Our Fantastic Economy
The Republicans have been saturating the airways with the story that the economy is in bad shape. This summation seems to have resonated with a share of the electorate. A recent CBS News poll found that 65 percent of Americans remember the economy being good under former President Trump while only 38 percent rate the current economy under Biden as positively [1]. In actually, the economy has been quite good over the past 7 years for both men and generally is doing as well or better than it typically performs despite having gone through a pandemic. Certainly, there is no factual basis for the 27 percent difference in how people rate the two presidents on economic performance.
The performance of the economy always has been fodder for opposition attacks. But, in 2024 there are two new circumstances that are affecting how voters assess President Biden on economic issues.
- First, there is an extremely large amount of disinformation being disseminated through the media and the Internet. People flat out lie, making up data.
- Second, the pandemic caused large swings in economic performance from quarter to quarter, which makes it difficult to keep up with the current state of the economy.
Combining disinformation with yesterday’s news has proven an effective way of painting a negative picture of a relatively healthy economy.
The Effects of the Pandemic
The pandemic began in the US in the winter of 2020, the last year of Trump’s presidency. The pandemic still continues today but in May of 2023, the Centers for Disease Controls deemed we were no longer in the emergency phase. The pandemic caused some large swings in economic performance: some occurring while Trump was president and others while Biden was in office. Some of the declines in performance were sharp but they did not last long and the economy recovered within months. For example, unemployment peaked at 14.7 percent in April 2020 and was 8.1 percent for the year. In the following year when Biden took the reins, the unemployment rate began to quickly recover and fell to 5.3 percent. Real Gross Domestic Product (measured by GDPC1) also experienced a wide swing and now has settled down to historical levels. However, these fluctuations in economic performance have left a share of the population with an inaccurate view of the current performance of the US economy.
To get the news out to people that we are doing just fine, Biden has to promote the current good economic news. His greatest success has been in lowering unemployment. Everyone needs to know that unemployment basically has fallen to the lowest levels possible. People also need to know that after a brief period of inflation that both affected economic growth (as measured by RGDP) and real average earnings, inflation has come down and real growth rates are positive. The short answer to these economic issues is they were short lived blips and are now in the past.
Beating Unemployment
As Chart 1 shows, the annual unemployment rate is currently 3.8 percent which is about as well as we have done over the past 66 years. Current unemployment is actually slightly below the best level achieved during the Trump administration or by any other president since the 1950s. Although unemployment was generally low during Trump’s presidency, he and Biden faced a very different starting point as shown by the red arrows in Chart 1.
Chart 1: Annual US Unemployment Rate since 1953
Source: Bureau of Labor Statistics, Employment status of the civilian noninstitutional population, 1953 to date https://www.bls.gov/cps/cpsaat01.htm
When Trump took over, the unemployment rate was 5.9 percent and falling rapidly as the economy was finally recovering from the Great Recession. It declined about another percentage point under Trump initially and then skyrocketed up to 8.1 percent at the end of his term. This is the rate Biden inherited and was his administration’s starting point. Since taking office Biden has added approximately 14.8 million jobs to the economy, which exceeds the job increases that occurred under of all previous presidents.[2]
Biden has cut the unemployment rate by more than half. As Chart 1 shows, now, at an unemployment rate of 3.8 percent the economy is really at full employment and it is nearly impossible to lower the rate further. The Chart shows the unemployment rate since 1953 to provided broader context for interpreting the current rate. There will always be some unemployment due to people transitioning between jobs and structural changes that make some jobs obsolete and create new ones. Basically, you cannot do better than Biden has on unemployment.
Weathered the Pandemic; Returned to Growth
Similarly, the economy has returned to positive real economic growth under Biden. As Chart 2 shows, the growth rate of our GDP, which is the value of all the goods and services we produce, was negatively impacted by the pandemic. Toward the end of Trump’s term, we experienced three quarters in which nominal GDP and real GDP (GDPC1) fell. GDPC1 is adjusted to account for the eroding effects of inflation. Chart 2 shows, in 2020 both nominal and real GDP fell reflecting a significant contraction in the economy. This decline continued for the last 3 quarters of 2020 and is shown in the chart by the downward spike. However, by the beginning of Biden’s terms, things began to turn around. Nominal GDP has basically sky rocketed and is following a new sharper upward trajectory. When measured in real terms, GDPC1 shows growth has returned to the historical levels, which has average 2.8 percent a year since 1948. The Bureau of Economic Analysis estimates that in the fourth quarter of 2023, real GDP increased 3.4 percent. [3]
Chart 2: Nominal and Real Gross Domestic Product since 1947
Source: Federal Reserve Bank of St. Louis, Real Gross Domestic Product, Billions of Chained 2017 Dollars, Quarterly, Seasonally Adjusted Annual Rate; https://fred.stlouisfed.org/series/GDPC1
Although the growth rate of real GDP has followed a long run trend of just shy of 3 percent, it has consistently fluctuated around this trend and periodically dips into the negative. As Chart 3 shows, we have experienced periods of negative real GDP growth 10 times since the late 1940’s. There are 32 quarters out of the 304 quarters examined, that had a negative growth rate when compared to the same quarter in the previous year. So experiencing short periods of negative growth is not rare. However, the magnitude of the decline in 2020 was the largest we have experienced in modern times. It was a sharp, short lived dropped followed by a large positive growth spirt in 2021. In the second quarter of 2021, real GDP grew by 11.9 percent over the same quarter in the previous year (2020, quarter 2),
Chart 3: Growth Rate of Real GDP since 1949
Source: Federal Reserve Bank of St. Louis, Real Gross Domestic Product, Percent Change from Preceding Period, Quarterly, Seasonally Adjusted Annual Rate. https://fred.stlouisfed.org/series/A191RL1Q225SBEA
Getting Inflation under Control
The US economy periodically has spikes in inflation, as Chart 4 shows. Trump enjoyed relatively low inflation during his term largely because he became President shortly after the Great Recession, which had depressed demand and prices. This period of time was an aberration. One should not expect inflation to be zero and especially not negative. Negative inflation occurs when prices are falling across multiple sectors. Falling pricing are a reflection of contacting demand and is a signal of a weak, unhealthy economy. We experienced negative inflation in 2009, at the start of the Great Recession. After hitting a low of about 1 percent at the start of Trump’s fourth year in office, inflation began to rise.
When Biden took over, inflation was rising sharply and it topped out at 8 percent in the middle of this term. Inflation is managed primarily through controlling the money supply, which is a function of the Federal Reserve. Inflation has been declining as fast as it rose and is on track to return to the typical annual level that is between the 2 to 4 percent range. Over time, the annual inflation rate has averaged 3.7 percent. It is currently 4.0 percent for 2024.
Chart 4: Annual Inflation Rate in the US since 1957
Source: Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers (CPI-U), Base period 1967, https://data.bls.gov/timeseries/CUUR0000AA
Rising Real Wages
When there is substantial inflation, pay raises can be basically wiped out by the rising cost of living. That is, if one gets a 4 percent pay raise but inflation is 4 percent, your real income has not increased. The extra money you get is all absorbed by the higher cost of living [4]. Chart 5 shows the nominal and real growth rates of earnings since 1980.
Chart 5: Nominal and Real growth in Earnings since 1980
Source: Bureau of Labor Statistics, Weekly and hourly earnings data from the Current Population Survey, Original Data Value https://data.bls.gov/timeseries/LEU0252881500
As Chart 5 shows, although the nominal increase in annual earnings ranges mostly between 2 and 8 percent, the real grow rate has been negative for 19 of the past 43 years. During Trump’s term the real growth rate of earnings ranged from near zero to 6 percent. During Biden’s first year, the real growth rate fell to negative 3 percent but has since recovered and turned positive.
Conclusion
The economy is in good shape and headed in the right direction with:
- 3.8% unemployment
- 14.8 million new jobs created in the past 3 years
- 3.4% real GDP growth rate
- 4% inflation rate (and falling)
- 1.4% real earnings growth rate (and increasing)
Notes
[2] https://edition.cnn.com/politics/live-news/state-of-the-union-biden-03-07-24/h_d7601323b6cfc072a168fa84e73dc724?tab=Fact%20Check
[3] Data source: Bureau of Economic Analysis, https://www.bea.gov/data/gdp/gross-domestic-product
[4] Our national measures of earnings are averages for the population as a whole. As such, real growth in earnings measures if everyone is typically better off (the earning’s pie got bigger) rather than how one’s earnings change as you move along the distribution curve due to increased experience.