The American economic paradox
It's the rebound economists didn't see coming.
Why it matters: America did nothing that should have been necessary to really get the economy moving again. We didn't get the coronavirus under control, and we gave up on fiscal stimulus after a single short-lived round of it. Nevertheless, we're about to close out by far the strongest quarter of economic growth in American history.
By the numbers: On an annualized basis, the U.S. economy is going to grow about 25% this quarter, according to the Wall Street consensus. The previous record growth rate was 16.7% in the first quarter of 1950.
- Reality check: The economy is still producing much less, with many fewer workers, than it was pre-crisis, and probably won't regain those levels before 2022. Second quarter GDP plunged at a -32.9% rate — vastly worse than the previous postwar record of -10% seen in the first quarter of 1958.
Few expected a rebound this fast and this steep. Back in June, when coronavirus cases were declining quite quickly, the Fed expected that we would end the year with unemployment at 9.3%, and saw the economy shrinking by 6.5%.
- Today, with coronavirus deaths still at their June levels, the Fed is much more optimistic. It sees 2020 ending with unemployment at 7.6% and an economy that has shrunk by just 3.7%.
- In real numbers, that works out to almost 3 million extra jobs, and $600 billion in economic activity, over and above what the Fed expected just three months ago.
Be smart: We might only be a week away from the end of the quarter, but there are still massive error bars on how well the economy is doing. A New York Fed model shows 14.3% growth this quarter — which would be extremely disappointing — while its Atlanta Fed counterpart shows 32% growth. Needless to say, such divergence is unprecedented.
- We won't get an actual GDP figure until Oct. 29, and subsequent revisions to that number could be large.
The big picture: While the economy is certainly doing better for the rich than it is for the poor, even the poor, in aggregate, are rebounding from the depths of the recession.
- Axios' Bryan Walsh has the long list of those who aren't doing better, including most prominently the 26 million Americans who remain on unemployment rolls.
- The better the broad recovery, the less effort that policymakers will make to help those who, through no fault of their own, are being left out of it.
My thought bubble: Economists are bad at forecasting large moves. That's why the 2008 crisis came as such a shock, and it's also why the magnitude of the third-quarter rebound this year is so unexpected.
The bottom line: When you're navigating uncharted waters, no one is going to be able to talk with certainty or authority about the effects of fiscal policy, monetary policy, or COVID-19 prevalence on broad economic growth.
- What we thought we knew turned out to be wrong. That's par for the course in macroeconomics.
- The excess economic growth explains some — but only some — of the stock market's impressive showing of late. There's still a lot of room for stocks to fall, if sentiment turns.