September 13, 2022
The rapid onset and global spread of the COVID-19 virus gave rise to immediate and unprecedented actions that still are forcing the economic pendulum to swing in larger arcs today, some 2½ years later. The economic responses to the virtual shutdown in domestic and global economic activity near the end of the first quarter of 2020 started a chain reaction of large changes in economic activity, the likes of which have not been felt in recent history.
Efforts to halt the virus’s spread led to immediate and massive job layoffs. During February and March 2020, 22 million jobs were lost as businesses either shut down completely or cut back operations severely. The chart below shows monthly changes in employment since January 2008, the beginning of the Great Recession. It took two full years for employment to decline about as much as it did in just two months at the onset of the coronavirus pandemic. Then followed a long, slow recovery that took another four years for employment to reach the level at the start of the Great Recession. At that point, the economy continued a long-term trend of adding jobs at a steady rate of just under 200,000 jobs per month, a period during which supply and demand were in relative balance and inflation remained controlled at under 2% per year, while economic activity grew steadily but slowly.
The sudden loss of income led the United States and other economies around the world to provide immediate fiscal stimulus, most often as cash deposited in consumers’ bank accounts to prevent consumer spending from plummeting. That infusion of cash accomplished what was intended and more. GDP declined by 5.0% in the first quarter and by 31.4% in the second quarter (annualized percent change). Consumers responded by spending much of their cash infusion to yield a 33.4% recovery in the third quarter and 4.3% growth in the fourth quarter, holding the economic downturn to 3.4% for 2020. Strong consumer spending led to an extremely robust 5.7% GDP growth in 2021, as employment returned to 90% of pre-COVID-19 employment by the end of last year, restoring as many jobs in two years as had been gained during six years following the Great Recession. This created situations in which consumer demand grew faster and more strongly than the supply of goods and labor could keep up with.
Not only was demand rising at a faster level, but the pandemic caused serious disruptions of the global supply chain. Even though inflation-adjusted consumer spending reached 9.5% in 2021, supply disruptions led to commodity price increases, then to wage inflation. Even with offers of higher wages, manufacturers could not find enough employees. During the pandemic, people’s attitudes toward employment shifted, leading many workers in the U.S. and abroad to remain out of the workforce.
All major economies provided some stimulus to support unemployment. As the next chart shows, the global average amounted to about 7% of GDP. However, none were nearly as generous with discretionary easing as the U.S., where the federal government disbursed assistance costing close to 13% of GDP, more than double the stimulus in China or the European Union, according to Goldman Sachs.
The result of this large pendulum swing in fiscal easing and a large negative swing of the pendulum tracking supply chain disruptions created an artificial shortage of goods. So, prices did indeed rise. Inflation is now running at levels not seen in more than a generation, causing consumers to suffer the erosive effects of rapid inflation. Even though wages have grown, they are lower now than at the start of the pandemic, once the effects of inflation are considered.
The chart below shows the monthly producer (PPI) and consumer (CPI) price indexes since 2008. Prices at the manufacturing and consumer levels have been higher than the Federal Reserve Board’s 2% target since early 2021. In May, the PPI increased by 10.8% and the CPI by 8.6%, compared to year-earlier levels—the widest pendulum swing since the late 1970s.
As the impact of rising interest rates increasingly dampens spending, the likelihood of a recession continues to increase. Many economic forecasters believe that recovery from this impending downturn will be slower than from the last sharp but short recession. That is how generous government assistance, tangled with persistent supply chain mishaps, led to higher prices, which in turn are now requiring sharply rising interest rates to bring inflation under control. These higher interest rates will likely slow consumer spending and thereby increase greatly the likelihood of a recession by the end of this year. ν
Dick Storat is president of Richard Storat & Associates. He can be reached at 610-282-6033 or storatre@aol.com.
