Economics: GDP, a brief history of US Budget Deficits, and other economic trends

Last week on the SAS blog, we discussed Covid Relief and the Economy. In light of the recently passed $1.9 trillion Coronavirus relief package, this week we offer more background on comparable economic conditions and relief responses. Will this time be different? Is or will $1.9 trillion be enough?

 

GDP

Economists and journalists seem to be focused on predictions for Gross Domestic Product (GDP) growth rates for 2021.  The expectations are pretty staggering.  Predictions range from 4% to 8% GDP growth for 2022.  This is in sharp contrast to GDP growth rates from 2010-2020 which ranged from 1.5% to 2.93%-defined as sluggish.  In the decade 2000-2010, including the financial meltdown of 2008-09, this period was also characterized by sluggish growth yet also featured peaks around 4% within that time frame.  The period between 1990-2000 was more robust with 5 years over 4% growth.  

 

US Budget Deficits

During the Clinton Administration we were able to balance the federal budget.  Some blame the sluggish growth post 2009 on the smaller than desired stimulus package passed by Obama and Congress as a result of the housing meltdown and its effects on the economy.  The size was limited by politics, with both Republicans and conservative Democrats concerned about deficit spending.  

 

Trends

Economics is notorious for inaccurate predictions.  This is similar to stock market analysts.  Both economists and stock market analysts are right 50% of the time-you just don’t know which 50% are correct until after the fact.  

Another notable economic trend since the financial meltdown has been below average inflation (CPI) rate.  Previous to 2009, inflation assumptions based on reality were 3%.  Since 2009 inflation has been very tame averaging 2% and lower.  Therefore the real rate of return-investment return minus rate of inflation-was still pretty consistent and positive.  

An additional consequence of the 2009 meltdown is that businesses were forced to become more efficient and productive.  As the economy recovered employment did not recover as quickly as in previous recessions and wages stagnated.

Employment eventually returned but the question is whether employment and the economy would have rebounded sooner if the aid packages were more robust and similar in comparable size to the $1.9 trillion legislation that recently passed.

Economists, the Treasury Secretary and the Federal reserve are very concerned about the current level of unemployment as the pandemic has eviscerated parts of the labor force.  The risk of continued lagging employment could have a long lasting impact on working families and the American economy.  

The gains in the stock market are related to persistent  low inflation, massive financial and monetary intervention, and the anticipation of GDP growth rates projected higher than we have seen in a long time.  Have markets priced in this rebound or is there more to come?  With valuations at highs it’s clear that markets are looking forward to projected growth rebound.

 

For this and all SAS Financial Advisors newsletters, check out our blog at www.sasadvisors.com/blog

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