In the fourth quarter of 2021, The U.S. economy moved into a moderate recovery stage with GDP reaching its pre-pandemic level. However, the slow labor market recovery, supply-chain disruptions, energy price increases, product and material shortages, and transportation bottlenecks, combined with the unprecedented expansionary fiscal and monetary policy stimulants, contributed to a high inflation rate of 7%.

The Federal Reserve’s October 2021 Beige Report found that a majority of the Fed Districts saw positive growth in consumer spending, but saw declines in auto sales and low inventory levels and rising prices. Other reported economic notables from the October Beige Report:

• Manufacturing grew moderately as did trucking and freight.

• Growth in nonmanufacturing activity ranged from slight to moderate.

• Residential real estate activity slowed slightly but the market remained healthy, overall.

• Agriculture conditions were mixed.

• Outlooks for near-term economic activity remained positive, overall, but some Districts noted increased uncertainty and more cautious optimism than in previous months.

As of November 2021, the leading economic indicators point to a continuous modest economic growth in 2022. The projected modest recovery can be attributed to the stimulus package and an accommodating Federal Reserve monetary policy of keeping rates low.

The fiscal policy stimulants, though, are projected to increase the Federal Government’s deficit from its $779 billion level in 2019 to over $3.668 trillion in 2021. The projected deficit, in turn, is expected to augment the Federal debt from its $23 trillion level in 2019 to $29 trillion in 2021. The Federal Reserve’s purchases of that debt from 2019 to 2021 has led to an increase in the U.S. monetary base from $4.945 trillion in May of 2020 to 6.331 trillion in November 2021. In the long run, the fear is that the current expansionary monetary actions, unless reversed, will lead to even higher inflation as the economy moves back to full capacity. Furthermore, the unprecedented deficits and federal government debt levels will result in higher interest rates in the future. In the absence of a strong supply-side economic growth, the long-run cost of the monetary and fiscal policy stimulants will be a slower economic growth accompanied by inflation and relatively high levels of unemployment. Finally, there is considerable uncertainty over the impacts that possible new policy initiatives and executive orders of the Biden Administration will have on the overall economy. Policies to monitor include: energy, environment, taxes, immigration, government debt, and trade policies.

• The monetary base is the total amount of a currency that is either in general circulation in the hands of the public or in the commercial bank deposits held in the central bank's reserves.

Trends

Production and Energy Price

The moderate growth in GDP in the second and third quarters of 2021was characterized by similar patterns in production. Total industrial production in October was 5.1% above its year-earlier level and at its highest level since December 2019. In October, capacity utilization for the industrial sector increased 1.2% to 76.4%. Energy production in November 2021 was up from 8.9% from its year-earlier level, but 5.6% lower than its November 2019 level. The lower energy production combined with moderate economic growth contributed to higher energy prices. Crude oil prices, in turn, increased 101% from $39.40 per barrel in November 2020 to $81.48, and 54% from $53.96 in November 2019 (pre-pandemic period) to $81.48 in November 2021. Similar trends characterized electricity and natural gas prices. Of particular note to the production trend was the decline in U.S vehicle sales, which after increasing 62% from April 2020 to April 2021, decreased 30% from April 2021 to November 2021. Lastly, after peaking at 1.73 in April 2020, the manufacture and trade inventory-to-sales index declined 27% to 1.26 in November 2021.

• Industrial production measures the output of industrial establishments in the following industries: mining and quarrying, manufacturing and public utilities (electricity, gas and water supply).

• Capacity utilization tracks the extent to which the installed productive capacity of a country is being used in the production of goods and services. It is reported as the percent of capacity being used for production (as opposed to sitting idle).

• Manufacturing inventory-to-sales ratio is the ratio of business inventories to sales in the manufacturing, retail and wholesale trade industries. Business inventories are either goods ready for sale or shipments that are still being held by the producer, or goods acquired for the purpose of reselling them without further processing.

Retail Sales and E-Commerce

Similar to the GDP trends, retail sales spiked in the first quarter of 2021 and then grew at lower rates in the second and third quarter.

Capital Investment

The pandemic led to a 14.5% decrease in the level of aggregate domestic investment during the second quarter of 2020 from $3.34 trillion to $2.85 trillion. In the third quarter, investment did rebound, increasing 16.8% to $3.33 trillion. Much of the increase, though, was replacing the inventory shortage in production. Overall, for the first three quarters of 2021 new business investment grew only moderately, while corporate earnings increased, resulting in an increase in corporate cash positions. The large corporate cash positions reflect an economic environment of uncertainty. In addition to the moderate rate of growth in corporate investments, the first three quarters of 2021saw a significant decrease in bankruptcy. Bloomberg’s bankruptcy index decreased 90% from 301 at the beginning of August of 2021 to 29.9 in November of 2021.

Housing

After hitting a low of 4 million sales in July 2020, existing housing sales increased 50% to 6.34 million sales in November 2021. Housing inventory, in turn, for the same period decreased 19% from 1.54 million houses to 1.25 million. However, construction of new houses decreased by 11% from 839,000 to 745,000 during this period. With the decline in construction and inventory, median home prices soared during this period. The S&P/Case-Shiller housing price index increased 22% from 220 in July 2020 to 269 in November 2021. Contributing to the uptick in the housing market were lower mortgage rates, with the 30-year mortgage rate average 2.9% for the past year.

• Inventory of Houses for Sale tracks the number of homes that are currently on the market.

• S&P/Case-Shiller U.S. National Home Price Index tracks the value of single-family housing within the United States. The index is a composite of single-family home price indices for the nine U.S. Census divisions

Fiscal Policy

In 2021, the federal government raised over $3.58 trillion in revenue from income, social insurance, and corporate taxes, and it spent over $7.25 trillion on welfare and individual security programs (social security, health care, and income security programs), national defense, interest on the federal government debt, and physical resources (energy, commerce and housing, transportation, and regional development). Two trillion of the $7.25 trillion government expenditures in 2021 funded the pandemic stimulus relief bill. The government's excess of expenditures over tax revenues in 2021 equated to a deficit of $3.675 trillion. The 2021 deficit follows a $3.12 trillion deficit in 2020. The deficits, increased the government’s debt to $28.9 trillion and the public debt-to-GDP percentage to 125%.

Monetary Policy

The Federal Reserve continued to undertake extraordinary monetary measures in dealing with the 2020 financial crisis resulting from the pandemic. The Fed slashed interest rates and purchased a large proportion of the government debt as part of their open market operations. The Fed has signaled that it will remain accommodative for a prolonged period of time, but in the face of inflation may start reducing their Treasury debt purchases. In 2018, the Fed’s balance sheet was approximately 20% of GDP. With the Fed’s expansionary monetary policies in 2020 and 2021 of monetizing the rising federal debt, its balance sheet has risen to 38% of GDP.

In the long run, deficit spending and monetizing the debt can lead to higher interest rates and/or high inflation once the economy moves back to full capacity. The long-run cost can be a lower steady-state economic growth accompanied by inflation and relatively high equilibrium levels of unemployment. In a seminal work by Reinhart and Rogoff (This Time is Different), the authors found that public debt above 90% can reduce average growth rates by more than 1%. In 2000, the US federal debt was 60% of GDP, by 2013 it had increased to 100%, and for 2021 it is expected to be 125%.

Employment

With the moderate growth in 2021, the unemployment rate decreased to a 4.6% level in November 2021 and the underemployment rate to 8.3%. At the same time, though, the recovery increased job vacancies by 81% from 5,769,000 in April 2020 to 10,438,000 in November 2021, with an increased number of workers electing not to enter the work force.

• Underemployment: This measure of unemployment includes the total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force.

Inflation

From 2016 through 2020, the U.S. inflation rate remained relatively low, averaging 1.78%. This lowflation environment persisted even with a public debt at 125% of GDP, quantitative easing, a pre-pandemic tight job market, and high capacity utilization. As noted, in 2021the slow labor market recovery, supply-chain disruptions, energy price increases, product and material shortages, and transportation bottlenecks, combined with the unprecedented expansionary fiscal and monetary policy stimulants, led to a 7% inflation rate.

With the Biden Administration’s emphasis on expanding renewable power and, at the time of this writing, possible passage of a pending “Build Back Better” bill, there is a growing concern of a continued increase in inflation, as well as a concern that if the Federal Reserve were to increase interest rate to slow down the inflation, it would precipitate a recession.

Trade and Exchange Rates

The U.S current account trade balance deteriorated from a deficit of $65.8 billion at the beginning of 2021 to $80.93 billion in November. The increase in the current account balance, in turn, did not lead to a depreciation of the dollar against most major currencies in 2021. For example, from the beginning of the 2021 to November 2021, the British pound decreased slightly from $1.36/BP to $1.33/BP and the price of the Euro decreased from $1.22/Euro to $1.12/Euro.

*All the graphs were created by the students with data collected from Bloomberg.