Second quarter GDP numbers miss projections by as much as 30%, but Biden claims he’s getting America back on track. Meanwhile, back in the real world a challenging job market, epic inflation, and the end of a moratorium on evictions might be taking the bloom off this rose before it’s even picked.
Last week, President Biden took a victory lap on the economy after strong growth in the second quarter showed the United States continues to recover from the pandemic. Writing on Facebook and Twitter, he said, “Our economy grew at the fastest rate in nearly 40 years during the first half of the year. Consumer confidence is up. Jobs are up. Personal income is up. Unemployment is down. We’re getting America back on track.”
Unfortunately for us all, a closer look at the numbers and the underlying metrics isn’t nearly as promising as the President suggests. GDP did grow at 6.5% year-over-year, a strong figure by any standards, but also a major miss, off some 30% from projections. Prior to, a survey of analysts by Refintive expected much larger 8.5% growth; Dow Jones estimated 8.4%. In addition, first quarter growth was revised down, slightly, from 6.4% to 6.3%. According to the chief economist at Capital Economics, Paul Ashworth, the lower growth number offers “more evidence that stimulus provided surprisingly little bang for its buck, with the economy quickly pushing against unexpected supply constraints instead, which have driven inflation higher.”
We’ll get back to inflation in a moment, but the numbers underlying the growth in GDP weren’t exactly encouraging either. Private domestic investment fell 3.5%, due to declines in inventory and residential investment. Imports increased and government spending fell, even amid some of the largest deficits ever. On the bright side, the increase was driven largely by consumer spending, up 11.8% and representing 69% of all economic activity. Unfortunately, much of this spending appears to be driven by consumers dipping into their reserves as personal savings plummeted over 50%, from $4.1 trillion to $1.97 trillion, meaning any uptick in spending could be temporary.
The employment picture follows a similar trend, often disappointing expectations while posting numbers that would be considered excellent in normal times. In April, we added 266,000 jobs against an estimate of 1,000,000, the biggest miss since we’ve been tracking this data. In May, we were much closer to the estimate, but still off by almost 100,000 jobs, 583,000 actual versus 650,000 expected. June was a bright spot, adding 850,000 jobs against an estimate of 720,000. Recently, the weekly job claims have also missed estimates, however. Initial claims were 400,000 compared to an estimated 380,000, double the pre-pandemic normal. Continuing claims also creeped up to 3.27 million, for a grand total of about 13.6 million people receiving benefits. Overall, the job market is down by about 6.8 million jobs since February 2020 and, technically, Biden was wrong: The unemployment rate rose last month to 5.9%.
According to the Peterson Institute for International Economics, PIIE, “the labor market remains well short of normal.” “While the economy is still missing millions of jobs, numerous other signs were more characteristic of a very tight labor market in which demand for jobs was plentiful but supply remained constrained. Job openings and quits have both been at record levels, and in June there were 0.9 job seekers for every job opening, only slightly less tight than the labor market just prior to the pandemic.” They calculate that 2.1 million more people should be in the labor force given the relative strength of the economy. As a result the “realistic” unemployment rate is a much more disturbing 7.3%, compared to the regularly reported 5.9%. Ultimately, PIIE asks two critical, yet open questions, “(1) what is the relative pace of demand and supply improvements in the labor market, an issue that will affect the pace of nominal wage growth and price growth and (2) will the economy be able to close the full 9 million jobs gap quickly or will the last few million jobs be more difficult because some people have permanently left the labor force as a result of the pandemic?”
On top of an abnormal labor market, we have inflation that is unprecedented in recent years. On Friday the personal consumption expenditures index, a measure of inflation that excludes food and energy, increased 3.5%, the biggest jump since 1991. This is after a 3.4% spike last month. Food and gas prices have, of course, also skyrocketed. The Consumer Price Index for food is up 5.4% from June 2020. Wholesale prices, almost certain to be passed onto the consumer at some point, are even worse. Beef is expected to increase between 13% and 16%, pork between 19% and 20%, poultry between 20% and 23%.
Simultaneously, gasoline prices are at the highest level since October 2014, up almost 40 cents per gallon compared to pre-pandemic 2019, $2.82 versus $3.21, and more than a dollar since last year. Potentially even more concerning, the prices do not seem to be declining after the Memorial Day holiday as they usually do. In 2019, for example, they hit their high point in May at $2.95 per gallon, then started declining to $2.65 by the end of the year. This year, however, they were at $3.08 per gallon in May, then climbed to $3.16 in June and $3.23 in July.
While Biden is technically correct when he claimed that wages are up, the problem is prices are up, much, much more. In June, hourly pay did grow at the fastest clip in more than a decade according to the Economic Policy Institute, but when you account for inflation, real wages actually fell by 2% compared to 2020. This is an especially stunning figure when you consider that June 2020 was in the heart of the pandemic and millions of Americans lost their jobs, or had their hours and salaries cut.
A Pew Research survey conducted last September found that a full one in four adults reported having trouble paying their bills since the outbreak, a third had to access savings and retirement funds, and one in six had to borrow money or rely on a local food bank. Overall, 25% of adults said that they or someone in their family had lost their job with 15% saying it was them personally. Close to a third of adults, 32%, said they had salary cuts or reduced hours, 21% saying it happened to them personally. Of that group, 60% reported earning less than before the pandemic. Somehow, real wages are now 2% lower, meaning many, many people are even worse off despite recent improvements in wages and growth.
The overall picture is not likely to improve anytime soon. Stunningly, economists no longer expect rapid growth from here. This is, in fact, expected to be the high point of the recovery. “The good news is that the economy has now surpassed its pre-pandemic level,” Mr. Ashworth explained. “But with the impact from the fiscal stimulus waning, surging prices weakening purchasing power, the delta variant running amok in the south and the saving rate lower than we thought, we expect GDP growth to slow to 3.5% annualized in the second half of this year.”
This is in stark contrast with what we were promised at the start of the Biden era. It was only in February when economists were predicting an unprecedented boom as far as the eye could see and inflation itself wasn’t a concern. US News & World Report, in an article helpfully titled “Anticipating 2021 boom,” quoted Sung Won Sohn, an economics professor at Loyola Marymount University, who claimed “You have massive government stimulus, low interest rates from the Fed, and the vaccine supply is growing. The economy is beginning to fire on all cylinders.” Back then, the predictions were for up to 9% in the first quarter and 6% or more for the full year. Now, not so much, we’re lucky if we get even half that.
What’s changed? Biden got his $1.9 trillion stimulus plan, schools and states are now flush with cash, unemployment benefits are juiced, and government money is raining down on the economy. In fact, we’re spending $3 trillion more than we’re taking in this year, 13.4% of GDP. To put this in perspective, that’s the second highest deficit since 1945, when we were still fighting World War II, surpassed only by 2020, when we were in the middle of the pandemic. According to the experts, this borrowed cash was supposed to create an economic boom. In March, Gregory Daco, Chief US Economist for Oxford Economics, claimed, “The key engine of growth is going to be that powerful cocktail of both a healthier economy along with fiscal stimulus.” He promised 7% growth and 7,000,000 new jobs. Incredibly, some were worried it would stimulate the economy “too much.” Howard Gleckman, a senior fellow at the supposedly non-partisan Tax Policy Center, said “This one, there’s no question. Everyone agrees it will stimulate the economy. The question is will it stimulate the economy too much?”
Perhaps even more incredibly: We still listen to these very same experts and politicians, despite a history of poor predictions and abject failure. On July 4th, President Biden said, “This year, the Fourth of July is a day of special celebration, for we are emerging from the darkness of years; a year of pandemic and isolation; a year of pain, fear, and heartbreaking loss. Just think back to where this nation was a year ago. Think back to where you were a year ago. And think about how far we’ve come. From silent streets — (applause) — from silent streets to crowded parade routes lined with people waving American flags; from empty stadiums and arenas to fans back to their seats cheering together again; from families pressing hands against a window to grandparents hugging their grandchildren once again. We’re back traveling again. We’re back seeing one another again. Businesses are opening and hiring again. We’re seeing record job creation and record economic growth — the best in four decades and, I might add, the best in the world.”
Less than a month later, however, he reissued the mask mandate and said “in all probability” he would be recommending more restrictions, as in a potential return to lockdowns. Let’s hope his predictions for the economy are more accurate, though I highly doubt it. Ironically, one can already see evidence of this in protests organized by progressive leaders on the Capitol steps this past weekend to extend the moratorium on evictions. According to progressive House members, some 9,000,000 to 11,000,000 people will lose their homes if Congress doesn’t act. How is that possible if the economy is booming like Biden says? Either way, this might not be the getting America back on track that we all need.