The U.S. Economy: Downs and Ups in the Corona Year

The United States are strongly affected by the Corona Pandemic. So far, a large number of people have died from Covid-19. Similar to other major economies, economic output in the USA fell drastically in March and April as the number of infections increased and various containment measures were imposed in many places. In the first and second quarters of this year, gross domestic product in the United States plunged by 1.3 percent and 9 percent respectively compared with the previous quarter.

Following this slump in economic output in the first half of the year, there was a strong recovery in the summer months after the pandemic had been contained somewhat for the time being and the various lockdown measures had been partially lifted. The main stimulus to the economy in the summer was the financial aid package adopted in March. Key elements of the program were an increase in unemployment benefits until the end of July and one-off payments to low and middle-income households. A significant number of the unemployed are thus likely to have temporarily earned more than they previously did with a job. Above all, private consumption was thus supported. In addition, the savings rate of households has risen, allowing many people to build up a financial cushion for the following months.

As a result of these developments, gross domestic product grew strongly by 7.4 percent in the third quarter according to the Bureau of Economic Analysis (BEA). Similar to the previous slump, this growth is also the strongest since quarterly GDP data have been published. However, economic output in the third quarter was still 3.5 percent down on the level seen in the final quarter of 2019. Both private consumption and corporate investment have once again shot up. Private consumption grew very strongly by 8.9 percent in the third quarter, following a slump of 11.2 percent in the first half of the crisis. Not all consumption categories have been equally affected by the Corona crisis. Given that the various lockdown measures have restricted or rendered the provision of personal services impossible, real consumer spending on services as a whole slumped by 14.9 percent in the first half of the crisis and, against the backdrop of a further increase in the number of corona cases and restrictions, grew at 8.5 percent in the third quarter as well, less sharply than purchases of consumer durables, which even grew by 16.2 percent over the summer following a slight slump of 3.7 percent in the first half of the year. The crisis has so far also had less of an impact on non-durable consumer goods, which include food and other goods for daily use, than on services.

This pattern shows that the corona crisis differs markedly from other recessions, in which the purchase of durable consumer goods such as cars, furniture or computers is postponed, while personal services usually suffer less. The pattern to date also indicates that economic development in the coming months is likely to be severely dampened by the continuing high number of corona cases, since under these circumstances it is unlikely that the service sector will experience a strong recovery. The purchase of consumer durables to date may also be due to the fact that many households have temporarily made purchases for work from home, leisure activities or means of transportation, such as cars or bicycles, in the course of increasing work from home and avoiding large crowds of people, which may not be repeated to the same extent in the future.

Foreign trade also shows a pattern in which trade in services – which among others includes tourism and professional travel – has been affected much more than trade in goods. The United States’ trade balance deficit has risen significantly in this year of the Corona. By preventing an even sharper slump in private consumption, the financial stimulus measures also had a supporting effect on imports from the rest of the world.

Rather unexpectedly, corporate investment also showed a remarkably clear brighter picture in the third quarter, although there were various negative factors such as uncertainties about the further course of the pandemic and economic development, as well as the uncertain outcome of the US presidential and congressional elections. After a decline of 9.2 percent in the first half of the year, the third quarter saw an increase of 4.7 percent. As expected, investments in equipment were volatile this year, while spending on research and development or software, which is also otherwise less sensitive to economic cycles, reacted much less strongly and less quickly to the slump and recovery of the economy. The economic recovery is now likely to slow down significantly. The pandemic still has the country in its grip and is repeatedly leading to new restrictions on economic activity in some states.

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