Trump’s Optical Growth Illusion

By Dr Santosh Kumar Mohapatra*

 The US economy expanded by an annualized 33.1% in Q3 2020 (July- September), beating forecasts of a 31% surge. It is the biggest expansion ever. Americans may feel elated by this report. The government will likely estimate that the economy grew faster on an annualized basis last quarter than in any such period since record-keeping began in 1947.  

After the announcement, the White House was quick to take credit, with President Donald Trump tweeting that it was the “biggest and best” and promising “Next year will be FANTASTIC!!!” Vice President Mike Pence echoed Trump’s self-congratulations in a tweet of his own, saying, “President @realDonaldTrump created the greatest economy in the history of the world and we are well on our way back to that with today’s amazing Third Quarter GDP number. However, this is not a reality but an optical illusion.  

For President Donald Trump, this isn’t great news. Market observers say the GDP bounce is too little, too late to move the needle with voters. The scorching pace won’t last. The economy is waning and facing renewed threats. Confirmed viral cases are surging. Government stimulus has run out. According to Nancy Vanden Houten, an economist at Oxford Economics, “The strength of this figure is an optical illusion.  

The GDP growth is reflected in increase in private inventory investment, exports, non-residential fixed investment, and residential fixed investment that were partly offset by decreases in federal government spending. U.S. consumer spending which accounts for more than two thirds of U.S. economic activity, increased 1.4% in September after gaining 1% in August.

The personal spending surged and was the main driver of growth, helped by checks and weekly unemployment benefits from the federal CARES Act. More than $3 trillion in government pandemic relief, which included a weekly. unemployment benefits subsidy, spurred record economic growth in the third quarter.

Consumers boosted purchases of goods like new motor vehicles, clothing and footwear. They also lifted spending on healthcare, membership clubs, as well as outlays at sports canters, parks, theatres and museums. Still, consumer spending remains below its level at the start of the year, held back by outlays on services like air travel and hotel accommodation. Spending has shifted towards goods, indicating the services-driven economy’s recovery from the recession, which started in February, would be slower than previous downturns.

This recovery could be at risk without additional stimulus, as households with unemployed workers find themselves stretched financially heading into the holiday shopping season. Personal income and consumer spending could also take a big hit if the pandemic continues to spread and states re-impose restrictions.  

In India, GDP growth for a quarter is calculated by comparing to the same quarter the year before, a YoY comparison, on the other hand, the US does a quarter-on-quarter (QoQ) comparison, and then annualises the figure. It means US calculates growth of a quarter from GDP of previous quarter. “It’s easier to get big growth rates when you’re coming off a lower base.

However, the GDP is still 3.5% below its pre-pandemic level and the outlook for Q4 and 2021 remains uncertain as the pandemic is far from controlled and a vaccine is not ready yet. The reason for higher growth is that the rebound comes off a smaller numerical base. Mathematically, a bounce-back that equals or even slightly exceeds an earlier drop doesn’t mean the economy has fully recovered.

To use a simple example: A drop from 100 to 70 is a 30% fall. Yet a 30% rebound from 70 gets you only back to 91. There is need of a 43% gain to get back to 100. US had seen contraction of growth by 31.4% in April- June 2020 and 5% in January-March 2020. The obvious admonition is that when you drop 30% and gain 30%, you’re still below where you started,

The strong GDP figure also camouflages the K-shaped nature of the recovery that has caused economic sectors such as housing to rebound strongly, while other industries like airlines and restaurants remain moribund.  

There are deeper reasons, too, for viewing report on gross domestic product with skepticism. It reflects huge gains last quarter that resulted from simply reopening many businesses after the virus had paralysed the economy in March and April. Since August, the economic outlook has darkened as hiring has slowed. Consumers may spend circumspectly during winter. A resurgence in COVID-19 cases across the nation were to cause extensive business shutdowns or restrictions, could crimp spending in the fourth quarter and the economy would struggle to sustain a solid recovery.  

Even as the virus continues an unimpeded sweep across much of the country, Congressional gridlock has pushed the possibility of additional fiscal stimulus which economists, is urgently needed for the near future. This is bad news for the fourth quarter. The inability of Congress to pass another fiscal stimulus bill chip away at Americans’ spending power at the worst possible time, as landlords and lenders phase out their tolerance programs. There are a growing number of signs that critical consumer spending is falling, and on pace to shrink further. If one looks at the last four months of real personal income, it’s gotten smaller every month. It’s slowing down.

A large part of that is we’re getting a decline in personal income. The employment gains have stagnated and the expanded unemployment benefits that were a lifeline for millions have expired. Without a speedy tenacity, the country will likely face more economic pain.

What is disconcerting is that the U.S. government ran a record budget deficit of $3.1 trillion in the fiscal year that ended in September. The massive deficit reflected the government’s effort to support the economy ravaged by the coronavirus pandemic. The four pieces of legislation passed by Congress this year to combat the recession was by far the largest fiscal response to an economic crisis since the Great Depression of the 1930s. By comparison, the deficit in fiscal year 2019 totalled $984 billion.

Relative to the size of the economy, the deficit—at an estimated 15.2 percent of gross domestic product (GDP)—was the largest since 1945, according to congressional estimates. The last time the government ran deficits anywhere near this big relative to the size of the economy was during World War II. Total outlays were $6.55 trillion in the latest fiscal year, while receipts totalled $3.42 trillion.

The four cornavirus financial relief bills, including the $1.7 trillion CARES Act passed in March, were estimated by the Congressional Budget Office to cost $2.4 trillion combined. Two of the government’s biggest three revenue sources dropped in 2020, according to the report. Personal income taxes, the biggest income source, dropped to $1.6 trillion from $1.7 trillion in 2019 and corporate income taxes, which make up a relatively minor portion of overall revenues, also dropped, to $212 billion from $230 billion. Payroll taxes, however, inched up, rising to $1.3 trillion from $1.2 trillion in 2019.

America ended the fiscal year with $21 trillion of debt – which means debt is now larger than a year’s worth of economic output. And this mammoth, gargantuan level of debt is only going to get bigger. It’s discouraging to see both candidates for President proposing trillions of dollars in additional debt instead of plans to save Social Security and Medicare

Experts say that the government will have to return to a sustainable deficit path, but that the tax hikes and spending cuts needed to accomplish this goal should be put off until the pandemic subsides. In an outlook, the Congressional Budget Office (CBO) said that the fiscal deficit will remain elevated over the next decade. The lowest projected deficit over the next decade is $1.080 trillion in 2027. The Congressional Budget Office (CBO) is a federal agency within the legislative branch of the United States government that provides budget and economic information to Congress.

Fed Chairman Jerome Powell and top economists have urged the two parties in Congress to put aside their differences and pass more fiscal relief, but talks on another relief package have lost momentum.

The basic reality is that the virus remains out of control, and the risks of social and economic activity are maybe even higher than in the spring. Also, out of more than 22 million jobs lost in March and April only around 11.3 million were recovered so far while a new stimulus bill hasn’t been approved yet. Americans are showing mounting concern about the economy. Consumer confidence slipped in October after having risen sharply in September.

 

 

The author is an Odisha-based columnist /economist/ social thinker. He can be contacted at [email protected] 

 

 DISCLAIMER: The views expressed in the article are solely those of the author and do not in any way represent the views of Sambad English.

 

 

 

 

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