U.S. economy: Massive fiscal stimulus leads to fast recovery

The U.S. economy started the year 2021 with momentum. This development is likely to be due in part to the fiscal relief and stimulus package adopted at the end of December, which includes, among other things, one-time payments to low- and middle-income individuals totaling 600 dollars, as well as an increase in unemployment benefits of $300 per week. In addition, the U.S. vaccination program has gotten off to a good start by international standards and is likely to have increased confidence that the pandemic will gradually subside in the current year. The U.S. economy is now most likely receiving a strong tailwind from the new fiscal relief and stimulus program, which will probably be adopted in mid-March and is expected to amount to around nine percent of gross domestic product. The very expansionary fiscal policy and the gradual easing of the containment measures will massively stimulate private consumption in the coming quarters, even though many middle-income households are likely to use the transfer payments in part to build up savings. I expect a GDP growth rate of almost eight percent this year (the consensus seems to be lower at 6 to 7 percent).

In the United States, the economy grew by an annualized 4.3 percent in the fourth quarter of last year. The recovery after the pandemic-related slump in the first half of the year thus continued at a much slower pace – in the third quarter, GDP had shot up by an annualized 33.4 percent. The various measures to contain the pandemic – the United States was struggling with rising Corona case numbers at the end of the year – continued to weigh on personal services in particular in the fourth quarter. Industrial production, on the other hand, grew at solid rates.

The U.S. economy started the new year with momentum. This is indicated by industrial production and retail sales, which rose noticeably in January. The ISM purchasing managers’ indices also remained well within the growth zone. These developments are also likely to be attributable to the fiscal relief and stimulus package adopted at the end of December, which includes, among other things, one-time payments to low- and middle-income individuals of $600, as well as an increase in unemployment benefits of $300 per week. In addition, the U.S. vaccination program has gotten off to a good start by international standards and is likely to have increased confidence that the pandemic will gradually subside this year; containment measures are likely to be eased gradually. Political uncertainty has also decreased with the installation of the new president. However, despite recent favorable economic developments, the situation remains difficult for many households and businesses, and consumer sentiment was subdued at the start of the year.

The U.S. economy is now receiving a strong tailwind from the new fiscal relief and stimulus program, which will in all likelihood be adopted in mid-March and will amount to around $1.9 trillion – or around nine percent of gross domestic product. Key components are likely to be direct payments of $14oo to low- and middle-income individuals, as well as the extension and increase of unemployment benefits by $300 a week through the end of September. In addition, other funds will be used to fight the pandemic, families will receive tax relief, and states will receive financial support, among other things. The very expansionary fiscal policy and the gradual easing of containment measures will massively stimulate private consumption in the coming quarters, even though many middle-income households are likely to use transfer payments in part to build up savings. Against a background of strong consumer demand and rising foreign demand, business investment will also increase markedly. Unemployment will continue to fall. In February, the unemployment rate was still at 6.2 percent, having temporarily shot up to 14.7 percent in April 2020 from 3.5 percent in February 2020. One may expect steady decreases in unemployment in the coming months. However, as is well known, the official unemployment rate underestimates the true extent of unemployment, particularly because many people have withdrawn from the labor market, at least temporarily.

The strong recovery of the U.S. economy is supported by the continued very expansionary monetary policy. The key interest rate has been at almost zero percent since March 2020 and extensive securities purchases are being carried out. Monetary policy is likely to remain expansionary – also because the central bank will – as officially announced in August 2020 – allow a moderate overshooting of the inflation rate above the average inflation target of two percent on the basis of its revised monetary policy strategy in order to compensate for a previous undershooting. In the current year, the inflation rate is expected to rise above two percent. Currently, I am less worried about inflation than some other commentators. But one should certainly not deny that inflation risks will increase and one should not take for granted that inflation rates will slow down to around two percent again. The U.S. Federal Reserve can be expected to begin gradually making its monetary policy less expansionary in the course of 2022 in light of a then positive output gap.

All in all, I currently still expect the U.S. economy to expand by 7.8 percent in the current year. My forecast is higher than the forecasts of many others (The consensus seems to still lie between 6 and 7 percent). In 2022, the growth rate is likely to be 3.3 percent.

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