The State of the U.S. Economy

There are quite a lot of disagreements over the state of the U.S. Economy. Sometimes, one even gets the impression that people are not talking about the same country. While some describe the economic state in a positive way, others emphasize the dark sides of the U.S. economy more often. As is so often the case, when viewed soberly, the truth lies somewhere in between; but still both views are partly right. The U.S. economy, like the whole country, is diverse. There are numerous economic successes – such as the world’s leading companies in the field of information and communication technology or the macroeconomic development that is quite favorable in international comparison. But the American economy also has big problems; in particular, many people have long had a low income or no work at all as a result of the corona pandemic.

The labor market and wage developments have been causing headaches for a long time. It is true that US companies created many new jobs by the time the pandemic broke out; the unemployment rate in February was only 3.5 percent. But too many had withdrawn from the job market, for example because they had given up hope of a job. In addition, poorly paid new jobs were often created – for example in the catering industry or in the so-called gig economy. In the past few decades, many formerly well-paid jobs for the middle class – especially in industry – have been lost due to automation or relocations abroad. According to the American Bureau of Labor Statistics (BLS), real hourly wages increased only slightly by 6.6 percent in the ten years between June 2009 (the low point of the financial crisis) and the end of 2019. However, it should be noted that fringe benefits or bonus payments have not been taken into account here. In addition, the real increase would be slightly higher if, instead of the consumer price index used by the BLS, the real increases were calculated using an alternative inflation measure from the Bureau of Economic Analysis that shows a lower price increase. Nevertheless, it can be said that in the past decade the large masses in their wallets felt surprisingly little of the moderate but long-lasting expansion phase of the economy.

The Covid-19 pandemic has dramatically exacerbated the problems on the labor market. The official unemployment rate shot up to 14.3 percent in April. If classification problems are also taken into account in the statistics, the actual unemployment rate is likely to have even been around twenty percent. Low-paid employees – for example in the hospitality or entertainment sector – were often affected by unemployment. In the wake of the gradual recovery during the summer, the unemployment rate fell again to 8.4 percent by August. Social and economic problems were cushioned by a generous increase and extension of unemployment benefits passed by the US Congress in March. A significant proportion of the unemployed may even have earned more in the meantime than with a job. However, unemployment benefits have been lower since August and more and more people will no longer receive any benefits at all. The number of unemployed is likely to continue to decrease gradually, but it will still remain high. The already high level of economic inequality before the pandemic is likely to increase.

Despite these major problems, however, it should not be forgotten that the US economy as a whole has repeatedly proven to be resilient and, for example, grew faster than Germany and many other European economies in the years before the pandemic. In the United States, the economy has grown by a little more than a quarter in real terms since the end of the financial and economic crisis until the outbreak of the Covid-19 pandemic – i.e. between 2009 and 2019 – according to data from the European Commission, it was slightly more in Germany than 20 percent and in the euro area only around 15 percent. The US economy has often been predicted to crash – for example after the financial and economic crisis or the election of Donald Trump as President in 2016. However, the United States has managed to escape from major events or crises faster than many European countries.

The light and shadow of the United States have also become obvious since the corona pandemic outbreak. From a purely macroeconomic perspective, the United States weathered the pandemic better than many other countries. At around 10 percent, the decline in gross domestic product in the first half of 2020 was less than in the major European economies and less than in neighboring Canada. Various smaller and medium-sized European countries, however, recorded smaller drops in gross domestic product than the United States. Thus, while the USA has so far got through the corona crisis relatively lightly from a macroeconomic perspective, significantly more people have died of Covid-19 than in most European countries in relation to the total population. This again points to the downside of the United States.

After the pandemic was curbed somewhat in early summer, the various lockdown measures were partially withdrawn. In the course of this, the US economy grew significantly by probably four to five percent in the third quarter (annualized growth rate is likely to be around 20-25 percent). However, the recovery was slowed by an increase in the number of Covid-19 cases in some states and renewed restrictions on economic activities. Various containment measures and uncertainties about the further course of the pandemic remain in place and dampen economic dynamism. The continued economic recovery will also be more subdued because of high unemployment and the associated substantial loss of income, which is dampening private consumption. As mentioned earlier, the unemployment rate was still 8.4 percent in August. As the U.S. economy gradually recovers, high unemployment will continue to decline gradually. Business investments are also likely to increase gradually; For the time being, however, they are still burdened by uncertainties about the further course of the pandemic and the uncertain outcome of the presidential and congressional elections in November. The outcome of the elections could have a major impact on upcoming decisions in various policy areas, such as how any further fiscal stimulus measures are designed.

The trade conflict between the United States and China is likely to continue. The style and the measures used may change under a new president, but there is a broad agreement between the two political parties over many important issues. In January, the “Phase One” agreement was signed, in which China committed itself to a sharp increase in imports from the USA. So far, however, China seems to have only partially fulfilled these obligations – probably also because of the corona pandemic. In addition, the two countries are not only in a trade conflict, but also in an increasing geopolitical rivalry. Relations between the United States and China have deteriorated significantly at various levels.

The US economy is supported by the very expansionary monetary policy. The key rate has been almost zero percent since March. In addition, extensive securities purchases are carried out. Monetary policy will probably remain expansionary in the coming years – also because the central bank announced at the end of August that it would allow slightly higher average inflation than in previous years. Specifically, an undershoot of the inflation target of two percent (measured by the index of personal consumption expenditure) is to be compensated by a subsequent moderate overshoot.

Overall, I expect the US economy to shrink by around four and a half percent this year. The recovery in 2021 and 2022 is likely to be significant, but the slump in prosperity from the first half of 2020 will only gradually be made up for. Exact forecasts are currently very uncertain. From today’s perspective, growth rates of around three and a half and three percent respectively in 2021 and 2022 seem realistic to me. The United States is likely to remain a leader in information and communication technology for the foreseeable future. But for a socially and economically sustainable development of the US economy, from which the broad masses of the people benefit, we need more significant increases in wages than in the past.

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