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According to the Bureau of Economic Analysis (BEA) first estimate of GDP growth, the economy grew 1.6% in the second quarter of this year.  That means growth was 6.5% on an annual basis.  This is slightly higher than the 6.3% growth in the first quarter.

While 6.5% annual growth is very strong, the number was below economists’ expectations.  The consensus view was that the economy would be growing at an 8.5% annual rate.  Why were the economists’ forecasts so far off the actual number?

Since May of last year, the economy has recovered very rapidly.  We experienced a V-shaped recovery from the steep, but very short lived, recession.  The recession actually lasted about six weeks, from mid-March to the end of April.  Because of the economic shutdown, GDP growth turned negative.  On an annual basis, second quarter GDP economic growth was almost -32%.

But the economy began to re-open in May.  More than 4.4 million jobs were added back to the economy in May and June of last year.  The third quarter GDP growth hit a whopping 33.1%.

Then last fall, the virus flared up again.  Some businesses were forced to shut down.  That resulted in growth slowing to an annual rate of 4%.  The federal government responded to that slow down by passing another stimulus package.  This was in addition to a series of multi-trillion dollar stimulus packages passed in Spring 2020.

Last Spring, the economy almost fully re-opened.  Economists saw the unemployment rate fall in Spring and early summer, leading most to forecast 8.5% growth for the second quarter.  The 6.5% actual number was a surprise.

It appears that growth is being restrained by mostly lower income workers who refuse to go back to work when their employer calls them  Many say that with the state unemployment compensation and with the additionally $300 weekly benefit paid by the federal government, it simply doesn’t make sense to return to work.

For lower income earners, returning to a 40 hour week will result in about the same amount of wages that they are receiving from the government.  Since working 40 hours per week would result in very little additional money, they chose to not go back to work.

Technically they can’t do that because the state unemployment benefit requires that an unemployed worker actively seeks employment and must accept a comparable job when offered.  The reality is they figure out how to stay unemployed and collect the benefits from government. So they continue to not work.

How bad is the problem?

One study estimated that up to 1.8 million unemployed workers have refused to go back to work because it is better for them financially to remain unemployed.  Had the federal government not added the extra $300 per week to the state benefits package, these workers would have gone back to work..  That addition to the labor force would have resulted in a higher growth rate in the second quarter, likely approaching the 8.5% rate economists had forecast.

Depending on the activity of the Delta variant of the Covid virus, most economists are forecasting about 7% annualized GDP growth for the third quarter of this year.  In September the additional $300 federal government unemployment compensation addition will expire.  That means at least 1.8 million workers will return to their jobs, easing the labor shortage and encouraging more growth.  As such we could see economic growth for the fourth quart in the 8% range.

That means for the entire 2021 year, GDP growth will exceed 7%.  That will be the best year for GDP growth in the US since 1984.

At this point, no more stimulus or deficit spending is needed.  In fact, any more will likely lead to higher inflation, especially considering that the Federal Reserve is not doing anything to help control the inflation problem.  Because growth is substantial and considering the economy is back to where it was prior to the pandemic, the FED should set price stability as its primary goal.

The longer they wait to do that, the more drastic action they will be forced to take.



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