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Challenge #1 – COVID-19 and the 2021 Economy
The primary driver of U.S. economic growth in 2021 will likely be a repeat of 2020: COVID-19. The importance of the interrelationship between individual health, healthcare, and the economy has never been so visibly apparent. The United States economy typically chugs along at a pretty good pace unless there is a bump or shock to derail its progress. The key is to get the economy moving forward – precipitating a snowballing effect, where economic growth continues until something happens to stop it. When economic growth occurs, increased employment leads to more consumer spending, which leads to more economic growth. Consumer spending is generally the primary driver of U.S. economic growth, as it comprises approximately two-thirds of Gross Domestic Product (GDP). GDP is the benchmark for economic growth and measures the value of goods and services produced in a given period. Likewise, a snowballing effect can occur in the opposite direction. If consumer spending declines economic contraction continues until something happens to reverse it. If something happens to derail consumer spending, that’s where fiscal policy (spending by the U.S. government) and/or monetary policy (the Federal Reserve reducing interest rates) can be used to put consumer spending back on track. Fiscal policy can include spending on specific programs by the federal government and stimulus programs featuring direct payments to individuals. Although a variety of factors influence interest rates, the Federal Reserve’s monetary policy (buying and selling Treasury securities) strongly influences the movement of interest rates. The Federal Reserve targets the fed funds rate, a very short-term interest rate, which is the overnight borrowing rate between banks. When the Federal Reserve changes this rate, there is generally a rippling effect on other interest rates in the financial markets. Lower interest rates generally increase consumer spending. Higher interest rates generally lower consumer spending. The goal of the Federal Reserve – balance economic growth with acceptable levels of inflation. The table below shows U.S. economic growth as measured by the annual percentage change in GDP over the last 3 decades. As stated earlier, generally the U.S. economy chugs along unless there is a bump or shock to derail it. Over the last three decades economic growth was positive in 27 out of 30 years.
Annual Percentage Change in GDP (Source: Bureau of Economic Analysis)
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
-2.5
2.6
1.6
2.2
1.8
2.5
2.9
1.6
2.4
2.9
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
4.1
1.0
1.7
2.9
3.8
3.5
2.9
1.9
-0.1
-2.5
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
1.9
-0.1
3.5
2.8
4.0
2.7
3.8
4.4
4.5
4.8
An economic bump occurred in 1991 due to the Federal Reserve increasing interest rates and an oil price shock. By 1990 the rate of inflation (as measured by the change in the Consumer Price Index) exceeded 5%; the Federal Reserve countered by increasing the fed funds rate to lower consumer spending and reduce inflation. It might seem hard to believe given the low interest rates of the last decade, but in July 1990 the fed funds rate stood at 8.0%. An oil price shock also occurred as oil prices more than doubled in 1990 in response to the Iraqi invasion of Kuwait. Decreasing inflation and a reversal of oil prices led to a slashing of interest rates by the Federal Reserve from 8.0% in July 1990 to only 3.0% in September 1992. Low interest rates and the dot.com boom, the rise of internet and technology companies, paved the way for strong economic growth in the 1990s with four years of economic growth of 4.0% or greater.
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Center for Business and Economic Insight
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