They call economics the dismal science, and Diane Swonk normally exemplifies her profession’s penchant for gloominess. “People say, ‘You’re always talking about the downside,'” Swonk, the chief economist at the tax firm Grant Thornton, told me one recent afternoon. “Well, it’s my job to hedge the downside.”
But as the economy emerges from a pandemic of historic proportions, Swonk has reached a surprisingly upbeat conclusion about what’s going to happen next. The US economy, she believes, is poised to grow 6.6% this year. Even more startling, her peers are in broad agreement: Economists surveyed by Bloomberg this month forecast a median GDP growth rate of 6.2%.
These are astonishing numbers, the kind you just don’t see in developed economies — almost ever. “It’s mind-boggling, even for me,” Swonk said. “And I’ve been doing this a long time.” The last time gross domestic product increased that quickly was 1984, when Swonk was still in school and I was three years from being born.
Swonk says the boom this time will be like the 1984 expansion but “on steroids.” Economists are forecasting such fast growth partly because the downturn in the pandemic was so steep — the 3.5% GDP decline in 2020 was the worst year for the economy since 1946. Yet the improved outlook is also being driven by a confluence of factors — from stimulus checks to low interest rates to accelerating vaccinations — that are convincing Americans to spend more than economists were expecting just a few months ago.
According to the latest projections from the International Monetary Fund, the economy is on track to return to its pre-COVID trajectory by the end of this year. Things look so good, in fact, that the greatest threat to the near-term outlook (short of some horrific vaccine-resistant variant of the coronavirus) is that it ends up being too good — that the surge in demand overwhelms businesses desperately scrambling to meet it.
After such a terrible year, it feels weird and wrong — like tempting fate — to point to such unabashedly good news without burying it in a million caveats. If COVID-19 has taught us anything, it’s how much can change in an instant. Allen Sinai, the chief global economist of Decision Economics, is 82 and has been forecasting the economy for even longer than Swonk. After all these decades on the job, he says it makes him nervous to make such a bullish call.
But Sinai sees promising similarities between today and other rare periods when the economy really took off. In 1984, he told the Christian Science Monitor, “What is going on now smacks of a boom.” That year, GDP surged 7.2% and continued to grow above 3% for five more years. He sees a sustained expansion this time around too. “This is for real,” he told me. “I think we’re going to continue to get surprised on the upside.”
Stimulus and syringes
The rosy outlook is first and foremost a triumph of economic policy. Even though it bungled its public-health response to COVID-19, the government moved swiftly to support the economy as it descended into a free fall last spring. You can see the scale of support in this paradoxical statistic: In a year when millions of Americans lost their jobs, household incomes still rose about 6% in 2020, thanks to a massive round of stimulus checks last spring and an expansion of unemployment benefits for those laid off in the downturn. In the meantime, rapid interest-rate cuts, bond purchases, and an emergency lending program from the
kept plenty of
in financial markets.
The speed and scale of the support was a lesson learned from the painfully slow recovery after the Great
, when both the Bush and Obama administrations spent too long deploying too little stimulus as jobs evaporated. It took until 2018 for the economy to return to its prerecession track, costing millions of Americans their jobs and homes and businesses.
This time around, Washington mostly got it right. “Policymakers followed the philosophy of go big, go early, and put in a lot of stimulus very early in this recovery,” said Michelle Meyer, the head of US economics at Bank of America.
Significantly, the government didn’t stop with those early injections of money. Congress approved a second round of stimulus checks at the end of December and a third round in March. That latest round — up to $1,400 a person — has already shown up in government data: Retail sales soared 9.8% in a single month, the Commerce Department reported last week. It was the second-fastest gain since the government began tracking the data in 1992.
And consumers aren’t done spending those checks. Surveys suggest that Americans have spent or are planning to spend between one-fourth and one-third of their stimulus money, and are stashing the rest in their bank accounts or paying down debt. That means they’ll be in a good financial position to spend in the coming months as the economy reopens, springing on things like vacations that they had put on hold during the crisis. Economists at Goldman Sachs estimate that Americans will finish this quarter with $2.3 trillion more saved than they typically do, and will start to draw on those excess savings in the second half of this year.
The economic recovery is also being fueled by rising vaccinations. About 40% of Americans have now received at least one dose of the vaccine, a number that could climb to 70% by the end of June if the country’s vaccination campaign maintains its momentum.
Today, with the end of the pandemic in sight, consumers are already beginning to spend their money differently than they were just a few months ago. Last year, during the never-ending lockdown, Americans cut back sharply on in-person services. Spending on groceries and couches soared, while money devoted to dining out and hotel stays plunged by more than 60%. Now, after months trapped at home, people have begun to venture out with their wallets: According to credit-card data, spending on restaurants and hotels is within 5% of January 2020 levels.
With the economy on track for a speedy recovery, thanks to government intervention, economists are now contemplating another question: How long will it last? Lighting a fire under consumer spending is one thing; creating a steady-burning economy is another. The recovery will only last if businesses feel confident enough to hire more workers and invest in more factories and technology. “If that happens, that then further underpins consumer spending into the future,” Bank of America’s Meyer said. That’s what will make this expansion a self-sustaining one, as opposed to a transitory jolt from government money.
The labor market still has a long way to go before policymakers can celebrate. The unemployment rate remains high at 6% — and that doesn’t even count the millions of Americans who have stopped looking for work in the pandemic. But the gains made so far are promising: Nearly a million jobs were added to the economy in March, led by increases in the leisure and hospitality sector. “What I think we’re in the early stages of seeing is this positive feedback loop,” Meyer said.
Creating that virtuous, self-sustaining loop won’t be smooth. Just as the rapid collapse of the economy caused bizarre side effects and problems, so too will the rapid bounce back. Businesses can’t just ramp up capacity with the flip of a switch, especially after such a long and unanticipated shutdown. Consider, for example, an airline trying to add more routes as people start booking their vacations. It can’t just call back its furloughed pilots — it needs to make sure they’re current on their licensing checks and have completed enough takeoffs and landings in recent months to qualify to fly under federal aviation regulations. And if pilots are assigned to fly new planes, they must go through additional training on that specific aircraft, a process that can take several months. With demand outpacing supply, airfares are already spiking in some markets.
Labor isn’t the only thing in short supply. Rock-bottom interest rates have spurred a sudden wave of home buying, but many sawmills shut down early in the pandemic and home builders can’t find enough lumber to keep up with the rising demand. (Lumber prices are triple what they were at the beginning of 2020.) Car-rental companies like Hertz and Avis, which were forced to sell off large portions of their fleet during the pandemic, are now charging as much as $700 a day in some markets because of a severe shortage of automobiles. And auto plants can’t supply them with new cars fast enough because of a global shortage in computer chips, which were gobbled up by work-from-home employees getting new laptops and parents buying their stir-crazy kids the latest PlayStation.
The ongoing public-health crisis will make the usual bottlenecks in an economic recovery even worse. Restaurants around the country, for instance, are reporting that they can’t find enough cooks and servers to staff up fast enough, even though unemployment is still high. It’s a puzzling development, until you consider that most adults aren’t fully vaccinated yet, and a lot of workers still don’t want to put themselves at risk of contracting the virus. Combine that with childcare issues — as schools and daycare centers remain slow to reopen — and it’s understandable why workers aren’t rushing to fill low-wage jobs with high levels of exposure.
The labor shortages are good news for workers willing and able to work. The Fed’s Beige Book, an anecdotal survey of economic conditions across the country, found that some employers have raised wages to attract and retain workers, while others are offering signing bonuses as high as $1,000.
A shortage in labor and supply will probably mean two things. First, it could effectively cap the pace of growth in the short run, convincing, say, families to travel a little later than they would have liked to. Second, it could lead to some pockets of inflation, like the sky-high rates for rental cars and lumber. But with enough time, economists predict, prices will stabilize. Airlines will be able to train up their pilots. Lumber production will accelerate. And as the pandemic recedes, more workers will return to the labor market. “Supply will eventually pick up,” Bank of America’s Meyer told me. “The US economy is dynamic.”
Risks in the long run
That view — that any inflation will be temporary — is the consensus take among economists. The Fed’s own policymaking committee predicts that inflation will accelerate to 2.4% at the end of this year, before slowing to its preferred rate of 2% next year. But despite that slight initial overshoot, the Fed expects to keep its target interest rate near zero through 2023, to encourage job growth. The Fed “is not going to let up with monetary easing until they see the whites of the eyes of full employment again,” Sinai of Decision Economics said.
But not all economists are so sanguine. Larry Summers, the former Treasury secretary, has said that the US government is engaged in the “least responsible” fiscal policy in 40 years. So much federal spending, he warns, will trigger faster price increases and could force the Fed to raise rates. By lighting too big a fire under the economy, he thinks, Biden is creating an uncontrollable blaze.
When it comes to creating a sustainable recovery at home, others worry more about the dire outlook facing the rest of the world. While the US economy is set to recover by year’s end, the IMF forecasts that Europe will likely still be playing catch-up beyond 2022, as will emerging markets such as India and Mexico, which haven’t been able to vaccinate their populations at the pace of advanced economies. That means the US won’t be able to rely on many of its traditional export markets to keep growing, which could become a bigger problem once the effects of government spending fade.
And even if the recovery proves sustainable, strong growth on its own won’t solve the economy’s underlying inequalities, which worsened during the pandemic. The racial gap in unemployment between Black and white workers has widened. Mothers in low-income jobs have disappeared from the workforce at far higher rates than those with higher wages or no children, as well as men. And students of color, who were already at a disadvantage before the pandemic, are now returning to school with greater rates of learning loss than white students.
The pace of economic growth will certainly help: The faster jobs return, the less risk there is that the temporary pain of the recession will turn into permanent scars, as it did after the Great Recession. But to create truly sustainable growth, policymakers need to begin focusing on targeted measures to remove the deep-rooted obstacles to education and employment that still confront millions of Americans. Unless those systemic barriers are dismantled, they will continue to limit the US economy’s potential in the long run.
“We have to keep our focus and not just ride the euphoric wave, but also think about where we want to land on the other side,” Swonk said. “As horrible as this year was, you hope that we can pull something out of it that makes it more lasting than just the sugar rush of a couple years.”
Joe Ciolli, Ben Winck, and Andy Kiersz contributed reporting.