At the 40th Annual NABE Economic Policy Conference

As Prepared for Delivery

It is a pleasure to join NABE in its annual assessment. It is a good moment to assess our economy’s recovery. There is broad agreement that the strong U.S. recovery has exceeded expectations following the devastation of the pandemic and the Putin price shock to food and energy. Beyond this, there are preliminary indications the recovery is laying strong foundations for the future—with business dynamism, labor force engagement, and key categories of business fixed investment exceeding pre-pandemic trends—catalyzed by President Biden’s historic legislation.

Today’s Recovery

The U.S. economy is healthier today than was forecast just one year ago, stronger than the same stage of previous recoveries, and better on growth and inflation than our peers. There has been a large decline in inflation toward its 2 percent target alongside solid growth and low unemployment. Indeed, headline and core PCE inflation have been around 2 percent for the past half year. Inflation has declined even as growth was around 3 percent over the year, and unemployment remained below 4 percent for 2 years, the longest stretch since the 1960s.
Looking to history, we have never had a year where inflation has declined this fast, alongside robust growth and a stable, low unemployment rate. Remember the Bloomberg headline of October 2022: Forecast for US Recession Within Year Hits 100%? Just one year ago, forecasters simply did not believe inflation could fall by this much without a jump in the unemployment rate.

Rather than necessitating the output and employment costs associated with the Phillips Curve, as some anticipated, the resolution of a perfect storm of supply shocks and other pandemic distortions bears primary responsibility for the rapid decline in inflation. In part, this reflects the Administration’s efforts in partnership with the private sector to fix broken supply chains in areas like ocean shipping, trucking, semiconductors, and at the ports as distortions unwound. As supply chain pressures fell from record highs to pre-pandemic lows, disinflation followed close behind, and the United States experienced both a stronger recovery and faster disinflation than our peers.

Foundations for the Future

More broadly, the U.S. recovery has seen improvements relative to pre-pandemic trends in labor market expansion, business dynamism and key categories of business fixed investment, reflecting the President’s economic plan. These improvements augur well for future potential growth and help lay the foundation for achieving the President’s goal of more durable and broadly shared economic growth over the long-term.

First, business dynamism has risen. There’s a small-business boom taking root across America. Sixteen million business applications have been filed since the President took office, making these the strongest three years on record for new business applications in 20 years. Out of this surge in entrepreneurship, many applications are leading to new businesses hiring workers. That’s especially true for small businesses, which have added an average of 739,000 new jobs each quarter since the President entered office. Women and minority owned businesses have played an important role in this surge as well.

President Biden secured unparalleled support for small businesses and startups through dozens of initiatives, ranging from expanding access to credit and federal procurement to ensuring universal access to high speed internet.

In the decades preceding the pandemic, business dynamism, in particular new business entry and job reallocations, were declining. Prior research drew a connection between this and dampened aggregate productivity growth as the economy shifted toward fewer young, small, and innovative firms. Since the pandemic, new business entrants are increasing, especially outside central business districts, and we are seeing more workers being hired by smaller and new firms. This is a sign of confidence in the economy and, if sustained, could yield returns over the longer term.

Second, the strong labor market recovery has drawn more people into the labor force and led to a substantial reallocation of jobs and workers. In February 2021, as President Biden was taking office, the Congressional Budget Office (CBO) projected that unemployment would be at 4.6 percent at the end of 2023. Instead, unemployment has been below 4 percent for two years running, thanks to this Administration’s actions.

Many economists worry about permanent labor market scarring effect associated with deep recessions. It seems likely that this recovery avoided much of the scarring associated with past recessions, as the employment level, labor force participation rate, and level of real GDP are higher now than the CBO projected even before the pandemic, in January 2020.

In addition to supporting a strong labor market recovery through the American Recovery Plan, the Administration’s efforts helped enable labor supply to expand to meet demand. Prime age labor force participation has continuously exceeded its pre-pandemic level since February 2023, just three years after the pandemic downturn began, while it took more than 12 years to reach its prior peak after the global financial crisis.

Administration policies enabled record numbers of people to come back into the labor force—including by providing vital support for child care and other support to household balance sheets. Prime age employment for women was at its highest level on record for much of 2023, reflecting shifts in work patterns coming out of the pandemic as well as the President’s support for child care.

There has been substantial reallocation of jobs and workers—with high rates of job switching leading to stronger real wage growth, new skills, and upgraded opportunities.

While the data is volatile, strong productivity growth over the last year has returned productivity to its pre-pandemic trend after declining earlier in the business cycle. Meanwhile, productivity growth measured as output per worker has outpaced all other G7 economies in this cycle so far.

The combination of inflation coming down alongside a strong job market has led to measurable gains for household balance sheets. This has been the strongest recovery on record for real wage growth in over 50 years with real wages rising a cumulative 3.4% over the business cycle. We have also seen the largest increase in median wealth on record, up 37% from 2019. And, unlike in prior recoveries, households were able to lower credit card and student loan debt payments.

Finally, business investment has been strong. Together, President Biden’s signature legislative achievements—the Bipartisan Infrastructure Law (BIL), CHIPS and Science Act, and Inflation Reduction Act (IRA)—represent the most significant public commitment to investing in America in a generation. Even after President Biden had signed his historic Investing in America laws, professional forecasters projected non-residential fixed investment would stagnate in 2023. Instead, non-residential fixed investment grew by 4.1% in real terms last year, including the largest contribution on record from manufacturing. In fact, inflation-adjusted manufacturing construction spending has more than doubled in the United States, and inflation-adjusted construction of computer, electronic, and electrical manufacturing facilities has increased by more than 1,000% since President Biden took office.

The increase in investment is strong relative to prior economic cycles. Four years after the global financial crisis, businesses investment had not recovered, in contrast with the current cycle, which has seen real businesses investment up by 10% and non-residential fixed investment up by even more. Compared to our G7 peers, U.S. gross private domestic investment has outpaced nearly all other economies.

This is in contrast to the previous administration’s unconditional corporate tax cuts in the Tax Cuts and Jobs Act (TCJA) in 2017. NABE Surveys found that only 4 percent of businesses said they had redirected hiring and investment to the United States in response to the 2017 TCJA tax cuts, whereas 83 percent of goods-producing businesses reported they had redirected hiring or investment to the United States in response to the IRA, and 16 percent of businesses overall.

There is also preliminary evidence that investment is increasing in communities that have previously been left behind—consistent with the President’s commitment to investing in all of America. For instance, the Treasury Department found that more than 70% of clean energy investments announced since the Inflation Reduction Act are going to communities with below-average median household incomes, college graduation rates, and employment-to-population ratios.

Conclusion

The evidence is increasingly clear that we have achieved a strong, broad-based recovery, while inflation has fallen rapidly towards its 2 percent target. Current improvements in business dynamism, labor force engagement, and investment could lay the foundation for durable, broadly shared economic growth over the longer term. In the President’s words, this is the kind of bottom up, middle out growth that provides working families more breathing room and more opportunity.

###