The end to the Trump recovery is in sight

Most business journalists and economists continue to underestimate the strength and resilience of the U.S. economy. Last week’s employment report shows that the unemployment rate declined to 6.9 percent in October, a full-point decline from September. It is likely that by January 2021, when the Trump administration leaves office, the economy will have fully recovered its pre-pandemic economic performance so that the Trump recovery will be complete. An incoming Biden administration will have an economy better than the one Barack Obama and Joe Biden left to Donald Trump.

Over the past six months, the economy has enjoyed the most rapid economic recovery in history. This followed the sharpest and shortest recession in history. From February to April, the decline in output, income and employment was large enough to boost the unemployment rate by 11.2 percentage points in two monthly steps that were the largest (April) and the fourth-largest (March) monthly increases in the 73 years since 1947. The two-month recession was the shortest in our history. The previous shortest recession was the six-month recession that began in January 1980, when the unemployment rate rose from 6.3 percent in January to only 7.8 percent in July.

Despite continuing claims that the recovery is losing steam or stagnating, there have been six months of historically massive declines in the unemployment rate. Over the first three months (May to July), the monthly unemployment rate decline averaged 1.5 percentage points; over the next three months (August to October), the decline averaged 1.1 percent per month — a slower pace, but still the second-fastest pace of improvement in post-war history.  

If this pace continues over the next three months, the unemployment rate would fall to 3.6 percent in January, essentially back to the booming performance achieved prior to the pandemic. In May, the unemployment rate fell 1.4 percentage points, the second largest decline in post-World War II history until then. In June, it fell 2.2 percentage points, the new largest decline in history. In July, it fell 0.9 percentage points; in August, 1.8 percentage points, the new second-largest in history; in September, it fell 0.5 percentage points; and in October, 1.0 percentage point, the fifth-largest decline in post-war history. Since April, five of the six largest one-month unemployment rate declines in post-war history have occurred, and the other was the ninth-largest.

Before the pandemic, the largest one-month decline in the unemployment rate occurred in November 1949, a fall of 1.5 percentage points. It followed an equally historic 1.3 percentage point one-month surge in the unemployment rate (from 6.6 percent in September to 7.9 percent), returning the unemployment rate to 6.4 percent. Both the rise in October and the fall in November were the largest in the post-war record until the pandemic. The one-month upward blip in unemployment came in the month that President Harry Truman’s “Fair Deal” program raised the federal minimum wage from $0.40 per hour to $0.75 per hour, the largest percentage increase in the minimum wage in history. 

The sharp drops in the unemployment rate for the past six months — and for probably the next few months or so — have been historic in nature and have made strong headway in returning the economy to its pre-pandemic performance. The declines eventually will shrink in size, but will remain unprecedented in size until the economy returns to normal.

As noted, it is common for analysts to characterize the economy’s performance to be quite incomplete, stalling out roughly halfway back to “normal.” The error here is to judge normal by where the unemployment rate peaked — 14.7 percent in April — and not relative to the size of improvement required to reach “normalcy,” say the 3.5 percent rate registered last February. A move from a 14.7 percent rate in April to 6.9 percent in October — a reduction of 7.8 percentage points — is 53 percent of the peak unemployment rate. 

We are much further along than halfway back to normal, however. Normal is not returning to zero; it is returning to the 3.5 percent unemployment rate registered in February 2020. The 7.8 percentage point reduction over the past six months is 70 percent of the desired recovery. Halfway back was achieved in August — actually, 56 percent — when the unemployment rate had fallen to 8.4 percent. At the rate of decline of the unemployment rate since April, or since July, the economy will achieve normalcy by January.

The incoming administration is likely to face an economy as strong as it was before the pandemic. There are major losses as the economy adjusts to the pandemic, but many offsetting gains. Many workers will have left the labor force permanently, just as there have been in three previous recessions. The more likely short-term economic policy problem will be staying on a high-employment path without pushing the economy back into a government-mandated recession or overstimulating a booming economy. 

Another risk to this quick recovery is that federal unemployment assistance was cut at the end of July, and disappeared in September, and many workers who have been unemployed over the period have mortgage or rent payments that have been legally suspended through December. Some additional relief for the unemployed, including both a modest degree of additional assistance for still laid-off workers and for those at risk of losing housing because of current or earlier default on mortgages or rent, would reduce the major risk to achieving the quick return to normalcy. 

So far, these risks have not slowed the recovery, but policymakers cannot count on such continuing luck. The case for a modest relief effort is extremely time-sensitive. It must be done very soon to have the desired effect. If the economy continues to recover as rapidly as expected without such a stimulus plan, it will not be viewed later to be as economically or politically necessary. 

Congress continues to postpone additional assistance at the nation’s peril. The next two to three months is the window of greatest risk, not after the economy returns to normal.  

John A. Tatom is a fellow at the Institute for Applied Economics, Global Health and the Study of Business Enterprise, Johns Hopkins University, and a former research official at the Federal Reserve Bank of St. Louis.