A Reality Check on the Economy

Eakinomics: A Reality Check on the Economy “Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence.” It is useful to remember the words of the 2nd president as we are bombarded daily by administration spokespeople about the dire state of the economy and the need for (another) multi-trillion dollar federal response. Yesterday, the Bureau of Economic Analysis (BEA) released its first estimate of economic growth in the 4th quarter of 2020. Here is what we know. Between the 4th quarter of 2019 and the 4th quarter of 2020, gross domestic product (GDP) fell by 2.5 percent. That is bad news, to be sure, but recall that it fell by 9 percent (or 31.4 percent at an annual rate) in the 2nd quarter of 2020 alone. Since then, GDP has steadily risen. It was rising at a 4.0 percent annual rate in the 4th quarter, and it is anticipated to rise even faster in the current quarter. (The Federal Reserve Bank of New York has the current estimate at 6.65 percent (annual rate)). All of this is way better than was forecast in early 2020. Inside the top-line, there was notable strength in residential construction (up 13.7 percent) and sold investment in equipment and intellectual property. But the key was household spending, which showed a sharp rise in durable goods spending (11.9 percent) and non-durable goods spending (4.3 percent), but a sharp drop in spending on services (-6.8 percent). That’s the coronavirus at work because disposable personal income rose by 3.7 percent. The economic problem is not a lack of income or demand; the problem is the virus. Quietly, private sources of income have continued to grow. Compensation of employees, wages and salaries, and supplements to wages and salaries are all up solidly. But the real story is the enormous policy response that has taken place already, $1.8 trillion in March 2020, another nearly $1 trillion in December 2020, and several hundred billion in between. The combination of reduced spending and enormous support shows up as personal saving being $1.1 trillion higher in the 4th quarter of 2020 than in the 4th quarter of 2019. That money is available to be spent in support of growth in the months to come. There should be a real urgency to do what is necessary to eradicate the coronavirus. But there should be a realistic assessment of the state of the economy, the overall success of policies this far, and the capacity of those policies to continue to support growth in 2021.