Authors of history, sociology, political science, and economics books will feast on the impacts and unintended consequences of the 2020 COVID pandemic for years. Rarely in world history has an event created this much structural change.
At home, kitchens have become DoorDash staging areas. Corporate offices have become home offices. Front porches have become shopping carts. At work, headquarters have gone remote. We measure commuting in steps not stoplights. Virtual has become vital for all businesses. In government, central banks have pledged to create inflation rather than fight it. Federal legislators have abandoned deficit spending constraints. Recessions have been outlawed. COVID swept through our public and private institutions with hurricane-force winds, bringing chaos and destruction. Fortunately, in a system as dynamic and resilient as the U.S. economy, chaotic destruction becomes creative reconstruction.
- David S. Waddell
World War II ended in 1945, after claiming more than 400,000 American lives. During that period, the sluggish post-depression U.S. economy reoriented population and manufacturing to the coasts to support the war effort. Productivity surged. Fiscal policy became ultra-expansionary as deficits vaulted from 4 percent of GDP in 1941 to 27 percent by 1943. Monetary policy also became ultra-expansionary, as M2 money supply grew almost 25 percent. For the period, U.S. industrial production doubled, U.S. corporate profits doubled, and wages rose 50 percent.
This occurred despite rationing restrictions. Consumer savings rates hit 21 percent, as fear and restrictions stockpiled consumer demand. Once the fighting stopped, spending levels surged. Factories retooled from ammunition to appliances and from tanks to automobiles. Economic productivity in the United States entered a golden age. Between 1940 and 1960, the U.S. economy grew from $1.2 trillion to $3.2 trillion for an annualized growth rate of 5 percent.
COVID will likely end in 2021, after claiming over 400,000 American lives. Just as the industrial response to WWII led to population migrations to the coasts, the technological response to COVID has led to population migrations away from urban centers. Technology utilization rates have soared as e-commerce and Zoom have replaced superstores and business commutes. Fiscal stimulus has inflated the U.S. deficit from 4.5 percent to 18 percent in 2020, while total M2 money supply has ballooned by 26 percent.
Personal incomes for all Americans have risen 8 percent this year despite high unemployment rates. Household net worth has risen 5 percent this year, so far, to an all-time high. Just as fear and rationing encouraged higher savings rates in WWII, shutdowns and lockdowns today have led to personal savings rates near 14 percent. Even still, total retail sales hit record highs in June. With vaccines in distribution, economists predict GDP growth of 4.5 to 5 percent for 2021, which is more than double our pre-COVID run rate. Recent productivity measures suggest GDP could remain above trend for years.
Bottom line: In 2020, the U.S. went to war with COVID-19. Not since WWII has the nation fully engaged systematically in the defeat of a foreign adversary. The mobilization of the industrial economy then resembles the mobilization of the technological economy now. Population migration to the coasts to work at factories then resembles population migration away from the urban centers to work on laptops now. Historic growth in the money supply and deficit spending then resemble historic growth in the money supply and deficit spending now. After WWII, many economists forecasted a post-war hangover and a slowdown in U.S. productivity. The opposite occurred. The end of WWII ushered in a prolonged period of productivity growth and well-above-trend economic growth. Textbooks refer to the period from 1940 to 1960 as our economic Golden Age. As we look ahead to the end of the war on COVID, history may not repeat, but we expect it to rhyme.
David S. Waddell is CEO and Chief Investment Strategist at Waddell & Associates. Sources: St. Louis Fed Database, Bureau of Economic Analysis.