The U.S. economy had an explosive first quarter of this year. Largely, this boom reflected a rebound because of the end of lockdowns put in place with surging COVID-19 cases and deaths from mid-November 2020 to mid-January. Those restrictions put a pause in the record pace of rebound in the second half of last year. Now that the pause has ended and the prospects are for continuing declines in new coronavirus cases, hospitalizations and deaths, there has been, and likely will continue to be, a fuller opening of the U.S. economy.
An astonishing expansion is emerging that will shake the core of our economy, raising serious doubts about the stimulus package enacted at the end of December and another in March, new proposals for expanded federal spending for social programs, and the record-setting pace of monetary expansion that is being sustained by the Federal Reserve.
Real GDP was up 1.6 percent in the first quarter from its pre-recession/pre-pandemic position a year ago, indicating that the economy has fully recovered from its brief recession and is growing at a pace not seen in many years. The two-month recession from March to April last year was the shortest and deepest on record, but the recovery was also incredibly fast, despite the winter pause. Real consumer spending was up 0.4 percent over the past year as well, again showing the large decline last spring has been fully reversed.
Personal income also boomed up in March, led by a large increase in transfer payments, mainly stimulus checks. But the earnings component of income also rose rapidly as more people returned to work. Real personal income excluding personal transfer receipts — a measure of real earning from production and not from government handouts — also has nearly fully recovered from its peak in February 2020. In March of this year, this measure of earnings rose at an 11.6 percent annual rate from the month before, more than reversing the pandemic-related minor declines in December to January and leaving earnings 1.2 percent below February 2020 and 7.5 percent higher than the recession low last April.
Improvements in this earnings measure is a key indicator of the end of a recession and beginning of a recovery used by the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), the generally accepted arbiter of business cycle turning points for the U.S. economy for over 150 years. The last recession began in February 2020 and all indicators of recovery that the committee and others use to assess economic performance have improved since April 2020, presumably the month of the recession trough, or end of the recession. It is not unusual for the committee to delay dating the end of a recession until many months or quarters after the trough actually occurred.
Given the continuing growth after the winter COVID-19-related pause, it will not be surprising if the NBER committee meets and announces that the recession ended last April.
Many analysts and policy officials expect 2021 to show the best economic performance in many years because of the economy’s resilience in face of the pandemic and the re-acceleration of employment, income and output. Even before the confirmation of the economy’s strength this week, the Congressional Budget Office had projected real GDP growth of 3.7 percent for the four quarters of this year, substantially below the 6.4 percent pace for the first quarter of this year but a pace they considered to be a rapid expansion. The Federal Reserve’s Federal Open Market Committee median projection for this year is 6.5 percent, the fastest pace of growth in the past 36 years, and in line with the reported growth rate for the first quarter.
The strength of the rebound from the pandemic’s effects has been underestimated. For example, the recovery in employment often has been understated by comparing the decline in the unemployment rate from 14.8 percent in April 2020 to zero — so that in February, for example, the recovery to a 6.0 percent unemployment rate could be said to be only 60 percent complete, one that is down 8.8 percent points from its peak of 14.8 percent. The economy was not at zero at the peak in February 2020 and is not expected to return there. Instead, it was a historical low of 3.5 percent and it would be astonishing if it could return to such a low level. But even on this basis, the unemployment rate has retraced 78 percent of its losses and could return to the 3.5 percent benchmark within a few months.
More strikingly, just before the pandemic hit, the number of continuing claims for unemployment in the week ending March 14, 2020 was 2.1 million people (all data on a not seasonally adjusted basis). It surged up, as lockdowns spread, to 22.8 million people continuing to claim unemployment compensation at its peak for the week ending May 9, a mere six weeks later. As of the week ending April 17, 2021, the most recent week available, continuing claims for unemployment compensation have declined to 3.8 million people, only 1.7 million above its pre-pandemic level. The decline to 1.7 million extra continuing claims for unemployment compensation is only 8.2 percent of the peak level of excess continuing claims of 20.7 million, meaning the recovery of continuing unemployment claims is 91.8 percent complete.
The recovery from the pandemic and its associated lockdowns is over, based on the usual measure of real GDP or real consumer spending. For some measures, such as earnings or employment, it is only 80 to 92 percent complete. Nonetheless, the 11-month recovery for the unemployment rate was 78 percent complete in March, and the recovery of the number of people claiming continuing unemployment compensation is more than 90 percent complete. Pending data releases for April are likely to narrow the gaps for employment and unemployment substantially.
The economy’s resilience over the past year is remarkable. But so is the inattention or lack of respect for these developments over the same period. The continuing rush to end a recession that ended a year ago — and to promote a recovery that is nearly complete, according to measures of output and real consumption spending, and for other measures — is astounding.
Since the end of December, two pieces of legislation to stimulate and rescue the economy and cover COVID-19 costs; a proposed, misnamed infrastructure bill estimated to cost $2.3 trillion; and a plan to assist American families, costing about $1.8 trillion, will add over $8 trillion to federal spending in the largest move toward the nanny state and socialism since the New Deal. Ignoring other new federal spending initiatives from last year, federal spending has climbed from about $4.4 trillion in 2019 to perhaps over $11 trillion in 2021, adding another $6 trillion or so to the end of 2020 debt held by the public of $21 trillion.
All of this has happened in a little over 100 days, a dizzying pace of unnecessary transformation of the U.S. economy. President Biden is due for a “chill pill,” while Americans celebrate the recovery and boom.
John A. Tatom is a fellow at the Institute for Applied Economic, Global Health and the Study of Business Enterprise at Johns Hopkins University and a former research official at the Federal Reserve Bank of St. Louis.
Editor’s note: This article was edited after publication to correct an error that stemmed from misreading data.