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Friday, February 19, 2021

A huge economic reversal from 2009

The U.S. economy is in a reasonably good place right now.

Consumer spending is robust and activity in the service and manufacturing sectors is increasing at a faster rate. The labor market stabilized in January, though as Thursday's report on initial jobless claims showed there is still considerable pressure for workers.

And with Congress having already passed a few trillion dollars worth of fiscal stimulus and up to $1.9 trillion in additional aid making its way into the economy over the months ahead, an improving trajectory seems sustainable for the U.S. economy. But the overall arc of this economic recovery is likely to look even better when compared to the sluggish decade of growth we saw after the financial crisis.

"We think most forecasters are not looking at the whole story for the last recovery," Ethan Harris, global economist at Bank of America Global Research, said in a note published Thursday. "In a number of ways today looks entirely different from 2009."

For Harris, this difference comes down to four core features:

• The stimulus [in 2009] was late, small and faded too fast. Today's stimulus has been timely, huge and very persistent.

• In a COVID-19 world, much of the stimulus effect is deferred until the economy reopens.

• The COVID-19 crisis should leave much smaller economic scars than the biggest banking and real estate crisis in modern history.

• Household balance sheets were deeply damaged in the last cycle; they are in great shape (in aggregate) today.

In the years ahead, lots will be made of the output gap — that is, the difference between present GDP growth and pre-crisis trend growth — and the speed with which this does or does not close. But Harris looks a bit more closely at the labor market. And specifically how quickly the gap between peak crisis-era unemployment might close in the wake of the pandemic-related recession.

And the short of it is that with additional stimulus, additional consumer spending power, and a corporate sector that isn't dealing with the kinds of aftershocks we saw in the beginning of the last decade, a pre-pandemic labor market could return within a year or two.

"Putting it all together, we look for a much faster return to full employment," Harris writes. "According to CBO estimates the economy did not reach full employment in the last cycle until 2017, 31 quarters into the recovery. This time we expect full employment by 3Q 2022 or 9 quarters into the recovery. Fasten your seatbelts."