A robust 6.4% growth rate in economic activity during the first three months of the year narrowed the output gap in gross domestic product and brought it closer to being erased.
One hopes that this achievement is not lost among the political and policy noise.
We are now fully confident that the American economy will move back above the pre-pandemic level of activity in the current quarter. Given the size of the shock to the real economy, the depth and breadth of the pandemic crisis and the uneven, at best, public health response, this is an extraordinary policy achievement.
But with markets soaring and political debate escalating over the Biden administration’s proposals on infrastructure and social spending, one hopes that this achievement is not lost among the political and policy noise in Washington.
In our estimation, this achievement is a function of the integration of fiscal and monetary policies in a quick, comprehensive and coherent fashion that sought to target and overwhelm the substantial economic challenge caused by the pandemic.
The use of unorthodox monetary policy and robust fiscal action that stretched the bounds of what was considered acceptable among policy mandarins is at the core of returning the economy back to pre-crisis levels in a short period of time that almost no one would have forecast one year ago.
If there are lessons that policymakers can take away from the twin systemic crises that have framed the past 15 years, they are the following:
- Take coherent and comprehensive action.
- Overwhelm the problem by flooding the zone with liquidity linked to concerted action by both the fiscal and monetary authorities.
- Be willing to sustain that action at a depth and breadth for longer than the conventional wisdom would consider prudent.
While there is always room for debate over policy action, one does hope that the way that authorities addressed the Great Financial Crisis and the pandemic will change the way in which future policymakers react to both garden-variety recessions and more systemic crises.
What does the data imply?
The gap between the actual and potential gross domestic product narrowed again as economic activity increased during the first quarter. Nominal GDP grew by 2.3% on a year-over-year basis and 0.4% in real (inflation-adjusted) terms, enough to shrink the nominal output gap of last year’s fourth quarter by half and the real output gap by a third.
In nominal dollar terms, the latest estimate of the output gap from the Congressional Budget Office is roughly $312 billion. In our “full-employment” estimates, the gap is $455 billion, which would take into account regaining lost output of discouraged and disadvantaged workers who are no longer in the labor force.
Given the direction implied by first-quarter data and strong early second-quarter economic reports, this will bring to a close one of the more remarkable periods in American economic history. Next up: The return to full employment, which we think is near 3.5% and will occur in the second half of next year.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.