The U.S. Economy: The Myths vs. The Realities
Kevin M. Bahr CBEI Chief Analyst; Professor of Business School of Business and Economics
Much has been written and discussed about the current state of the U.S. economy. Some of it is accurate, some of it not so much. An unprecedented combination of factors that include a pandemic and an unprovoked military invasion by Russia against Ukraine has created a complex and dynamic set of variables that have impacted the U.S. economy. This report will attempt to explain what is going on economically, why it is going on, and differentiate the myths from reality.
Myth #1: Government spending has caused inflation to soar. The Reality:
Inflation has increased significantly due to a combination of factors. Primary factors include supply chain disruptions, increased consumer demand resulting from strong employment growth due to government spending and stimulus programs, and increased energy prices. Government Spending, Employment, and Consumer Demand Prior to the effects of COVID-19 on the economy, U.S. employment peaked at 152.5 million in February 2020. Two months later in April, employment dropped to 130.2 million. In two months, employment had declined by approximately 22.3 million jobs. The loss of 20.7 million jobs in April was the most significant drop in monthly employment since the Bureau of Labor Statistics began tracking monthly changes in employment in 1939. During the financial crisis, approximately 8.7 million jobs were lost over two years . During the COVID crisis in 2020, 22.3 million jobs were lost over two months . In two months the unemployment rate skyrocketed from 3.5% to 14.7%. Multiple rounds of fiscal stimulus (government spending) were used by both prior and current administrations to combat the negative effects of the pandemic on the economy. Under the prior administration, multiple relief and stimulus packages were passed by Congress in early 2020, the largest being the $2.3 trillion CARES (Coronavirus Aid, Relief, and Economic Security) Act. An additional $900 billion stimulus was implemented in December and included direct payments to taxpayers. Under the current administration, fiscal stimulus included the $1.9 trillion American Rescue Plan in March 2021. The fiscal stimulus programs contributed to a rapid recovery for the U.S. economy. Beginning in May 2020 the unemployment rate began a consistent downward trend and reached 6.7% by year end, still significantly higher than the 3.5% unemployment prior to the pandemic. The economy continued its recovery in 2021 and in March 2022 the unemployment rate had dropped to 3.6%. After bottoming out at 130.2 million in April 2020, U.S. employment was nearly 151 million in March 2022. The strong and quick economic recovery that occurred beginning in May 2020 contributed to a rapid increase in consumer demand though March 2022 employment was still 1.5 million fewer than the pre-pandemic level. In February 2020, the annualized inflation rate was 2.5% while in March 2022 it climbed to 8.5%. Relative to two years ago, inflation was significantly higher, yet employment was slightly lower. However, the increased consumer demand resulting from employment growth is not the sole factor accounting for inflation.
Central Wisconsin Report - Spring 2022
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