The record of the U.S. economy over the past four years is remarkable. It is a record of steady economic growth, productivity growth, labor force growth and exceptionally low unemployment.
What makes that record remarkable is it has been achieved under a stream of adversity: the pandemic, followed by inflation, followed by exceptionally tight monetary policy.
The U.S. economy moved into 2020 in solid shape. In the fourth quarter of 2019, real GDP increased at an annualized rate of 2.6%. (Since 2000, the average annual rate of real GDP growth is 2%.) In February 2020 the labor force numbered 164,412,000; the unemployment rate, 3.5%.
The pandemic hit in March.
In April, the labor force numbered 156,276,000; the unemployment rate, 14.8%. In the first quarter of 2020, real GDP fell at an annualized rate of 5.3%. In the second quarter, it fell at an annualized rate of 28%.
In May, as the pandemic worsened, the economy began to recover. In the third quarter of 2020, real GDP increased at an annualized rate of 34.8%. In the fourth quarter, it increased at a 4.2% annualized rate.
By year’s end the labor force was up to 160,761,000, the unemployment rate was down to 6.7%.
In the first quarter of 2021, real GDP increased at a 5.2% annualized rate to $20,990.5 billion, which eclipsed the pre-pandemic high of $20,951.1 billion posted in the fourth quarter of 2019. For all of 2021, U.S. real GDP increased by 5.8%. At year’s end the labor force numbered 162,429,000; the unemployment rate returned to the sub-4% zone at 3.9%.
In November 2022, the labor force rose to 164,441,000, eclipsing the level posted in February 2020. In December 2022, the unemployment rate fell to 3.5%, the rate posted in February 2020.
No national economy recovered from the pandemic as quickly as the U.S. economy did.
On February 23, 2020, a massive outbreak of coronavirus in Italy set off a global financial panic. On March 16, the panic became a meltdown. To stop the meltdown, the U.S. Federal Reserve System and other central banks pumped a trillion dollars of reserves into banks and other financial institutions. They continued to load banks with reserves until the pandemic was clearly in retreat.
The Fed prevented a global financial disaster at the onset of the pandemic. But as the economy recovered, banks turned reserves into loans. New loans become new money. Between February 2020 and February 2022, the U.S. money supply increased by 40.5%.
That increase in the money supply caused the 12-month rate of inflation in the U.S. to increase from 1.4% in January 2021 to 8.9% in June 2022.
Only a central bank can cause inflation, and only a central bank can reduce inflation. The surge in inflation prompted the Fed to reverse course and tighten credit conditions. Aggressively.
In a series of steps between March 16, 2022 and July 27, 2023, the Fed increased its key interest rate (its IORB rate) from 0.15% to 5.4%. Market interest rates followed the same path. Mortgage rates moved from the 3-plus % range into the 7-plus% range.
In years past, monetary tightening of this magnitude would all but guarantee a recession. Not in this U.S. economy. Real GDP has increased in six consecutive quarters at rates ranging from 2.1% to 4.9%. The unemployment rate hasn’t budged from the 3.5-3.9% range.
I don’t know what has enabled this U.S. economy to perform as well as it has in the teeth of such adversity. I do know that it’s remarkable, and it’s not getting the attention or appreciation it deserves.
Equally remarkable: Georgia and Glynn. Stay tuned.
Reg Murphy Center