Just like in 2008, Joe Biden is coming into the White House during an economic crisis. But we are in much better shape this time around.
- President-elect Joe Biden will take over the White House while US is still in the midst of the ongoing coronavirus pandemic and the economy is still in rough shape.
- But unlike when former President Barack Obama took over in 2008, there are good signs that the economy is improving and will continue to bounce back.
- Consumer confidence is stronger, businesses look more resilient, and there are reasons to think 2021 will show meaningful economic improvement.
- Neil Dutta is the head of economics at Renaissance Macro Research.
- This is an opinion column. The thoughts expressed are those of the author.
- Visit Business Insider's homepage for more stories.
The US economy is still in bad shape. But while the coronavirus pandemic is still taking its toll on activity around the country, there are some encouraging signs — even beyond recent good news about a vaccine— that the economy is improving.
And despite worries by some commentators, the US is in better shape to bounce back than it was in 2008. The consensus remains too cautious on the outlook and the incoming administration is inheriting an economy likely to hit its stride in 2021.
As widely expected, the US economy rebounded in the third quarter of this year according to the most recent GDP report. The good news is that growth ran a bit faster than expected. That said, the US economy is still about 5% below its pre-pandemic trend.
For growth to return to trend, the economy will need to expand roughly 25% at an annual rate in the fourth quarter. That would be above the highest forecast among Wall Street economists and a very tall order. Nonetheless, there are credible reasons for optimism.
First, led by spending on durables, private domestic demand — that is actual spending by US households and businesses — ran a bit faster than the overall economy. Recall that domestic demand components in GDP tend to be more stable than other components such as inventories and net exports. As a result, domestic demand is more useful when estimating future GDP prints. The confidence needed to buy a big ticket item like a home or a vehicle is difficult to reverse, making the strong domestic demand encouraging for the road ahead..
Second, the inventory investment tailwind still has room to run. Recall that inventories — basically the goods that companies have in the stockroom waiting to be sold — tend to grow broadly in-line with the pace of final demand.
Right now, despite a sharp rebound in the third quarter, inventories remain below levels consistent with final demand — companies need to order more to catch up with consumers. Inventories never correct to where they ought to be, but if inventory investment gets to normal next quarter, it implies an added 2 percentage points to GDP.
Third, there is plenty of dry-powder for households with the personal saving rate still 8.5 percentage points above its level from the fourth quarter of 2019. That means Americans are banking a lot of the stimulus checks they received and are saving a good chunk of their income.
As difficult as it is to believe, the drop in consumption neatly matches the decline in real incomes excluding transfer payments. Put another way, the fiscal stimulus ended up as savings for households, much of it yet to be spent.
Fourth, public sector consumption and investment declined in the third quarter. Federal non-defense and state and local government spending & investment cut third quarter GDP by nearly a full percentage point. Given recent political developments, there is still a good chance that some additional fiscal help is on the way and the broader recovery is likely to produce a pick-up in tax revenues from state and local governments.
No economic outlook is without risks.
The downside risks are quite obvious these days. The rise in COVID-19 cases is prompting renewed lockdowns in some cities across the country. There's already a bit of evidence that dining out is slowing as cases climb. While lockdowns are important in curbing economic activity, research also shows that people often take matters into their own hands when case growth is widespread.
In advanced economies like the US, these voluntary social distancing measures are often as impactful as the lockdown itself because work-from-home arrangements and e-tailing are more widespread. The upshot is that there is not much room for these depressed sectors – service industries like leisure and hospitality – to fall. Moreover, consumers have shown that there is some service activity that can continue even as cases climb.
Indeed, one of the things we have learned about the virus and economy is its nonlinearity. That is, a high level of new virus cases is much worse than no new virus cases but in between there is a lot of variation in economic performance.
In this regard, the upside risks are less obvious but quite profound. Simply put, by this time next year, there will be a vaccine that is being distributed to the population with many millions already having taken it. If the virus is effectively eliminated, this will allow service industries to enjoy a more rapid recovery.
Finally, with the recovery in the third quarter, we are already seeing some draw parallels to 2008. As an example, one popular pundit argued, "the economy is roughly as far below its peak as in the darkest days of the last recession." Sorry, but statements like this are highly misleading.
Today, the shortfall in the economy is primarily in household spending on services. In 2008-09, the shortfall was more widespread: durable goods consumption, equipment spending and housing were all stuck in the basement. Back then it was services that actually did okay.
Getting someone to buy a home, car, or other durable goods likely takes a lot more time (balance sheet repair, confidence, credit conditions) than say, getting them to go to a restaurant or an amusement park.
The current shortfall in services is the price we pay to curb some activity to combat the spread of coronavirus. Once the virus is eliminated, likely through a vaccine, these depressed service industries will enjoy a more rapid recovery. In the meantime, they can still show some improvement as people take precautions and engage in more conspicuous consumption like travel and dining out.
In short, this is NOT 2008 and we'd fade those suggesting as much.
This is an opinion column. The thoughts expressed are those of the author(s).
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