U.S. Economy Takes 2021 to Rebuild

Economics 312 Class

In 2020, the pandemic led the United States economy into a recession, the deepest, but the shortest, economic downturn since World War II. The economic recovery of 2021 relied on the implementation of the COVID-19 vaccine and unprecedented fiscal and monetary stimulus programs.

Economic impact

In 2021, the U.S. national output increased by about $1T. This expansion brought job gains and declining unemployment, with the population vaccinated and returning to work. However, these positive changes have been accompanied by rapid inflation of 6.2%.

The Bureau of Labor Statistics (BLS) reported that the unemployment rate in October of 2021 was 4.6%, notably lower than the 14.8% at the peak of the recession in April of 2020. Unemployment lingered above the pre-pandemic level of 3.5%, which was the lowest rate since the late 1960s.

Unemployment is unevenly distributed across the nation. For example, economic recessions typically affect men more than women. However, the recent recession had a larger impact on women’s employment increasing income inequality with women’s unemployment rate rising to 16.2% while men’s unemployment rate rose to 13.5%. This disparity is potentially due to school closures and child care responsibilities.

The Bureau of Economic Analysis (BEA) reported that consumption expenditure increased from $14,857B in January to $16,060B in September of 2021, especially compared to $12,021B in April of 2020. Gross private domestic investment followed suit increasing from $3,927B in January to $4,089B by September of 2021.

Although Pfizer, Moderna, and Johnson & Johnson vaccinations became available to the public and allowed people to return to work, businesses continued to be short staffed. Compared to 2020 in a pre-pandemic economy, the labor force participation rate has gradually recovered by 3%, however, the number of people staying out of the labor force continued to present issues for businesses across the country.

[Graph A] Graph showing the United States Unemployment Rate, made by ECON-312, sourced by the US Bureau of Labor Statistics

Supply chains interruptions

The COVID-19 pandemic created a whole slew of issues for global supply chains. Businesses closed, either permanently or temporarily, for care of employee health and shutdowns. Elliot Smith at CNBC noted that lengthy shutdowns caused a post-pandemic spike in demand, causing supply chains to remain bottlenecked and problematic. Labor shortages contributed to price surges and further interrupted supply chains. These problems are expected to continue into 2022.

Climate change challenges

In 2021 the U.S. economy continued to experience climate change challenges. In February, Texas suffered widespread power blackouts and water shortages during a deep freeze, sending unprepared consumers and businesses into a frenzy. The deep freeze expanded to other Southern states where the power crisis disrupted public water systems. NBC News Group reported that with the sudden swing in demand for energy usage, prices soared to more than $9,000 per megawatt hour, in comparison to the seasonal average of $50 per megawatt hour.

Wildfires raged across the West coast. In August, Cheri Mossburg and Kelly McCleary at CNN reported that California battled wildfires that forced over 42,000 California residents to evacuate and scorched 106,562 acres of land. Federal Emergency Management Agency reported that, as of November 2021, there were 108 disaster declarations in the U.S. that received 1042 mitigation grants in the amount of $1.9 billion. 

Economic policy response

To boost the national economy, the United States House and Senate passed the Infrastructure Investment and Jobs Act that, on Nov.15, 2021, President Biden signed into public law. The bill proposed a spending budget of $2.25T and settled with $1.2T in an attempt to modernize U.S. infrastructures and to transition into clean energy, update the nation’s power grid to better combat climate risks, promote sustainability, and advance economic development. The Federal government will invest $550B over five years into transportation methods, power grids, broadband access, and water purification.

Specifically, $110B will be invested in roads, bridges, and major infrastructure with $25B spent on airports, $66B on public transit infrastructure, $7.5B on a national network of EV chargers. The bill also allocated $17B towards green energy and $50B to protect against floods and droughts to battle the climate change challenges. However, it is worrisome how this fiscal stimulus will be funded since the U.S. Federal debt currently exceeds total national income by 25%.

Graph showing the United States Federal Government budget, made by ECON-312, sourced by the US Bureau of Economic Analysis

The Federal Reserve Bank (Fed) implemented expansionary monetary policy flooding the economy with a historic amount of U.S. dollars spiking money supply from $3.84T in 2019 to a whopping $19.1T in 2021.

This increase in money supply was unsurprisingly accompanied by rapid inflation – prices have been ramping up month after month. BLS reported that in October, gasoline and natural gas prices increased by 30%, meat and poultry by 10.5%, and other major categories by 6.5%, contrasting to 1.4% low inflation in January, which was near the goal of 2% stable inflation. The Fed predicted that current inflation is transitory, primarily due to supply chains disruptions, meaning inflated prices were expected to slow down. If the Fed is wrong about labeling the current inflation as transitory, a recession along with more inflation could occur.

Graph showing the US Money Supply, made by ECON-312, sourced by the Board of Governors of the Federal Reserve System

Jeff Cox at CNBC noted that the Fed considered tapering measures by cutting stimulus and decreasing Treasuries by $10B a month. With the cut in stimulus spending, the Federal funds rate is projected to increase from its current near zero, though staying below 0.25% until employment stabilizes. Christian Wolf at NBER noted that with low Federal funds rate, banks lend at a low cost, therefore incentivizing the market.

In conclusion, 2021 has been a year of rebuilding during the ongoing COVID-19 pandemic. As the new administration rolled in, there were hopes to build back the economy after the ineffectual response to the pandemic in the prior year. With the distribution of vaccines, many were able to return to work and revitalize the markets improving economic performance. With the recession easing the government is able to relax expansionary policies and work towards stabilizing inflation.

Article by students Jarod Blackowiak, Olivia Boe, Jack Hanson, Arafat Hossain,Chloe Kintop, Daisy Llapa-Perez and Trevor Vitters