Get Ready for Another Fake Economic Recovery

Michael R. Strain
·4-min read

(Bloomberg Opinion) -- There are plenty of reasons to be worried about record-breaking economic losses suffered by the U.S. in the second quarter of 2020. The impact on workers and households has been severe. Many parts of the economy will be damaged for years.

Here’s another reason: Thursday’s bad economic news guarantees another round of deceptively good news in the fall, which could lead to unwarranted confidence that gives policymakers an excuse to provide inadequate support to a weak economy.

Second-quarter gross domestic product shrank at an annual rate of 32.9%. That’s the largest drop on record, and reflects the effect of the coronavirus pandemic and nationwide shelter-in-place orders in effect for much of the spring.

These losses all but assure double-digit GDP increases in the third quarter of 2020. Economists at JPMorgan Chase & Co. estimate that the June GDP is over five percentage points larger than the average in April, May, and June. So even if the economy does not grow at all in July, August and September, the third quarter is already set to outperform the second by a wide margin.

In a forecast released in early July, the nonpartisan Congressional Budget Office projected third-quarter GDP to grow at a 17% annual rate. This forecast should be revised downward given the weak economic performance in July, but double-digit GDP growth is still likely. The CBO also projects annualized fourth-quarter growth of 7.9%.

That eye-popping positive economic performance follows eye-popping economic losses is no surprise. These quarterly growth statistics are relative. The massive drop in economic activity in March and April means that August and September’s economy can look very good in comparison while remaining very weak in the most important sense.

The CBO forecast reflects this. Despite significant gains in the second half of 2020, it predicts that the economy will have shrunk by 5.9% at the end of 2020 relative to the end of 2019. This would be, and surely will be, a devastating reduction in output, income and prosperity.

Official third-quarter GDP numbers from the government won’t be published until around the time of the presidential election in November, but there will be plenty of indicators between now and then that will reflect the same deceptive dynamic: a very weak economy that is rapidly improving.

For example, the unemployment rate could fall by 20% between June and October. This would reflect a rapidly improving labor market. But a 20% drop would still leave the rate at 8.9%, a disastrously high level.

These confusing and contradictory statistics pose two dangers. First, record-breaking GDP growth and rapidly improving economic indicators could lead many people who are not directly affected by the weak economy to think that the economy is sound or even thriving.

This leads to the second problem, which is the danger of sapping political support for additional economic recovery measures in Congress.

We are probably seeing this to some extent in this week’s debate on Capitol Hill over the next round of economic stimulus. Rapid improvement in the labor market and consumer spending in May and June seem to have contributed to complacency for many Republican lawmakers who don’t seem to appreciate that even given those two good months, the economy is still worse than it has been since the Great Depression.

After treading water in July due to a resurgence of the virus in the South and West, the pace of economic improvement over the fall and winter is less certain. A start-and-stop U.S. economy that takes three steps forward and one step back may be in the future.

But it is difficult to imagine that the economy at the start of the next presidential administration won’t be significantly stronger than it is today. It is also difficult to imagine that the economy in the spring of 2021 won’t be very weak, with recession-level unemployment.

Good economic news is likely to fuel complacency that would become a major threat to the economic recovery. Congress, don’t be seduced by its siren song.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute. He is the author of “The American Dream Is Not Dead: (But Populism Could Kill It).”

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