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The July jobs report shows that the rapid V shaped recovery from the deep, but short-lived recession is continuing. The 1.8 million jobs created in July mean that more than 9 million jobs were created in the past three months. That is, by far, the fastest recovery from a recession ever.
While it is true that tens of millions of jobs were lost in March and April, the July jobs data re-enforces the speed of the recovery. Even with the shut-downs incurred in July due to the rising number of COVID cases, the economy continued to expand at a very rapid pace.
All of the decline in GDP occurred in March and April. In May the economy began to expand. In June and July, the expansion continued at a rapid pace.
But wasn’t the decline in GDP of 9.5% ( about 33% on an annualized basis) in the second quarter a sign that expansion hasn’t started?
The decline in April was so great, that even with the advances in both May and June, the second quarter was negative. In other words, if the output rate was 100 units in March, April’s output rate dropped to 70. But in May the rate climbed to 80 and in June to 90.
In that case, for the second quarter, output dropped from a rate of 100 in March to 90 in May, a decrease of 10%. But the decrease was all in April. May and June had strong increases. That’s what is happening in the economy now. July’s output rate also increased.
It appears that the first round of stimulus bills passed by Congress were enough to stop the decline and start the recovery. That raises the question about the need for a second round of stimulus. That is particularly a concern since the federal government budget deficit is already about $4.5 trillion this year. Any more stimulus would add to that number.
During the early years of the Obama administration, the annual deficit hit a record $1.4 trillion. This year’s deficit is already more than three times the record. The total public debt is almost $28 trillion. More stimulus could push the public debt to $30 trillion.
That’s about 150% of the annual GDP. Nearly all economists will say that public debt is usually not a problem as long as the total is less than one year’s GDP. Rising future interest rates, a capital shortage and eventually inflation are all potential problems with the large public debt.
While the consensus view from economists is that the economy will experience a U shaped recovery meaning it will take months, perhaps even years, for the economy to fully recover, the early numbers suggest otherwise. A quick and steep recovery appears to what we are experiencing.
As the number of COVID cases begins to decline and businesses fully re-open, the recovery will become stronger. The manufacturing sector is now experiencing rapid growth. That’s because the companies have to ramp up production to meet the increased demand. In addition, they have to produce more output to replenish the inventories which were worked down during the shutdown.
This trend in job creation and economic expansion will continue. That means the unemployment rate which fell from 11.1% in June to 10.2% in July, will continue to fall. By year’s end we will likely see unemployment at 8%.
In late October the estimate for GDP growth in the third quarter will be released. It will likely show the economy expanded by 6% to 7% ( about 20% or more on an annualized basis). That means by sometime next year the economy will have recovered from the steepest recession ever recorded.
That will mark the fastest recovery from a recession ever. In other words, it probably only took about one year to fully recover from the economic shutdown. In contrast, in took about four years to fully recover from the 2008-2009 recession.
We can thank President Trump for reducing regulations, eliminating the counterproductive parts of the Dodd Frank bill that minimized the effect of Monetary Policy and for the stimulus packages Trump signed into law for the rapid V-shaped recovery.
Voters will likely thank him in November as he will be re-elected.
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