed public health response, but by the time Covid restrictions were phased out (prematurely in parts of the country and probably later than necessary in others), people were fed up and bursting with repressed economic energy. Result: a big pickup in economic activity. No real surprise there.
But the major reason for the big difference in economic recovery in the period following Covid is almost certainly due to the much more aggressive economic policy response from the US government, both at the Fed and the Treasury. (And also globally, without which the US wouldn’t be doing as well as we are.) The Fed eased credit conditions and flooded the economy with liquidity and the Treasury put a lot of cash in people’s bank accounts. If we look just at the size of the Fed balance sheet (government securities held at the Fed), it grew by about $2tn over 5 years following the financial crisis but increased another $2.5tn in just 14 months following Covid. And the US Treasury added another $2tn or so of fiscal stimulus in response to Covid, about double what it did following the financial crisis. I think it is fair to say that US policymakers in 2020-21 have thrown caution to the wind and have explicitly chosen to err on the side of “too much, too quickly” for fear of the long-term adverse economic consequences of a less aggressive policy response, demonstrating that we did actually learn something after our last financial crisis (or at least some of us did).
So where are we now? Consumers and investors are confident and they have good reason to be. US economic growth is strong, employment is rising, social inequality is easing (a bit), inflation is up but still within the Fed’s comfort zone, interest rates remain low, capital markets are vibrant and the stock market is again at an all-time high. So I think it is fair to say that the US economy is strong and recovering much faster than perhaps we had reason to expect. Life is not back to normal for everyone, of course, but we are getting there and doing so much more quickly than last time around.
For a good summary of the current state of the US economy, read this article from yesterday’s NY Times: https://www.nytimes.com/2021/07/02/opinion/june-jobs-report-us.html?action=click&module=Opinion&pgtype=Homepage
But of course nothing is ever as good as it seems. We are not “done” with Covid, or rather Covid is not done with us. The Delta variant is spreading rapidly across the world and in the US, vaccination rates vary hugely across the world and also within the US (over 60% in Massachusetts but only 35% in Georgia), and some businesses are going to be in a world of hurt when they have to pay markedly higher prices for supplies, higher wages to attract good employees and higher taxes to help pay for the Covid response (which is all that kept many of them in business following the shutdown).
So yes the US economy is doing well, very well, for now at least. And for this we can largely thank the Fed and the US taxpayer. But it won’t always be this way, so I guess we should all enjoy it now while we can.
My wife says I’m a pessimist by nature, and many students and colleagues would agree, but I don’t think that’s true. I’m really an optimist. The pessimist is the person who says “things are terrible; they couldn’t possibly get any worse.” The optimist is not so negative, and says “don’t be silly; of course they can” Yep, I’m definitely an optimist!
Happy 4th of July all!