Biden Is Stepping Into a Dream Economic Scenario
(Bloomberg Opinion) -- It’s fashionable to think that, just like his former boss, President Barack Obama, president-elect Joe Biden is inheriting a damaged economy that will struggle to recover, perhaps for years. The reality is quite the opposite, with Biden stepping into a dream scenario for economic growth on the other side of the battle with the Covid-19 pandemic.
When Obama took office in January 2009, the economy was still grappling with the aftermath of the housing bust and subsequent financial crisis while not receiving the fiscal support needed from Congress to boost the pace of growth. A slow recovery ensued. So, naturally, the failure of Congress to agree on another stimulus package before last week’s election and the inability – so far – of the Democrats to gain control of the Senate has raised the specter that the economy will endure a similar fate in come years.
But the current economic cycle is in no way like the last. The economy is instead poised for a rapid rebound for six main reasons:
First, there is nothing fundamentally “broken” in the economy that needs to heal. And unlike the last two cycles, there was no obvious financial bubble driving excessive activity in any one economic sector when the pandemic hit. There is no excessive investment that needs to be unwound and the financial sector has escaped largely unharmed.
Second, the indiscriminate nature of the shutdowns this past spring provides the economy with a solid base from which to grow. The economy collapsed in the spring because in the effort to get ahead of the virus, we shut down about a third of the economy on an annualized basis. That created a lot of opportunity to rebound when the unnecessary causalities of the shutdown came back online and began to grow around the virus. That process will continue.
Third, household balance sheets were not crushed like they were in the last recession. Instead, the opposite occurred. Reduced spending, fiscal stimulus, rising home prices and a buoyant equity market have all helped push household net wealth past its pre-pandemic peak.
Fourth, the demographics are incredibly supportive of growth. During the last recovery, the economy was still adapting to the Baby Boomers aging out of the workforce with a much smaller cohort of Generation X’ers behind them. The larger Millennial generation was just entering college at the time. Now, the Millennials are entering their prime homebuyer years in force and will be moving into their peak earning years. The resulting strength in housing is fueling higher home prices and durable goods spending, and we are just at the beginning of the trend. Housing activity should hold strong for the next four years.
Fifth, household savings have grown by more than a $1 trillion, providing the fuel for a hot economy on the other side of the pandemic. Sooner or later, that money is going to come out of savings and into the economy and I expect it to flow into the sectors like leisure and hospitality where there is considerable pent up demand.
Sixth, and most importantly, vaccine is coming. Pfizer Inc. announced its Covid-19 vaccine is 90% effective. Many other vaccines are in development using the same strategy as Pfizer. To be sure, it will take some time for vaccines to be widely available but once they are the sectors of the economy most encumbered by the virus (the same as those for which consumers have pent-up demand) will be lit on fire. Moreover, schools and day cares can reopen allowing parents to return to the workforce.
With Covid-19 cases surging again, it is understandably hard to look optimistically to the other side of this winter. We should see some economic softness the next couple of months, but we can afford it with the private sector creating jobs at the 906,000 monthly pace that was seen in October. Don’t let the near-term challenges distract from the economic stage being set for next four years.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tim Duy is a professor of practice and senior director of the Oregon Economic Forum at the University of Oregon and the author of Tim Duy's Fed Watch.
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