The Post-COVID economy

Dr. Chris Phillips

The current economic environment is fallout from the devastating impacts of COVID. Key economic indicators that reflect the health and vitality of the US economy are economic growth, employment, and aggregate prices. Real Gross Domestic Product, unemployment rate and the inflation rate as reported by the Bureau of Economic Analysis and the Bureau of Labor Statistics measure these indicators. The following are recent economic statistics for these key indicators.

• 5% economic growth for 2021

• Over six million jobs created in 2021 with an unemployment rate of 4.2%

• 6.8% inflation rate over the past 12 months

The historical average for economic growth measured by Real Gross Domestic Product is approximately 3% per year. Post Great Recession growth averaged around 2.2% from 2009-2019, so 5% growth for 2021 is doubling our decade long average. Some degree of growth attributed to the natural rebound from the COVID recession of April-May 2020 due to government lockdown and the ensuing recovery in light of COVID restrictions and policies. Economists do not expect the 5% growth rate to continue over the long term.

Over six million jobs created in 2021, pushing the unemployment rate from 6.3% in January to 4.2% in November. In February 2020, the US was operating at its full employment level with a rate of 3.8%. The pandemic lockdown and following recession launched the unemployment rate to 14.8% and pushed over 15 million out of work. Today anyone that wants a job can find a job and nominal wages are increasing at a record pace. In fact, a central problem is employers not being able to find enough workers to meet business labor demands.

While economic growth and job creation are moving in the right direction, inflation is problematic and concerning. Price increases in energy, food and housing were the primary areas of concern per the Consumer Price Index. The COVID supply-chain disruptions are persistent and continuing globally. This has caused significant supply-chain issues affecting most all aspects of product supplies around the globe. As macroeconomists put it, 'the aggregate supply curve has shifted noticeable to the left'. Compounding the issues is the vaccination campaign to immunize against severe cases of COVID. This has resulted in much of the US returning to near-normal pre-COVID activities. The explosion in consumer demand fueled by federal and state economic aid has pushed, as macroeconomists put it, 'the aggregate demand curve noticeable to the right'.

Cost-push inflation due to a restraint on aggregate supply and demand-pull inflation due to an expansion of aggregate demand. The compounding of the two has resulted in significant levels of inflation coming on heels of a decade of historically low, if not deflationary pressure. The US experienced deflation in both 2009 and 2015.

Other key economic data points are confounding as to the overall direction of the US economy including energy prices, interest rates, real wages, median household incomes, national debt and the twin deficits of government and trade, stock market values, and currency values.

• Energy prices including the price of gasoline has increased sharply due to pandemic closures and collapsing prices in 2020 as well as increases in consumer demand, primarily due to refineries closing or cutting back production in 2020 due to a lack of demand and the time needed to restart production levels.

• Interest rates continue to be at historic lows, but combating inflation signals interest rate increases from the Federal Reserve.

• Nominal wages are increasing, but lower than inflation, so real wages have fallen.

• According to the US Department of Housing and Urban Development, median family income is $79,900 for 2021, the highest on record.

• Approximately $29 trillion national debt and twin deficits of budget and trade that are each running in the trillions.

• Record highs in stock prices as the Dow Jones surpasses 36,000.

• US dollar continues to be the world's reserve currency, although the rise of cryptocurrencies have upset the traditional norms of banking and commerce.

The disruption of the COVID pandemic on the global economy is without parallel and we would not expect markets to 'clear' quickly. Federal and state governments kicked into high gear in 2020 to mitigate the impact of the COVID pandemic and government mandated shutdowns. The Coronavirus Aid Relief and Economic Security (CARES) Act was signed by President Trump on March 27, 2020. This bill directed $2 trillion toward businesses, households, hospitals, schools and related industries to help with COVID relief efforts.

President Trump signed another $900 billion COVID Relief bill on December 27, 2020 with $600 payments to eligible individuals, rental moratoriums, business and general pandemic relief funds. President Biden signed the American Rescue Plan Act of 2021 as a $1.9 trillion in further COVID assistance including a $1400 payment to eligible individuals and extending unemployment benefits. Additionally, Congress recently passed a $1.2 trillion infrastructure bill to shore up basic transportation and communication systems. These four bills alone have a price tag of $6 trillion in the span of less than 2 years. Many are alarmed at these government-spending levels, while the House of Representatives has recently passed a $1.75 trillion social spending bill, that awaits action in the Senate. President Biden has pledged to sign this bill upon passage in the Senate.

While the wash of dollars to combat COVID may have some marginal explanation for the rise in inflation, the government's fiscal response is only in small part to blame from both Trump and Biden administrations. COVID itself is the primary culprit and to a certain degree government lockdowns and business supply disruptions. The inflation situation is global in scope and not only a US problem. President Biden could change some policies to help fight inflation in the short term such as eliminate the Trump tariffs, make legal immigration easier, and provide incentives to get domestic oil producers to increase production.

The economic outlook is a mixed bag as economic growth, job creation, household income and stock markets are all moving in a positive direction. Energy prices, inflation, debt, interest rates and real wages are moving in the negative direction. COVID is still the lingering cloud over the economy and political partisanship is reaching Civil War levels.

These issues preclude any harmony or bipartisan solutions given the divided, perhaps broken state of the country. President Reagan famously said in May, 1987, "one of the worst mistakes anybody can make is to bet against Americans." The US economy is still the envy of the world as all nations are reeling from COVID fallout. As the US medical and business communities discover and innovate more efficient ways to deal with the virus and rebuild our economy, the US will lead the post-COVID economy.

DR. CHRIS PHILLIPS teaches economics and statistics at Somerset Community College.

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