The U.S. Bureau of Economic Analysis (BEA) just reported the advance estimate of U.S. Real GDP (or inflation-adjusted GDP) for the first quarter of 2021. Headlines report that Real GDP grew at an annual rate of 6.4% this quarter, which is what would happen if the actual quarterly growth rate of 1.6% continued for four consecutive quarters. This follows quarterly growth of 1.1% in the fourth quarter of 2020 and 7.5% in the third quarter of 2020. These are impressive growth rates – U.S. real GDP had an average quarterly growth rate from 2000 to 2018 of just 0.5%, or just over 2.0% annually.
So what does this mean with respect to our current economic condition? The following graph shows the quarterly changes in Real GDP starting from our all-time peak in the fourth quarter of 2019. We had a small decrease in the first quarter of 2020, followed by a disaster in the second quarter as the pandemic and assorted economic shutdowns rocked the economy. The decline in the first half of 2020 was over ten percent, a record rate of decline over two consecutive quarters. Three straight quarters of very impressive growth followed. The recent quarter’s acceleration in growth is encouraging and signals the strength of our increasingly vaccinated and increasingly reopened economy. Yet, we still are almost 1% below our previous peak of Real GDP at the end of 2019, a gap we should see closed in the current (second) quarter of 2021.
Closing this gap does not really restore the economy to normal, since our previous peak occurred five quarters past, and the economy, absent the pandemic, was expected to have continued to grow, albeit at our usual tepid pace of 2% annually. The next graph shows Real GDP and Potential Real GDP, where Potential Real GDP is an estimate of the level of Real GDP that would occur at full employment. This graph takes a longer view and shows data from 2007. With this longer horizon we see the Great Recession years (2008-2009), the long recovery after the Great Recession, the period from the first quarter of 2018 to the fourth quarter of when actual GDP exceeded potential GDP, and then the sharp decline in 2020 due to the pandemic. Importantly, we have made great strides toward a return to Potential Real GDP, but we are not there yet. In fact, in the first quarter of 2021 we remain 2.2% below the estimate of potential Real GDP.
We have made remarkable progress, but we still have a ways to go before are back to what we might call ‘normal.’
Finally, there is another data series to consider and that is employment. The following graph is of nonfarm employment, a monthly data series produced by the Bureau of Labor Statistics (BLS). Employment peaked in February 2020 at 152.5 million workers. It declined by 1.1% in March 2020 when the pandemic began to bite, and cratered by 13.7% in April 2020 when the pandemic and business closures took full effect. April employment was 130.2 million, or 22.3 million below February’s level.
Employment has risen almost every month since April. It rose quickly at first, 2.2% in May, 3.6% in June, then 1.3% in July and 1.1% in August. But in the fall, the growth in employment became rather anemic, and employment even fell slightly in December. This year, 2021, we have had growth of 0.2% in January, 0.3% in February, and 0.6% in March. Employment growth seems to be accelerating, although it is still substantially lower than last summer’s numbers. For perspective, however, monthly employment growth rates are low -- over the period 2000-2018 the average monthly growth was 0.06%, or an annual rate of 0.7%, far lower than Real GDP.
Our March 2021 employment level of 143.2 million is still 9.3 million below our previous peak employment level, or 5.5%. The shortfall in employment is substantially larger than the shortfall in Real GDP and will likely take much longer to be eliminated. So, we are making great progress, and yet still have a ways to go.