In Review

Economy and Policy

August 17,2020

Chief Economist Scott Brown discusses current economic conditions.

Brief summaries of key elements in the economic outlook.

The Big Picture: The overall economic outlook depends on the virus, efforts to contain it, and the degree of fiscal support. We’ve had a sharp- but-partial rebound in May and June, following a steep decline in March and April. The pace of improvement is expected to moderate. The impact of the pandemic has not been felt evenly. About 40% of those at the bottom 20% of income earners lost jobs in March and April, and a third to one half of those jobs have been recovered. Fiscal support has been a life line for unemployed workers. White collar workers have been more able to work from home. Mid- to upper-income spending has been curtailed by social distancing (the top 20% of income earners account for more than half of personal income and more than half of consumer spending).

Gross Domestic Product: There is enough improvement in May and June to suggest a record pace of GDP growth in 3Q20. The monthly-to- quarterly arithmetic may seem quirky, but quarterly growth often depends on the months leading into it. For example, if we were to see no monthly growth in July, August, and September, real consumer spending would still rise at a 26.8% annual rate in 3Q20. That’s 70% of GDP. Note that the advance estimate of 3Q20 GDP growth is set for October 29, just five days ahead of the November 3 election. Granted, a strong third quarter won’t take us back to the 4Q19 level of GDP, but it will easily be a record increase in quarterly GDP, which Trump will carry into the election (although it’s likely that many will vote early). The pace of GDP growth is expected to slow to a more moderate pace in 4Q20 and in 2021.

The Job Market: The reported unemployment rate has come down, to 10.2% in July, but that’s misleading. We’ve had some classification issues (furloughed workers counted as “employed,” rather than as “unemployed on temporary layoff”), but that was not as much of a problem as in April and May. More importantly, the reported unemployment rate always understates the weakness in a downturn, as many unemployed workers give up looking for a job and are no longer officially classified as “unemployed.” The labor force has declined over the last five months, but if it had kept on trend after February, the unemployment rate would now be around 13%. After 20 consecutive weeks at over one million, initial claims for unemployment benefits dipped below that level last week. The reported figure is exaggerated by the seasonal adjustment, which is multiplicative (unadjusted claims are at their seasonal lows in August and September). Unadjusted claims totaled 832,000 in the week ending August 8 – trending down, but still extremely high by historical standards.