U.S. Economy: Economic recovery continues at a slower pace

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 31.4 percent (again annualized, the quarterly rate of contraction was 9.0 percent). All in all, the U.S. economy is likely to grow fast in the second half of the year. I expect an annualized growth rate of around 25 to 30 percent in the third quarter and around 3 to 4 percent in the fourth quarter. For the whole year of 2020, I expect a decrease in GDP of 4 to 4.5 percent.

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 31.4 percent (again annualized, the quarterly rate of contraction was 9.0 percent). Personal consumption expenditures decreased by 33.2 percent. The sharpest drop occurred for services which dropped by 41.8 percent. For private investment, similar sharp declines were observed. Positive growth rates, however, were recorded for government consumption and investment, which increased by 2.5 percent. Most industries experienced a sharp contraction in the second quarter from April to June 2020. Unsurprisingly, the sharpest contractions were observed for arts, entertainment, and recreation (-96.9 percent) and accommodation and food services (-88.4 percent).

In the spring, there were dramatic effects on the job market. The official unemployment rate was at 14.7 percent in April, but the “true” unemployment rate was probably 3 to 5 percentage points higher due to measurement issues. Since April, the unemployment rate has decreased to 7.9 percent in August. It will probably continue to gradually decline, but unemployment will remain higher than before the Covid-19 pandemic for a considerable period of time. This will also dampen the evolution of wages. While disposable personal income was until July strongly supported by fiscal stimulus measures such as the temporary higher unemployment benefits, it has decreased 3.5 percent in August. Currently, I expect a subdued evolution of personal income in the coming months, which will also dampen private consumption and the further economic recovery. Since May, job growth occurred in most sectors of the economy and were particularly strong in sectors such as hospitality, leisure, food services and drinking, retail trade or health services, which were all hardly hit by the pandemic and the lockdown. Let me stress that employment levels in most of these sectors remains well below their pre-pandemic levels. Unemployment rates for Black or African American, Asian, and Hispanic or Latino ethnicity was higher than for whites in August.

After the first wave of the pandemic was contained to some extent, various lockdown measures were relaxed. As a result, the US economy expanded significantly in the summer. However, the recovery was slowed by a strong increase in the number of Covid-19 cases in some states and renewed restrictions on economic activities. This situation will probably not change in the near future. Various containment measures and uncertainties about the further course of the pandemic remain in place and dampen economic dynamism. As I expected, the recovery during the summer was robust. But I also expected that the recovery would slow down in the fall and I still believe that we will observe much more modest economic growth rates in the coming quarters.

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. However, since August, unemployment benefits have been lower. The political parties have not yet agreed on new fiscal stimulus measures.

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 adopted 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 7 towards the end 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 against the backdrop of 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 an annualized growth rate of around 25 to 30 percent in the third quarter and around 3 to 4 percent in the fourth quarter. For the whole year of 2020, I expect a decrease in GDP of 4 to 4.5 percent. The decline in growth from the first half of this year will probably not be offset until early 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 additional wave of the pandemic, global tensions could further increase – especially between the United States and China.

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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