Can the US “Fully Recover”?
Post from First Trust Economics Blog
Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Deputy Chief Economist
Sept 7th, 2021
In early 2020, when COVID hit, the unemployment rate in
the United States was 3.5%, wages for low-income earners were
rising faster than wages for high-income earners, living standards
were rising…the economy was on a roll.
Then, because scientists said lockdowns would stop
COVID, they turned the light switch off. Real GDP fell at a 5.1%
annual rate in the first quarter of 2020 and then an annualized
31.2% in the second quarter.
Since then, because of re-opening, Federal Reserve money
printing, and massive Treasury debt issuance to fund pandemic
loans and benefits, the economy has rebounded. Real GDP hit at
an all-time high in Q2 this year, 0.8% higher than it was at the
pre-COVID peak at the end of 2019.
But this is not very comforting. Not only would the
economy have grown roughly 3% in the absence of COVID, the
economy has been boosted by over $800 billion in direct
payments to individuals. That $800 billion is roughly 4% of
annual GDP. Without this borrowing from the future, the
economy would be smaller today, not larger.
We estimate that the lockdowns have cost the US economy
6% (4% from stimulus growth + 3% growth absent COVID –
0.8% all time high from pre-COVID peak) in lost output. Of
course, it doesn’t appear this way because borrowing from the
future allowed more spending today. It’s like giving morphine
to an automobile crash victim. No pain, but underlying injuries.
So, how long will it take to fully recover? Factors that will
boost growth include the general waning trend in COVID (yes,
in spite of Delta, the death rate is running well below levels last
winter), the natural process of economic recovery, faster
productivity growth, entrepreneurs – who have packed many
years of innovation into the past eighteen months – and the loose
stance of monetary policy.
It’s important to pause for a moment and recognize that
monetary policy, with short-term interest rates set near zero, has
effectively become looser as inflation has moved upward. In the
past year, the consumer price index is up 5.3%, which means that
a short-term interest rate target of 0.1% generates a “real”
(inflation-adjusted) interest rate of -5.2%. By contrast, the
lowest real short-term interest rate in 2020 was -1.4% in March
2020. To put this in perspective, the lowest real rate in the
aftermath of the Financial Crisis was -3.8%.
However, at least a few factors will also weigh on economic
growth in the year ahead. First, the removal of fiscal stimulus
compared to what was done in 2020 and early 2021. Take away
the pain medication and the economic pain will become even
This underlying damage is reflected in the many small
businesses that have been destroyed by COVID lockdowns that
will not be there to help the economy rebound like they would
have after prior recessions. This problem is made worse by
excess unemployment benefits. Not only do these benefits slow
the recovery, but they translate into an erosion of worker skills
We think we’re seeing these negatives at work in some
recent tepid economic reports. Nonfarm payrolls grew only
235,000 in August, far below consensus expectations. Yes, there
is evidence that the Delta variant (and related policy responses)
were responsible for a significant portion of the slowdown in job
creation. Restaurants & bars reduced payrolls by 42,000 in
August versus a gain of 290,000 in July. But Delta wasn’t the
only factor. Just look at auto sales. Cars and light trucks were
sold at a 13.1 million annual rate in August, the slowest pace in
fifteen months and far below consensus expectations.
As recently as August 17, the Atlanta Fed’s GDP Now
model was tracking 6.2% annualized real GDP growth in the
third quarter. Now, three weeks later, it’s tracking 3.7%.
The next several weeks are important. It looks very likely
that the bipartisan infrastructure bill, boosting spending by about
$550 billion over the next decade, will pass. What’s unclear is
whether President Biden and his legislative allies can pass a
partisan bill of up to $3.5 trillion in extra spending, along with
tax hikes. The odds still favor the Democrats getting something
through on partisan lines, but the odds of a total failure to pass
the partisan bill are growing, and recent comments by Senator
Joe Manchin (D-WV) suggest that if something passes it will be
substantially less than what the far left wants.
In the end, a “full recovery” of the economy is possible, but
damage from past or future shutdowns – and a large partisan bill
that once again, like New Deal or Great Society legislation,
significantly increases the influence of the government over the
economy – threaten its pace.