Brown on Business
January 11-17, 2021
Economic bellwethers show tepid recovery for stimulus-aid economy in 2021
By Wesley Brown
wesley@dailydata.com
There are several key economic indicators that signal how well the U.S. economy is doing, but nearly all go unnoticed by the average American consumer.
In a year that will be for decades to come, economic forecasters across the nation are plowing into year-end statistical data released by the economic research arms within key federal bureaucracies, including Departments of Commerce, Energy, Labor, Treasury, and Health and Human Services.
These key reports, usually released on a monthly or quarterly basis, highlight many of the factors that drive the world’s largest economy, including inflation, consumer spending, energy prices, home construction and sales, interest rates, construction starts, manufacturing demand, retail sales, and industrial production.
However, the quarterly Gross Domestic Product (GDP) report and the monthly “employment situation” stand out as the critical bellwether economic indicators that garner the most attention. These two reports, released by the Bureaus of Economic Research and Labor Statistics within the Departments of Commerce and Labor, respectively, underscore the progress of the nation’s quarterly economic growth and monthly job market totals.
President Donald Trump recently took credit for a record 33.4% leap in annual GDP growth from July through September to highlight their importance. That third-quarter GDP expansion, which measures the economy’s total output of goods and services, nearly doubled the previous record of 16.7% in the years following World War II in 1950.
“Thanks to President Trump’s leadership, America has the most resilient economy in the world. This morning, we learned that the economy grew 33.1% on an annualized basis in a single quarter, by far the largest in recorded history. The United States has now regained most of its pandemic-related loss of output, and we are exceeding all of the experts’ expectations,” said the White House after GDP data was released in late October and later recalculated in late December.
However, the White House did not acknowledge that third-quarter GDP expansion only recouped the 31.7% collapse in the second quarter. After nearly all 50 states shut down their economies, the V-shaped recession between April and June was three times worse than the previous record GDP decline, a fall of 10% in the first quarter of 1958 when Dwight Eisenhower was president.
Going into the first quarter of 2020 a year ago, U.S. economists were already predicting that GDP growth would dip into negative territory and end the most prolonged period of economic growth in American history before COVID-19 was declared a global pandemic. In the years after the Great Recession under former President Barack Obama and after President Trump took office in 2016, the U.S. economy expanded for 130 straight months from July 2009 until the last quarter of 2019, BEA data shows.
Obama first jumpstarted the U.S. economy with an $830 billion stimulus package, called the America Recovery and Reinvestment Act, to keep the banking and auto industries afloat following the 2008 financial crisis. For years, the economy hummed at about 3% annual growth until the Trump administration passed another stimulus bill in 2017 when yearly GDP growth crept fell to nearly 2%.
Trump’s Tax Cut and Jobs Act, which included a $1.7 trillion corporate tax cut approved by Congress in December 2017, jolted the economy to real annual growth to meet the administration’s target of annual real GDP growth of 3%. However, that expansion slowed again in 2019 as budget deficits began to grow. The expected spike in revenues did not offset the resulting increase in U.S. government debt under the new law.
Today, despite the record 33% spike in GDP growth in the third quarter, the world’s largest economy still has not regained all the ground it lost in 2020 as the ongoing spike in COVID-19 cases continues to slow the current recovery.
On Dec. 16, the Federal Reserve forecasted real GDP growth to fall to only 2.4% in 2020, compared to a decline of only 3.7% predicted in September. That includes a GDP forecast of 8.9% in the fourth quarter, down from an earlier forecast of 11.2% before Christmas, according to the Atlanta Fed’s GDPNow estimate for Jan. 5. At the other end of the spectrum, the New York Fed Staff Nowcast and Wall Street powerhouse Merrill Lynch only expect fourth-quarter GDP growth of 2.5% and 6%, respectively.
And like the previous three stimulus bills, one under former President Obama and two under President Trump, the recent $1.8 trillion Consolidated Appropriations Act approved signed into law on Dec. 27 is also expected to “stimulate” GDP growth in the first quarter of 2021 and beyond. However, the Federal Reserve consensus for real annual GDP growth in 2021 was recently downgraded from 4.2% to 4% as news that distribution of the COVID-19 vaccine is not going as smoothly as expected.
As noted, the other elephant in the room is the loss of 33 million U.S. jobs amid the pandemic. According to the most recent data, the economy still needs to recover another 11 million jobs to get back to year-ago levels when the nation’s jobless rate stood at 3.6%. There were 165 million workers in the U.S. civilian labor pool.
At its Dec. 16 meeting, the Federal Reserve’s Open Market Committee (FOMC) projected U.S. unemployment to fall to 6.7% this year, compared to 3.7% in 2019. The nation’s jobless rate for 2021 and 2020 is projected to grow 5% and 4.2%, respectively. Yet, a full recovery of the nation’s job market will not occur until 2023, when Fed forecasters predict a 3.7% annual unemployment rate.
Meanwhile, Federal Reserve Chairman Jerome Powell cautioned against the expectation of a quick economic recovery, despite the recent stimulus package and other tools to reboot job growth. With interest rates at near zero percent, the Fed chair said the nation’s central bank is committed to using “its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.”
“The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Economic activity and employment have continued to recover but remain well below their levels at the beginning of the year,” said Powell. “Weaker demand and earlier declines in oil prices have been holding down consumer price inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.
“The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term,” Powell concluded.
By all accounts, that means that the lingering effects of 2020 will continue well into the new year with no relief in sight as of today. Stimulus or not.
