This is pretty astounding. When the pandemic hit, many economists feared it would leave lasting scars. After the 2007-2009 Great Recession, after all, it took a long time for the job market to heal and for displaced workers to regain their footing. Yet, somehow, following a once-in-a-century public health crisis that led to record-breaking job losses, American workers didn’t just recover all the ground they’d lost. They’re doing better than ever, better than had been imagined even before this traumatic global shock.
The labor market has outperformed pre-pandemic expectations on other metrics, too. For example, the CBO had expected the unemployment rate to be 4.2 percent at the end of 2023. Instead, it’s near half-century lows, at 3.7 percent. It’s been at or below 4 percent for the last two years.
Relatedly, the share of American adults who are actively in the labor force (that is, either working or looking for work) is also slightly higher than the Congressional Budget Office had expected.
The job market isn’t the only front on which we have bested forecasts made in the Before Times. The overall size of the economy, as measured by gross domestic product, is larger than it was expected to be around now, as Harvard University economics professor and former Obama administration official Jason Furman has pointed out:
And the Congressional Budget Office isn’t alone in understating where we would be by now. The International Monetary Fund says that U.S. gross domestic product is higher today, in inflation-adjusted terms, than it had expected at the beginning of 2020. The IMF ran these calculations for countries around the world, and found the United States was an outlier in beating the organization’s pre-covid forecasts:
So why did well-regarded professional forecasters underestimate the strength of the economy? And how is it that jobs and GDP are doing better than they expected, even as inflation has been unmistakably worse?
To some extent, all these things are related.
Forecasters obviously did not anticipate the pandemic. They also did not anticipate the unprecedentedly enormous government response to the coronavirus.
When the public health crisis hit and displaced millions of American workers, policymakers swung into action with a swiftness and single-mindedness they hadn’t exhibited in prior downturns. They implemented unusually generous fiscal and monetary stimulus — unusually generous relative both to prior U.S. recession responses, and to the responses in other countries. These choices to aggressively stimulate the economy happened during both the Trump and Biden administrations, to be clear.
Such stimulative measures helped get people back to work sooner, and avoided the long, painful slog back to normal that had followed the Great Recession. Hence, faster job growth.
They also massively stoked consumer demand, at a time when the productive capacity of the economy (i.e., companies’ ability to make and deliver the things their customers want) couldn’t keep up. Employers faced all kinds of shortages — of products, materials, workers — and consumers eager to buy stuff bid up the prices of whatever inventory companies actually had available. Hence, faster price growth.
More than three years after the pandemic began, those effects are finally fading. Price growth has cooled off a lot. Hiring is no longer showing the kinds of eye-popping numbers we once saw, but it’s resilient nonetheless. If you had asked me back in, say, January 2020 how Americans might feel about an economy with an “extra” 2 million jobs, unemployment less than 4 percent, and inflation just over 3 percent, I probably would have guessed the public would be pretty content.
Well, obviously, that would have been the wrong call. People are still furious about the extra price growth they’ve already endured to date, and unimpressed by all that extra job growth. Maybe voters just don’t like surprises. Or maybe it’s human nature for people to view better jobs or pay as things they’ve earned, while painful price hikes are things inflicted upon them — even if both are, to some extent, two sides of the same coin.
