Editor's note: Tatiana Bailey is director of the UCCS Economic Forum.
As an economist, I admit I relish in-depth, econometric reports with formulas, detailed tables and graphs. But I do have a strong reality streak and know that most people would rather forget their economics classes.
For this reason, and because I think sound information is foundational to good decision making, I set out to quickly develop an economic dashboard when I first came to Colorado to serve as a local economist. I wanted to help disseminate data that our community could easily understand and tangibly use. I firmly believe that, from an economic development standpoint, what gets measured gets done.
I found our community wonderfully receptive and now have 60 UCCS Economic Forum partners who receive the monthly, two-page dashboard. I like to periodically share this with the broader community and now seems like a good time given the disruption of the past year. Below you'll find part one of the highlights, with the second half publishing next Sunday.
GDP for the first quarter was recently released, and the economy grew 0.4% in Q1 of this year compared to Q1 of last year. If we stay at the current pace of increase and annualize the growth in Q1, the economy will grow 6.4% in all of 2021. This is a bit lower than the consensus estimates among economists, which was a projected annualized growth rate of 6.7%.
There is a lot to unpackage here. Let’s start with the nuts and bolts. With stimulus checks, augmented unemployment benefits and easing of social distancing requirements, personal consumption expenditures (PCE) increased significantly. Specifically, PCE increases were most notable in durable goods (led by cars and auto parts), nondurable goods (led by food, adult and other beverages), and services (led by food services and accommodations). There was also an increase in nonresidential fixed investment, which was mostly for IT-related equipment (+16.7% over the quarter) and intellectual property products (software, +10.1%). This boom in computer-related spending makes me wonder if individuals and companies are buying for partial, but indefinite, work from home or for upgrades to return to the office, or both. Recent tech earnings confirm that many stimulus checks are being used to upgrade phones and for other techie purchases. Residential investment also continues to buoy GDP growth. There was an increase in government spending mostly composed of the payments the government made to banks to process PPP loans and to purchase COVID-19 vaccines. There was a decrease in inventories mostly due to a decline in retail trade inventories.
Let’s first dissect personal consumption, which increased because personal income increased. Most of that is due to the increase in social benefits (e.g., stimulus checks and augmented unemployment benefits). In fact, personal income increased $2.4 trillion, or a whopping 59.0%, from Q4 of last year to Q1 of this year. The personal savings rate is now way up again to 27.6%. This is all very positive, especially for the households that have been disproportionately hit by the pandemic. Not surprisingly, a large national survey recently found that 70% of U.S. residents plan to spend more in the next 12 months (28% plan to spend more on restaurants).
Another important detail in the newly released GDP data is the PCE price index, which increased 3.5% over the past quarter. The PCE price index is an alternative measure for inflation. This is a big jump in just one quarter. Similarly, the Consumer Price Index has increased 2.6% from March 2020 to March of this year (up from 1.7% in the February 2020 to February 2021 measure). I’ve been talking for a while about why I think inflation is going to be a bigger issue in coming months and that is another whole article. I will say that another confounding issue on top of short or medium-term inflation is the increasingly high probability that unemployment will fall faster than expected. Although this would be a good thing, remember that the Federal Reserve has two mandates that dictate interest rate policy: inflation and unemployment.
Net exports were down more than usual and that significantly moderated GDP growth. The U.S. traditionally imports more than they export, but the high infection rates around the world alongside the supply bottlenecks dragged our exports down further. Simultaneously, the improving infection rates across most of the U.S. alongside rapid ramp up of vaccination kept Americans buying foreign goods (or American goods with foreign parts — which is just about everything). Given how slowly the rest of the world appears to be vaccinating, it’s likely that net exports will continue to be a drag on GDP growth. Similarly, the supply-chain and labor constraints within the U.S. will not only impact prices, they will also impact our ability to increase our own production of manufactured goods, which will also be a drag on GDP growth, albeit not indefinitely.
I would like to highlight how this bounce-back in GDP is so very different than other recessions. In previous recessions, there has almost always been a structural issue that has caused the economy to contract for at least two consecutive quarters (“recession”). The most recent example is the Great Recession, which exposed loose lending standards alongside a surge in homebuying. It took 34 quarters, or 8 ½ years, for real GDP to reach “potential GDP,” as economists call it. It took 30 quarters, or 7½ years, for the unemployment rate to drop below the natural unemployment rate (~4.0%). To be fair, the Great Recession was particularly severe, but looking at the two previous downturns shows a range of 3 to 5½ years, for GDP to reach potential GDP and a range of 3½ to 5¼ years for unemployment to dip below the 4.0% threshold.
And now is so very different. Experts are saying that real GDP will reach potential GDP post-COVID in four quarters, or just one year, and unemployment will return to the roughly 4.0% “natural” range in nine quarters, or 2¼ years.
If this is indeed true, do we need additional stimulus? That’s a policy decision and I prefer spreadsheets, but what I see is an administration that is on the heels of the greatest economic and health disruption of our lifetimes and is capitalizing on that to do some restructuring.
For a list of sources and other details, go to the UCCS Economic Forum website: uccseconomicforum.com