U.S. Economy: The pace of the recovery is dampened by a high number of Covid-19 cases

The Covid-19 pandemic and measures to contain it have led to a dramatic slump in economic performance in the United States. After the U.S. economy shrank by 5.0 percent (annualized) in the first quarter of the current year, the slump in economic performance was much more pronounced in the second quarter with a decline of 31.7 percent (again annualized, the quarterly rate of contraction was 9.1 percent) and dramatic effects on the job market. Millions of employees have lost their jobs. The official unemployment rate was at 14.7 percent in April, but the “true” unemployment rate was probably 2 to 4 percentage points higher due to measurement issues. Since April, the unemployment rate has decreased to 10.2 percent in July. It will probably continue to decline, but unemployment will remain much higher than before the Covid-19 pandemic for a considerable period of time. Although the recovery is now under way, the situation in the economy and on the labor market is still bad. In addition, the number of Covid-19 cases has risen again in some states and some lockdown measures were adopted again there.

The U.S. government’s extensive fiscal measures have been supportive in the first half of the year. These measures included direct transfers to low and middle income households, an increase and prolongation of unemployment benefits, and emergency loans for businesses. In July, it was not clear whether the increase in unemployment benefits would be extended beyond July. The political parties could not find an agreement on a new fiscal stimulus package. On August 8, the president signed an executive memorandum to extend reduced federal unemployment benefits beyond July (however, there are still various open questions regarding this issue). Monetary policy also strongly supports the economy. The U.S. Federal Reserve cut its key interest rates to almost zero percent in two steps. Extensive asset purchase programs were also decided and various measures were taken to ensure liquidity in the financial system. On August 27, the Fed communicated that it will start to target an average inflation rate of two percent (average is new), which might result in a somewhat higher inflation rate in the future. This would mean that a year-long undershoot of the inflation target – as was the case in previous years, would in the future be compensated for by a temporary overshoot. As a result, monetary policy might remain a bit more expansionary in the next year than under the previous monetary policy strategy. With the gradual recovery of the U.S. economy, the situation on the labor market will improve; the unemployment rate will probably drop below 10 percent in the second half of 2020. However, the situation on the labor market will remain concerning. The conflict between the United States and China, which involves trade, technology, and security issues – is likely to continue. In the so-called “Phase One” agreement signed in January 2020, a sharp increase in U.S. exports to China was agreed, which is unrealistic given the COVID-19 outbreak and the global economic crisis.

All in all, the U.S. economy is likely to grow fast in the second half of the year. I expect annualized growth rates of 18 to 22 percent in the third quarter and 5 to 7 percent in the fourth quarter. For the whole year of 2020, I expect a decrease in GDP of 4.5 to 6 percent. The decline in growth from the first half of this year will probably not be offset until 2022. My growth forecast for 2021 is at around 3 1/2 percent. For 2022, I currently forecast a growth rate of 3 percent. Obviously, such forecasts are associated with a very high degree of uncertainty. Besides the risk of a prolonged large second wave of the pandemic, global tensions could further increase – especially between the United States and China. Any economic forecasts or scenarios are of course associated with very high levels of uncertainty.

While I use several models in my forecasts, my published numbers are also strongly influenced by my personal experience and judgment.

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