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Macroeconomic Features of the Pandemic
Governor’s Council of Economic AdvisorsAugust 18, 2020
Joseph M. SantosProfessor of Economics
Ness School of Management and EconomicsSouth Dakota State University
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Marketplaces
Creative disruptions, macroeconomic shocks, sectoral shifts, and demographic trends
Policy Spaces
Growth, financial stability, fiscal, foreign-exchange, monetary, and trade policies
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Marketplaces
Creative disruptions, macroeconomic shocks, sectoral shifts, and demographic trends
Policy Spaces
Growth, financial stability, fiscal, foreign-exchange, monetary, and trade policies
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Macroeconomic Shocks
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12
14
16
18
20
Trilli
ons o
f D
olla
rs
2000q1 2005q1 2010q1 2015q1 2020q1
Source: Federal Reserve Bank of St. Louis (FRED).
Figure 1: Gross Domestic Product, in Levels
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−30
−20
−10
010
Com
pounded A
nnual R
ate
of C
hange (
%)
2000q1 2005q1 2010q1 2015q1 2020q1
Source: Federal Reserve Bank of St. Louis (FRED).
Figure 2: Gross Domestic Product, in Growth Rates
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05
10
15
20
25
Trilli
ons o
f D
olla
rs
2000q1 2005q1 2010q1 2015q1 2020q1
Net Exports Government Investment Consumption
Source: Federal Reserve Bank of St. Louis (FRED).
Figure 3: U.S. Gross Domestic Product − Expenditures
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−.2
0.2
.4.6
.81
1.2
1.4
1.6
1.8
Annual P
erc
enta
ge C
hange
2017 2018 2019
Source: Bureau of Economic Analysis.
Figure 4: Expenditure Contributions to Real GDP Growth
Consumption Investment Government Net Exports
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−25
−20
−15
−10
−5
05
Annual P
erc
enta
ge C
hange
2017 2018 2019 2020
Source: Bureau of Economic Analysis; 2020 data refect second quarter annualized growth.
Figure 5: Expenditure Contributions to Real GDP Growth
Consumption Investment Government Net Exports
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46
810
12
14
16
18
20
22
Perc
enta
ge o
f Labor
Forc
e
2000m1 2005m1 2010m1 2015m1 2020m1
U3 U6
Source: Federal Reserve Bank of St. Louis (FRED).
Figure 6: Civilian Unemployment Rates
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60
61
62
63
64
65
66
67
68
Perc
enta
ge o
f A
dult P
opula
tion
2000m1 2005m1 2010m1 2015m1 2020m1
Source: Federal Reserve Bank of St. Louis (FRED).
Figure 7: Labor−Force Participation Rate
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05
10
15
20
25
Media
n W
eeks U
nem
plo
yed
2000m1 2005m1 2010m1 2015m1 2020m1
Source: Federal Reserve Bank of St. Louis (FRED).
Figure 8: Median Duration of Unemployment Spells
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05
10
15
20
25
Thousands o
f P
ers
ons
2000m1 2005m1 2010m1 2015m1 2020m1
Job Openings Unemployed Persons
Source: Federal Reserve Bank of St. Louis (FRED).
Figure 9: Job Openings and Unemployed Persons
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01
23
45
67
Mill
ions o
f C
laim
s
01jan2006 01jan2008 01jan2010 01jan2012 01jan2014 01jan2016 01jan2018 01jan2020
Source: Federal Reserve Bank of St. Louis (FRED).
Figure 10: Initial Claims for Unemployment Benefits
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05
10
15
20
25
Mill
ions o
f C
laim
s
01jan2006 01jan2008 01jan2010 01jan2012 01jan2014 01jan2016 01jan2018 01jan2020
Source: Federal Reserve Bank of St. Louis (FRED).
Figure 11: Continued Claims for Unemployment
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−1
01
23
4
Annual In
flation R
ate
(%
)
2000q1 2005q1 2010q1 2015q1 2020q1
Source: Same−quarter−growth in personal consumption expenditures price index; Federal Reserve Bank of St. Louis (FRED).
Figure 12: Inflation Rate
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Sectoral Shifts
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24
68
10
12
14
16
Trilli
ons o
f D
olla
rs
2018m1 2018m7 2019m1 2019m7 2020m1 2020m7
Services Durable Goods Nondurable Goods
Source: Federal Reserve Bank of St. Louis (FRED).
Figure 13: Personal Consumption Expenditures
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−.5
0.5
11.5
22.5
33.5
4
Trilli
ons o
f D
olla
rs
2000q1 2005q1 2010q1 2015q1 2020q1
Nonresidential Residential Other
Source: Federal Reserve Bank of St. Louis (FRED).
Figure 14: Gross Private Domestic Investment Expenditures
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02
46
810
12
14
16
18
Com
pounded A
nnual R
ate
of C
hange (
%)
2007q3 2009q3 2011q3 2013q3 2015q3 2017q3 2019q3
Average Hourly Earnings Employment Cost Index
Source: Federal Reserve Bank of St. Louis (FRED).
Figure 15: Employee Compensation
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−5
05
10
Com
pounded A
nnual R
ate
of C
hange (
%)
2010q1 2012q3 2015q1 2017q3 2020q1
Source: Federal Reserve Bank of St. Louis (FRED).
Figure 16: Nonfarm Labor Productivity
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Monetary Policy
R Star Is Born
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Monetary Policy
R Star Is Born
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Taylor Rule
ffrtarget = f
(inflation gap, output gap, r ∗
)
Where ffrtarget is the target federal funds rate.
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Taylor Rule
ffrtarget = f
(inflation gap
+, output gap, r ∗
)
Where ffrtarget is the target federal funds rate.
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Taylor Rule
ffrtarget = f
(inflation gap, output gap
+, r ∗
)
Where ffrtarget is the target federal funds rate.
24 / 55
Taylor Rule
ffrtarget = f
(inflation gap, output gap, r ∗
+
)
Where ffrtarget is the target federal funds rate.
24 / 55
Taylor Rule
ffrtarget = f
(inflation gap, output gap, r ∗
)
Where ffrtarget is the target federal funds rate.
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01
23
45
67
Perc
enta
ge
2000q1 2005q1 2010q1 2015q1 2020q1
Source: Federal Reserve Bank of St. Louis (FRED).
Figure 17: Federal Funds Rate
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−10
−5
05
Perc
enta
ge o
f P
ote
ntial R
eal G
DP
2000q1 2005q1 2010q1 2015q1 2020q1
Source: Author’s calculations and Federal Reserve Bank of St. Louis (FRED).
Figure 18: Output Gap
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−1
−.5
0.5
Annual In
flation R
ate
Min
us 2
−P
erc
ent T
arg
et (%
)
2000q1 2005q1 2010q1 2015q1 2020q1
Source: Author’s calculations and Federal Reserve Bank of St. Louis (FRED).
Figure 19: U.S. Inflation Gap
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0.5
11.5
22.5
33.5
Perc
enta
ge
2000q1 2005q1 2010q1 2015q1 2020q1
Source: Holston, Laubach, and Williams (2016).
Figure 20: Natural Rate of Interest (R−Star)
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−6
−4
−2
02
46
8
Perc
enta
ge
2000q1 2005q1 2010q1 2015q1 2020q1
Effective Federal Funds Rate Taylor Rule
Source: Author’s calculations, FRED and Holston, Laubach, and Williams (2016); Taylor rule data until Q1 of 2020.
Figure 21: Federal Funds Rate and Taylor Rule Rate
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Monetary Policy
The Big Easing
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Monetary Policy
The Big Easing
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12
34
5
Trilli
ons o
f D
olla
rs
2000m1 2005m1 2010m1 2015m1 2020m1
Reserves Currency in Circulation
Source: Federal Reserve Bank of St. Louis (FRED).
Figure 22: Monetary Base
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0.5
11.5
22.5
33.5
Trilli
ons o
f D
olla
rs
2000m1 2005m1 2010m1 2015m1 2020m1
Source: Federal Reserve Bank of St. Louis (FRED).
Figure 23: Total Reserve Balances Maintained with Federal Reserve Banks
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Table 1: Unconventional Monetary Policy Tools
Policy Tool Description
Quantitative Easing Purchase Treasury and agency MBSCommercial Paper Funding Facility* Purchase eligible commercial paperPrimary Dealer Credit Facility Lend to primary dealersMoney Market Mutual Fund Liquidity Facility* Lend to money-market mutual fundsPrimary Corporate Credit Facility* Purchase eligible corporate bonds, primary marketSecondary Corporate Credit Facility* Purchase eligible corporate bonds, secondary marketTerm Asset-Backed Securities Loan Facility* Lend against asset-backed securitiesMain Street Loan Facilities* Lend to small and mid-sized businessesMunicipal Liquidity Facility* Purchase eligible short-term municipal notesPaycheck Protection Liquidity Facility Lend against Paycheck Protection Program-loansSwap Lines and Repurchase Facility Lend to foreign central banks
Asterisk denotes U.S. Treasury capitalization. Source: Wells Fargo Securities.
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68
10
12
14
16
18
20
22
24
26
Perc
enta
ge o
f G
DP
2000q1 2005q1 2010q1 2015q1 2020q1
Source: Federal Reserve Bank of St. Louis (FRED).
Figure 24: Monetary Base, Share of GDP
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−5
05
10
15
20
25
30
35
40
Sam
e M
onth
Gro
wth
Rate
(%
)
2000m1 2005m1 2010m1 2015m1 2020m1
M1 M2
Source: Federal Reserve Bank of St. Louis (FRED).
Figure 25: Money Stock
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11.2
1.4
1.6
1.8
Incom
e V
elo
city
2010q1 2012q3 2015q1 2017q3 2020q1
Source: Federal Reserve Bank of St. Louis (FRED).
Figure 26: Velocity of the M2 Money Stock
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Fiscal Policy
Extra Credit
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Fiscal Policy
Extra Credit
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05
10
15
20
Trilli
ons o
f D
olla
rs
2000m1 2005m1 2010m1 2015m1 2020m1
Personal Income Social Benefits
Source: Federal Reserve Bank of St. Louis (FRED).
Figure 27: Personal Income and Social Benefits to Persons
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05
10
15
20
25
30
35
Perc
enta
ge o
f D
isposable
Incom
e
2000m1 2005m1 2010m1 2015m1 2020m1
Source: Federal Reserve Bank of St. Louis (FRED).
Figure 28: Personal Saving Rate
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30
35
40
45
50
55
60
65
70
75
80
Perc
enta
ge o
f G
DP
2000q1 2005q1 2010q1 2015q1 2020q1
Source: Federal Reserve Bank of St. Louis (FRED).
Figure 29: Federal Government Debt Held by the Public
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−10
−5
05
Perc
enta
ge o
f G
DP
1970 1980 1990 2000 2010 2020
Source: Federal Reserve Bank of St. Louis (FRED).
Figure 30: Federal Budget, Share of GDP
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Some Debt Arithmetic
debt ↑ ⇔ deficit ↑
debt ↑ ⇔ interest rates ↑
debt ↑ ⇔ GDP ↓
Where debt and deficit are relative to GDP.
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Some Debt Arithmetic
debt ↑ ⇔ deficit ↑
debt ↑ ⇔ interest rates ↑
debt ↑ ⇔ GDP ↓
Where debt and deficit are relative to GDP.
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Some Debt Arithmetic
debt ↑ ⇔ deficit ↑
debt ↑ ⇔ interest rates ↑
debt ↑ ⇔ GDP ↓
Where debt and deficit are relative to GDP.
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Some Debt Arithmetic
debt ↑ ⇔ deficit ↑
debt ↑ ⇔ interest rates ↑
debt ↑ ⇔ GDP ↓
Where debt and deficit are relative to GDP.
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Table 2: Stabilizing Budget-to-GDP Ratios
Assume the federal government debt-to-GDP ratio is 0.80.
GDP Growth Interest Rate Stabilizing Budget Actual Budget
6.0% 1.0% -4.0% -4.59%3.0% -2.4% -4.59%5.0% -0.8% -4.59%
3.0% 3.0% 0.0% -4.59%5.0% 1.6% -4.59%7.0% 3.2% -4.59%
Sources: Federal Reserve Bank of St. Louis FRED and author’s calculations.
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Fiscal Policy
States’ Plights
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Fiscal Policy
States’ Plights
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.85
.9.9
51
1.0
51.1
1.1
51.2
Gro
ss C
hange a
fter
Peak
01jul2007 01jan2008 01jul2008 01jan2009 01jul2009 01jan2010 01jul2010
Alaska Arizona Michigan Nevada
New York North Dakota South Dakota US
Source: Author’s calculations and Federal Reserve Bank of St. Louis (FRED).
Figure 31: Gross State Product after December−2007 Peak, Select States
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11.5
22.5
3
Gro
ss C
hange a
fter
Peak
01jan2008 01jul2008 01jan2009 01jul2009 01jan2010 01jul2010 01jan2011
Alabama Alaska Arkansas Idaho
North Dakota South Dakota US Utah
Source: Author’s calculations and Federal Reserve Bank of St. Louis (FRED).
Figure 32: Unemployment Rate after December−2007 Peak, Select States
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.91
1.1
1.2
1.3
1.4
1.5
1.6
1.7
Gro
ss C
hange a
fter
Tro
ugh
01jul2007 01jul2009 01jul2011 01jul2013 01jul2015 01jul2017 01jul2019
Alaska Connecticut North Dakota South Dakota
Texas US Washington Wyoming
Source: Author’s calculations and Federal Reserve Bank of St. Louis (FRED).
Figure 33: Gross State Product after June−2009 Trough, Select States
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.2.3
.4.5
.6.7
.8.9
11.1
1.2
Gro
ss C
hange a
fter
Tro
ugh
01jul2007 01jul2009 01jul2011 01jul2013 01jul2015 01jul2017 01jul2019
Alabama Alaska Louisiana Michigan
Nebraska South Carolina South Dakota US
Source: Author’s calculations and Federal Reserve Bank of St. Louis (FRED).
Figure 34: Unemployment Rate after June−2009 Trough, Select States
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Figure 35: CARES Act State Aid per CapitaSource: U.S. Treasury and FRED; population counts based on 2019 data.)
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Thank you.
55 / 55