Strong Finish for 2020 Recovery

This morning the Bureau of Economic Analysis released its first estimate of the U.S. economy for the fourth quarter of 2020. The numbers are good: in inflation-adjusted terms we almost closed the gap caused by the artificial economic shutdown. The final number, if it stands through coming revisions, looks more like a tough but not abnormal recession.

Comparing seasonally adjusted, annual numbers for Q4 of 2020 to Q4 of 2019,

  • Gross Domestic Product was down 2.46 percent; in the third quarter the sam number was -2.85 percent and in the second quarter -9.03 percent, suggesting that the recovery continued through Q4;
  • Consumer spending stood at -2.61 percent, after recording -2.83 percent in Q3 and -10.24 percent in Q2;
  • Gross Fixed Capital Formation, a.k.a., business investments, was actually up 3.21 percent in Q4 year over year, after trailing 2019 by 3.37 percent in Q3 and 16.9 percent in Q2;
  • Net exports improved by 30.1 percent over 2019, though this number only suggests a smaller trade deficit;
  • Government spending fell by a minuscule 0.62 percent year over year.

Overall these are encouraging numbers, suggesting that President Trump’s prediction from last spring of a V-shaped recovery turned out to be accurate.

There has been a narrative in the public discourse suggesting massive job losses in December, which in turn would supposedly be attributable to the incoming Biden administration. That is not correct: the jobs decline in December was consistent with the regular ebb and flow of the labor market, though there were a couple of anomalies that can be attributable to renewed economic shutdowns in the most coronavirus-stringent states.

Since they are, for the most part, nothing out of the ordinary, the December jobs numbers are perfectly compatible with the GDP numbers for the fourth quarter. However, there are two signs of worry embedded in the numbers reported above:

  1. Consumer spending does not exhibit entirely sound trends. Consumption of goods increased year-over-year in the third quarter (7.23 percent) as well as in the fourth quarter (6.96 percent). When productive economic activity is in decline, and when it is playing catch-up through the recovery, it is troubling to see consumer spending outpace production by this strong a difference. This points to underlying inflation pressure, fueled by monetized entitlement spending by the federal government; in other words, my concerns from yesterday are reinforced.
  2. The rise in business investments, while welcome and a sign of confidence among businesses, is concentrated largely to residential construction. The building of new homes was up 13.7 percent in the fourth quarter over the same period in 2019. This is a strong number, but it is also a bit worrisome since mortgage payments have still not recovered entirely from the artificial economic shutdown.

The last point is reinforced by the strong decline in spending on new structures. This investment category has been down by double digits since Q2, trailing 2019 by 14.1 percent in Q4. While investments in equipment was up marginally (this is what you put in your structures once you have built them) the startling decline in structural construction – while residential construction is up – suggests that businesses are not entirely sure what to make of the future of the U.S. economy.

I share their concerns, especially since – again – the consumer-spending numbers reinforce my inflation worries.