(Reuters) - The U.S. economy's recovery from the COVID-19 pandemic was much stronger than initially thought amid massive fiscal stimulus, according to revisions on Thursday, which also showed the gap between the two measures of growth narrowing sharply in 2021.
Gross domestic product increased 5.9% in 2021, the Commerce Department said in its annual revision of GDP data. That was revised up from the previously reported 5.7% growth.
The economy contracted 2.8% in 2020, revised up from the previously published 3.4% decline.
"The pandemic recession from the fourth quarter of 2019 through the second quarter of 2020 was a bit less sharp than what is currently published," said Erich Strassner, associate director of National Economic Accounts at the Commerce Department's Bureau of Economic Analysis (BEA). "The recovery from the second quarter of 2020 has been a bit stronger."
The upward revisions to GDP in both years largely reflected more consumer spending, exports, and federal government spending than previously reported.
Spending was boosted by government subsidies to households and businesses as part of a nearly $6 trillion in relief since the pandemic started in the spring of 2020.
GDP, the standard economic growth measure, is the value of goods and services produced in the United States. Economic activity in the nation is also assessed from incomes earned and the costs incurred in the production of GDP, expressed as Gross Domestic Income (GDI).
Revisions showed GDI rebounding 5.5% in 2021, revised down from the previously published 7.3%. GDI contracted 2.3% in 2020 instead of 2.9% as initially estimated. The downward revision in 2021 reflected revisions to several components, including net interest income, private industry wages, and salaries, proprietors' income as well as corporate profits.
In principle, GDP and GDI should be equal, but in practice differ as they are estimated using different and largely independent source data.
The gap between GDI and GDP, also known as the statistical discrepancy, is the sum of measurement errors in estimating the respective components of GDP and GDI. The statistical discrepancy widened sharply prior to the revision, attracting the attention of Federal Reserve officials and economists.
SUBSIDIES A CHALLENGE
With GDP revised higher and GDI lower, the statistical discrepancy narrowed to -0.6% of GDP in 2021. That was revised from the previously reported -2.3% and brought the statistical discrepancy in line with historical norms.
The gap was at -1.0% of GDP in 2020. Last year's initially reported unusually large statistical discrepancy in part reflected challenges handling the massive subsidies in the national accounts. According to the BEA, the blowout in the GDP/GDI gap had not led to changes in the methodology and there would be no changes in procedures going forward.
"There's no question that the record level of subsidies related to the pandemic certainly created challenges for harmonizing the story between GDP and GDI," Dave Wasshausen, chief of the Expenditure and Income Division at the BEA told reporters.
"All the COVID-related special effects tables have been posted. We've updated all of those tables and all along the goal has been to strive for transparency so people understand exactly how we're interpreting those programs and how to book them on the gross domestic income side of the accounts as subsidies or grants or what have you."
Subsidies were revised down to $478.8 billion in 2021 from the previously reported $490.0 billion. Tax credits to fund paid sick leave and employee retention accounted for the bulk of the revision. The initial projections for subsidies were drawn from Congressional Budget Office and Treasury Department reports.
The revisions were based on actual claims information from the Treasury Department's Office of Tax Analysis.
Overall, the GDP revisions to data from the fourth quarter of 2016 through the fourth quarter of 2021 did not change the economic picture. But the short pandemic recession was slightly less steep than previously reported.
The economy contracted 18.2% from its peak in the fourth quarter of 2019 through the second quarter of 2020, instead of 19.2% as previously reported. It was still the worst recession on record. The recovery from the second quarter of 2020 was a bit stronger than previously estimated, with the economy growing at an average annual rate of 9.8% through the fourth quarter of 2021, an upward revision of 0.2 percentage points.
The number of Americans filing new claims for unemployment benefits fell to a five-month low last week as the labor market remains resilient despite rising headwinds from the Federal Reserve's stiff interest rate increases and slowing demand.
The weekly unemployment claims report from the Labor Department on Thursday, the most timely data on the economy's health, also showed jobless rolls shrinking to their lowest level in just over two months in mid-September. That raises the risk that the unemployment rate will drop this month, keeping the Fed on its aggressive monetary policy tightening path.
"The Fed won't be slowing the pace of their rate hikes yet with 75 basis points in November and 50 basis points more in December a virtual certainty," said Christopher Rupkey, chief economist at FWDBONDS in New York.
"The Fed is going to go until something breaks, but so far, nothing is breaking beside the stock market and early signs that home prices are starting to fall."
Initial claims for state unemployment benefits decreased 16,000 to a seasonally adjusted 193,000 for the week ended Sept. 24, the lowest level since April. Data for the prior week was revised to show 4,000 fewer applications filed than previously reported. Economists polled by Reuters had forecast 215,000 applications for the latest week.
While there have been reports of some companies laying off workers, claims have remained at the lower end of their 168,000-252,000 range this year. Economists say most employers are hoarding workers after experiencing hiring difficulties in the past year as the COVID-19 pandemic forced some people out of the workforce, in part because of prolonged illness caused by the virus.
They expect companies to pull back on hiring before resorting to widespread job cuts.
Unadjusted claims declined from 12,642 to 156,060 last week. There was a sharp decline in applications in Michigan, as well as notable decreases in New Jersey, New York, and Missouri. They more than offset increases in Massachusetts and Ohio.
The Fed wants to cool labor demand in order to bring inflation down to the U.S. central bank's 2% target. The oversized rate hikes are raising the risks of a recession next year.
U.S. stocks opened lower. The dollar rose against a basket of currencies. U.S. Treasury prices fell.
TIGHT LABOR MARKET
The Fed bank last week raised its policy interest rate by 75 basis points, its third straight increase of that magnitude, and signaled more large increases to come this year. Since March, the Fed has hiked its policy rate from near zero to the current range of 3.00% to 3.25%.
There were 11.2 million job openings at the end of July, with two jobs for every unemployed person.
The claims report showed the number of people receiving benefits after an initial week of aid fell from 29,000 to 1.347 million in the week ending Sept. 17, the lowest level since July. The so-called continuing claims data, a proxy for hiring, covered the week that the government surveyed households for August's unemployment rate.
Continuing claims dropped by 65,000 between the July and August survey periods. The unemployment rate rose to 3.7% in August from 3.5% in July.
The Fed last week raised its median forecast for the unemployment rate this year to 3.8% from its previous projection of 3.7% in June. It boosted its estimate for 2023 to 4.4% from the 3.9% projected in June.
The strong labor market is helping to keep the economy afloat. While a separate report from the Commerce Department on Thursday confirmed that the economy contracted in the first half of this year, it is not in recession, with domestic demand rising at a 0.5% rate.
Gross domestic product fell at an unrevised 0.6% annualized rate last quarter, the government said in its third estimate of GDP. The economy contracted at a 1.6% rate in the first quarter.
The government also revised GDP data from the fourth quarter of 2016 through the fourth quarter of 2021, which showed the economy's recovery from the COVID-19 pandemic was much stronger than initially thought.
The revisions also showed the gap between GDP and the other economic growth measure, gross domestic income (GDI), was far smaller than initially thought in 2021.