The U.S. economy experiences a strong summer. Fiscal relief and stimulus measures and fast initial progress in the U.S. vaccination program drive a strong recovery in private consumption and investment. In addition, many households accumulated savings last year which will be partly used for private consumption this year. I am optimistic for the U.S. economy and expect a GDP growth rate of almost eight percent this year (the consensus is somewhat lower at around 7 percent). For 2022, I forecast an economic growth rate at around 3.5 percent. Inflation will increase this year to almost four percent, but will decrease again in 2022 to around two percent. In the medium-term, I expect somewhat higher inflation rates than in the pre-pandemic period of time.
The U.S. economy is experiencing a strong recovery. In the first quarter of 2021, economic output rose by 1.6 percent in the first quarter (annualized 6.4 percent). The recovery continued in the third quarter and will remain strong over the summer. I expect that the gross domestic product (GDP) will increase at rates of around 10 percent in the second and third quarters of this year. New corona infections peaked in mid-January. In spring, the vaccination program evolved very well by international standards and has contributed to a gradual waning of the pandemic. However, a significant part of population is not yet vaccinated and might choose not to get vaccinated. Mutations of the virus could lead to another wave of the pandemic in the fall. Nevertheless, the availability of vaccines and better treatments make it currently unlikely that very strict containment measures will have to be adopted.
In the second quarter, industrial production and retail sales continued to rise at solid rates. Purchasing managers’ indices remained above the expansion threshold of 50 index points, and consumer sentiment also brightened. Besides progress in the vaccination program, these developments were also heavily driven by the relief and stimulus packages adopted at the end of December and in mid-March totaling more than two and a half trillion US dollars. This sum includes, among other things, one-time payments to low- and middle-income persons of $2,000 and more generous unemployment benefits.
The very expansionary fiscal policy and the gradual easing of containment measures are massively stimulating private consumption in the current year. In addition, households have massively expanded their savings rate on average since the outbreak of the pandemic. This year and next, the savings rate should gradually return to normal and further stimulate private consumption. These factors should lead to very strong economic growth in the summer half-year, driven primarily by private consumption. In the wake of this development, the situation on the labor market will also improve significantly. In June, the unemployment rate was 5,9 percent down from 14.7 percent in April 2020. However, the official unemployment rate continues to underestimate the actual extent of unemployment by probably more than two percentage points. After some rather disappointing months, a relatively high number of 850’000 new jobs were created in June.
Against a background of strong consumer demand, business investment will also continue to increase markedly. Although corporate financing conditions are less favorable than last year, they continue to support the propensity of companies to invest.
Monetary policy will remain expansionary – partly because the central bank’s revised monetary policy strategy will allow a moderate overshooting of the inflation rate above the average inflation target of two percent. In the current year, the inflation rate is likely to rise to over three percent on average; however, this is also due to temporary factors such as supply chain disruptions and higher oil prices compared with last spring. Currently, I am less worried about short-term inflation than some other commentators. But one should certainly not deny that inflation risks have increased and one should not take for granted that inflation rates will rapidly slow down to around two percent again. One should also stress that the Federal Reserve bases its decisions mainly on the Personal Consumption Expenditures Price Index (published by the Bureau of Economic Analysis) and not on the Consumer Price Index (published by the Bureau of Labor Statistics). The Personal Consumption Expenditures (PCE) Price Index tends to be somewhat lower than the Consumer Price Index (CPI) and I do not think that the PCE will rise persistently above three percent this year. Having said that, I expect somewhat higher inflation rates for both types of indices in the medium-term than in the years before the pandemic. I think that the Federal Reserve will already start to slowly adjust its policy in the course of the second half of the year (so I think it will happen somewhat earlier than other commentators expect).
All in all, I am still optimistic for the U.S. economy and I expect an economic growth rate of 7.7 percent in the current year (this is somewhat higher than other forecasts). For 2022, my current forecast indicates a growth rate of 3.6 percent.
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