U.S. economy still in good health – but headwinds from the coronavirus will be felt

February 24, 2020

The US economy grew by an annualized 2.1 percent in the fourth quarter of last year – the same growth rate as in the third quarter. As in previous quarters, private and public consumption has increased noticeably. On the other hand, corporate investment has declined amid the trade dispute between the United States and China. In January of the current year, the governments of the United States and China somewhat mitigated the trade conflict by signing the so-called “Phase One” agreement – a renewed escalation seems unlikely, at least before the US presidential election in November.(1)

The consequences of the corona virus will be felt in the first quarter and second quarter of the current year; companies are likely to be reluctant to invest and foreign trade will also be burdened. Recovery effects can be expected in the second half of 2020. However, it is too early to fully assess the economic consequences of the coronavirus. Obviously, economic growth may be considerably reduced under a serious scenario.

However, the U.S. economy continues to be supported by favorable developments on the labor market. 225’000 new jobs were created in January, which is slightly below the average growth of 175’000 over the previous twelve months. The unemployment rate stood at 3.6 percent in January 2020. The labor force participation rate increased by 0.2 percentage points to 63.4 percent. These developments will probably continue and ensure solid growth in disposable income and private consumer spending over the forecast period. The two most important indices for consumer confidence – surveyed by the University of Michigan and the research organization Conference Board – have recently increased noticeably. Against this background, the US Federal Reserve is likely to keep its key interest rates constant. The increase in the central bank’s preferred price index for personal consumption expenditure (PCE) is likely to move from the current 1.6 percent to close to 2 percent and thus be roughly in line with the targeted rate. Against the background of a high budget deficit, no new impulses are likely to come from fiscal policy. All in all, the U.S. economy will grow by 1.8 percent this year. As mentioned above, economic growth may be lower if the effects of the coronavirus will be severe. In 2021, the growth rates should be 1.7 percent.

(1) In the “Phase One” agreement, it was agreed that China would buy American goods and services over the next two years to an extent that would be $ 200 billion higher than China’s level of imports from the United States in 2017. China has also agreed to reduce or eliminate unfair technology transfer practices and take measures to better protect intellectual property from the US perspective. The United States has waived the imposition of 25 percent special tariffs on various consumer goods. In addition, for a commodity group valued at $120 billion, the special tariffs are halved from 15 percent to 7.5 percent. An early comprehensive agreement and a significant reduction in mutual tariffs are currently not foreseeable.

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