Money & The Economy

Third-quarter GDP growth confirms super V-shaped recovery

The US Department of Commerce just announced that real GDP grew at an annual rate of more than 33% in the third quarter of this year. That rate is double the previous record growth which was set more than half a century ago. It is now clear that a super V-shaped recovery is currently underway.

Even with the phenomenal growth rate, the economy is still about 3.5% lower than this time last year. But the speed of the recovery from the very deep, but short-lived recession is something never before seen in the US.

In January and February of this year, growth was very strong. In fact, it appeared that the economy in 2020 could have seen a 4% annual growth rate, which we haven’t seen in two decades. Then the virus hit and the economy was forced to almost completely shut down from mid-March until the end of April.

The effect of the shut-down in March was so bad that it dragged down the entire first quarter, which saw a 5% annualized decrease in GDP. The shut-down in April was similarly so bad, that even with a strong V-shaped recovery starting on May 1, the second quarter saw an annualized decrease in GDP of 33%.

But starting on May 1, the economy began to re-open. While monthly growth figures are not available, economic growth can be estimated by looking at the number of new jobs created. Normally about 200,000 to 300,000 new jobs are created in an average month. The most jobs ever created in a single month prior to this year was 1.6 million.

In May, 2.8 million jobs were created. In June the number jumped to a whopping 4.6 million. It was clear that a V-shaped recovery was underway. With 1.8 million new jobs created in July and another 1.4 million in August, the V-shaped recovery looked very strong with some economists using the term “super V-shaped” recovery.

Although the V-shape started to flatten a bit in September, the economy is still growing rapidly. A second stimulus package would have sped up growth in the fourth quarter of this year, but even without more stimulus, fourth-quarter growth will be very strong.

There are about eight to ten states that continue to allow the fear of catching the virus dominate economic activity. States like New Jersey, New York, Pennsylvania, Illinois, Michigan, California, Washington and Oregon, continue major shutdowns. This is crippling their state and slowing the national recovery.

What will happen in 2021?

That mostly depends on government economic policy. The policy depends on which political party controls the Presidency and the Congress. If Trump is re-elected and his coattails are long enough to flip the House and keep the Senate, the current policies will continue and may be enhanced.

That means low taxes, less interference for government, more individual freedom and more individual responsibility. That will lead to more economic growth, more opportunity for all Americans, rising wages and low inflation.

Conversely, if Biden is elected president, he will, as he did as vice-president during the Obama/Biden administration, concentrate on curing perceived social injustices rather than economic growth. That means higher taxes on all Americans. It means very higher taxes on America’s highest income earners who provide the capital which is sorely needed to see growth in a capital intensive economy.

The Biden administration will raise not only income taxes but also capital gains taxes, from the current maximum of 23.8% perhaps as high as 43%. That too will reduce capital formation and tend to slow economic growth. Perhaps Biden should follow former President Bill Clinton.

In 1996, Clinton lowered the capital gains tax rate from 28% to 20%. That led to four years where annual economic growth exceeded 4 ½%. It also less to an increase in tax revenue and a surplus in the federal government budget. Unfortunately, Biden doesn’t agree with Clinton’s policy.

Biden will also give the government complete control of the health care market and perhaps control of the higher education market. That reduces individual freedom and leads to more social responsibility rather than individual responsibility. That also tends to slow growth.

Under Biden, economic growth would be similar or worse than the less than 2% annual growth seen during the Obama/Biden years.

Let’s hope Trump is re-elected so that economic growth can accelerate, provide opportunity to all Americans and significantly raise the standard of living. Why would Americans want anything different?

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Michael Busler

Michael Busler, Ph.D. is a public policy analyst and a Professor of Finance at Stockton University where he teaches undergraduate and graduate courses in Finance and Economics. He has written Op-ed columns in major newspapers for more than 35 years.

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