Was 2021 a “Career Year” for the U.S. Economy?

Putting 2021’s GDP growth in historical perspective

After watching the Super Bowl last weekend, my mind wandered to the following question: If the U.S. Economy was a professional athlete by the name of “GDP,” how would GDP’s 2021 stack up against history? Would we be comparing GDP’s performance in 2021 to Tom Brady’s 2007 season, Lebron James’ 2012 - 2013 season, or Tiger Wood’s “Tiger Slam” years of 2000 – 2001?

Would podcast hosts and talking-heads go on-and-on about 2021, debating how it compared to GDP’s epic 1950 to 1951 run, where GDP put up back-to-back years of over 8 percent growth? Or, maybe they’d compare 2021 to GDP’s mid-1960s romp of averaging 6.3 percent growth from 1964 to 1966.

But, of course, GDP is not a high-profile athlete. And, clearly other factors have already over-shadowed GDP’s numbers from last year—the high rate of inflation, a shaky stock market, and saber rattling abroad—all of which have occurred in just the first six weeks of 2022.

However, we should not lose sight of what the U.S. economy did in 2021. Putting 2021 in its historical context helps in a lot of ways—it helps us understand why we are also seeing high (and historic) rates of inflation; and why, soon, the Federal Reserve will act to slow things down. Overall, understanding 2021 will help us form our expectations for 2022 and beyond.

So, let’s dive into GDP’s 2021 “season.”

GDP’s 2021 Stats

First, the key stats from GDP’s 2021 year: the quarterly growth rates (measured in two ways, “percent change from a year ago,” and “continuously compounded rate annualized rate of change):

If you are aware that the average growth rate of real GDP from 1948 to 2021 is about 3.1 percent, or that more recently the growth rate is closer to 2 percent (as I discussed in a previous post), then it’s easy to judge that 2021 was above the norm.

However, without historical context, it is not obvious how much above the norm 2021 was or was not. To figure that out, let’s do what sports fans do and rank GDP’s top years. To do that, I sorted all quarterly growth rates between 1948 and 2021 (296 quarters) from highest to lowest.

Let’s start with GDP measured as the “percent change from a year ago.” Table 2 shows the top 20 quarters for this growth rate (for brevity I am not showing all 296 quarters):

There are some fascinating insights to be gleaned from this list:

• The second quarter of 2021 ranks number 2 out of 296 quarters since 1948—number 2!

• The next most recent quarter on that list is 1984! There is not one quarter from the 1990s or the 2000s that crack the top 20.

• In fact, the next most recent quarter in the rankings (prior to 2021 Q2) is the second quarter of 2000—which comes in at number 55 in the rankings with a growth rate of 5.2 percent. The 1990s do not show up in the rankings until number 65, with the fourth quarter of 1998 representing with a 4.9 growth rate.

• In addition, any quarter from the 1990s or 2000s is below two other quarters from 2021. The third quarter of 2021 ranks 63rd (4.9 percent growth) and the fourth quarter of 2021 ranks 44th (5.5 percent growth). Hence, three out of four quarters from 2021 are in the top 22 percent of all quarters since 1948.

(For anyone interested, I’m happy to share my Excel file with the full rankings of all 296 quarters; email me if so.)

Clearly, 2021 was a standout year. We can dig a little deeper to see how much of a standout year it was.

Was it Normal?

For another perspective on GDP’s epic year, below is a histogram of all 296 quarters.

Notice that GDP growth rates appear to be normally distributed—not exactly, but pretty close. If that is the case, that implies that 95 percent of all quarters will be within the red bands I’ve added to the picture—which translates to growth rates between -2.33 and +8.59 (if you look closely at the axis that is about where those red bands line up).

This picture helps underscore how unusual 2021 was, the second quarter of ’21, in particular. In fact, assuming a normal distribution, a growth rate of 12.2 or more should happen about 0.0012 percent of the time. What that means is that if we could redo, or simulate, the past 296 quarters multiple times, that growth rate would be extremely rare. In the parlance of Marvel movies—the “MCU”—it would be highly unlikely to find that growth rate in the “Multiverse.” In fact, in our real world, if you were building a forecasting model for GDP growth, you wouldn’t even bother considering such a high number as a plausible scenario to report to your bosses. If you did, they would think that you were delusional.

So, where do I get that probability? For yet another perspective on 2021, I calculated the “Z-scores” of the growth rates, which “standardizes” the growth rates relative to the average (3.1 over the 1948 to 2021 period), and scales that value by the standard deviation (2.73 over the sample).

What does it mean to “standardize” a statistic? Recall a time recently or a long time ago when your teacher handed back your exam with a mark of “77” staring at you in red ink. What was your immediate thought? Sadness or relief probably, depending on your expectations. And you probably wondered where your 77 stood relative to the rest of the class. Were you close to the mean, far away, or what? Standardizing a statistic provides the answer to that question.

Here is the histogram of the Z-scores:

In the histogram of Z-scores we can see exactly how far from the average the second quarter of 2021 was. The Z-score for that quarter equals 3.33, which reveals that the 12.2 percent growth was more than three standard-deviations from the mean. Such an extreme value is considered an “outlier” in statistics. If there was as student in your class that had a test score three standard deviations above from the mean, they were likely disdained by all, and your instructor might have thrown that score out when computing the average for the class. The Z-score reveals that the 12.2 percent growth rate is such an outlier that we should expect it to occur only about 0.0012 percent of the time. 

In other words, the second quarter of 2021 was extremely unusual. 

A different view

How did we get such an unusual occurrence? The series I discuss in the previous section is based on calculating the growth rate of real GDP as a “percent change from a year ago.” For the second quarter of 2021, that implies the 12.2 is capturing the extreme burst in the macroeconomy from the end of the second quarter of 2020 to the end of the second quarter of 2021.

In that view, this type of growth rate is best thought of as “recovery” or “rebound” rate of growth. Hence, it’s not surprising to see how unusual the 12.2 growth rate turns out to be historically—we have been living in unusual times, obviously.

Does that mean GDP had a “career” year? Not exactly. From the perspective of the “percent change from a year ago” measure, I’d say that GDP had a “comeback” year.  Similar in spirt to Cincinnati Bengals quarterback, Joe Burrows, tearing his ACL in one season, and then leading his team to the Super Bowl in the next. In that case, we can give GDP the “Comeback Player of the Year” award for 2021.

Regardless, the 12.2 percent growth is notable—we’ve only seen one higher “rebound” in history.

For a different perspective, notice the growth rates in the second column of Table 1 above, the “continuously compounded annualized” rates of change. This measure captures how GDP changes over a three-month time-frame; say, from the end of the first quarter (end of March), to the end of the second quarter (end of June). The “annualization” means that we take that “raw” change (from the end of March to the end of June), then multiply it by four (technically the formula is more complicated than that, but you can think of it in those terms). This is a better measure of what’s happening in “real-time” during a quarter, as opposed to comparing what’s happening in a quarter to that same quarter a year ago.

So, how does 2021 stack up with this measure of growth? I show that here in Table 3:

Here, we see the fourth quarter of 2021 show up at spot number 46. Thereafter, you can see the second and first quarter of 2021, in spots 55 and 60, respectively.

While these rankings are not as dramatic as the 12.2 percent value highlighted earlier, it is still pretty darn impressive. These 2021 quarters are within the top 20 percent of all quarters since 2021.

GDP’s impressive 2021 is just as notable if we look at the annual percent change. Table 4 displays the top-20 years the U.S. economy has had since 1948 (a total of 74 years).

Real GDP growth in 2021 ranks number 10, out of 74 years.  In fact, we haven’t seen a growth rate higher than our 2021 experience since 1984, almost four decades ago. 

So, perhaps the “athlete” GDP didn’t have a year that ranks up there with Michael Jordan’s 1995-1996 season. But it’s clear we have all lived through a historic year.

With such a relatively high historic growth rate, it should not come as a surprise that we’ve experienced high rates of inflation. Nor should it be a surprise that the Federal Reserve now faces the task of squashing that inflation. One lingering question, in light of this historic context, is why didn’t the Fed have a sense of this six months ago? I explore that question in future posts.