Friday, January 28, 2022

GDP reflects a Biden Boom in 2021, well past the rise in inflation

You can complain about the Biden Administration not doing enough to dig us out of the mess that America was in at the end of 2020 (I certainly do at times), but you also can’t deny that it was a Biden Boom in his first year in office.
The U.S. economy notched its strongest growth in nearly four decades in 2021 after the government pumped trillions of dollars in COVID-19 relief, and is seen forging ahead despite headwinds from the pandemic, strained supply chains as well as inflation.

A surge in gross domestic product in the fourth quarter as businesses replenished depleted inventories to meet strong demand for goods was the final push. Last year's robust growth reported by the Commerce Department on Thursday supports the Federal Reserve's pivot towards raising interest rates in March.

The economy grew 5.7% in 2021, the strongest since 1984, as the government provided nearly $6 trillion in pandemic relief. It contracted 3.4% in 2020, the biggest drop in 74 years.
And I'll add that this is REAL GDP growth, which is measured after inflation is removed. On a nominal basis, we saw GDP rise by a cool 10.0% percent, with consumption accounting for more than 90% of the increase.

There is no doubt that the added income from stimulus checks, higher unemployment benefits along with a lessening of COVID as an overhang (well, at least for most of 2021) led to a restoration of spending for Americans last year. It fact, for all the talk about supply chain woes, it’s worth noting that the extra demand led to imports rising by 14% on an annual basis, resulting in a record trade deficit that kept GDP from going even higher.

UW’s Menzie Chinn notes that the strong recovery from the COVID recession of 2020 has now put the US economy back near its full potential (shown in green in the chart below), and it happened a lot faster than our last 3 recessions.

The large annual GDP growth number for 2021 was boosted by an even stronger 4th Quarter, up by 6.9% on an inflation-adjusted basis, and 14.3% on a current-dollar basis. That number comes with a caveat, as Professor Chinn points out more than half of that gain in Q4 was building back inventories that had been decimated in the earlier part of the COVID era.

I’ll also note that government purchases of goods and services actually declined in Q4, and didn’t add much at all for the last 9 months of 2021. How can that be, when we’re running huge budget deficits? Part of it is because much of the spending already happened in 2020 and early 2021, and then backed off as needs reduced.

But it’s also because much of what we identify as “spending” was in the form of transfers of cash to individuals and businesses, and that doesn’t really show up in GDP until someone does something with the cash. There hasn’t been a big increase in government employees or direct government investments in actual things, no matter how the deficit scolds push it.

I find that an interesting point, and it means that Government GDP number may well go up in 2022 as we see payments to medical providers rise at the state and federal levels, along with the infrastructure bill paying to do work that has been long backlogged.

But what about inflation? It knocked off around 43% of the growth for the year, and more than half of the current-dollar gain in Q4. But that’s still a lot of growth left-over, and I think people prefer 6.9% PCE inflation in Q4 to the 6.7% unemployment that we had at the start of this year. Or they should if they’re not poisoned by Faux News.

I also note that big rise in inventories, which in any kind of normal capitalism will result in lower prices or at least a limiting in price growth. And while it’s a bit worrisome that December and January are showing signs of slower consumer spending and confidence with OMIcron’s emergence, it also should slow down the cycle of price increases.

Looking forward, it’s clear that 2021’s Biden Boom got us back toward a more typical economic situation, except with higher wage growth on the lower end (that’s a good thing, folks). Now if we can fix our still-flawed safety net and offer more support and choices for Americans so they can have a better situation for both work and play, the 2020s economy might actually be the first one in a while that has worked for the everyday person.

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