U.S. economy: The recovery continues, but high growth rates are over for the moment

The U.S. economy grew significantly by 1.6 percent in the second quarter of the current year compared with the previous quarter (annualized 6.6 percent). The economic recovery after the pandemic-related slump in the first half of 2020 thus continued; gross domestic product had already increased at a similar rate in the first quarter. In the meantime, economic output has returned to the level of the final quarter of 2019 before the pandemic. Private consumption in particular increased significantly in the second quarter, but business investment activity was also strong. New Corona infections declined steadily through the end of June and the vaccination program progressed well by international standards. In the wake of these developments, infection control measures were gradually relaxed in the states. This benefited personal services in particular, which grew at strong rates. However, industrial production also increased noticeably.

In the third quarter, the economy is expected to grow at a similar rate to the first half of the year. The purchasing managers’ indices were still well above the expansion threshold of 50 index points in July, but do not indicate any further acceleration in economic growth. Consumer sentiment – as measured by the indices of the Conference Board and the University of Michigan – however got less optimistic recently. It might be a temporary deterioration due to the increase in Covid cases. But it might also indicate a gradual moderation of economic activity in the coming months.

Obviously, the pandemic is not over yet. In the second half of the year, the economy in the United States is likely to continue to grow with momentum, but growth rates will probably be somewhat lower in the fall and winter than in the first half of the year. Corona case numbers have risen significantly again during the summer in several states against the backdrop of the delta mutation now dominating. In addition, progress in the vaccination program has – at least temporary – slowed down due to vaccination skepticism in some regions. As of mid-August, the rate of fully vaccinated persons in the United States is slightly more than 50 percent; however, vaccination rates are sometimes much higher among at-risk groups and in metropolitan areas. Although strict containment measures are unlikely, as they were last winter, the economic recovery is nevertheless being somewhat dampened by the spread of the delta variant.

The fiscal packages adopted in December and March – amounting to around 13 percent of GDP – are still having a stimulating effect, and boosting private consumption and demand for residential property in particular. However, the stimulating effect is likely to gradually diminish in the coming quarters.  But consumer demand will still be the main growth driver of the US economy in the coming quarters. In 2022 and 2023, growth in private consumer spending will weaken further but still increase at solid rates. Against this background, business investment will also increase noticeably. Although corporate financing conditions are likely to become less favorable than recently, but will continue to support companies’ propensity to invest.

The dynamic recovery of the US economy has also continuously improved the situation on the labor market. The unemployment rate was only 5.2 percent in August, down from 6.7 percent last December and as high as 14.7 percent in April 2020. However, many people have withdrawn from the labor market, at least temporarily; the labor force participation rate in August was considerably lower than before the pandemic in February 2020, so the official unemployment rate might underestimate the true extent of unemployment by roughly 1 ½ percentage points.  The labor market situation will continue to improve. In 2022 and 2023, however, the decline in the unemployment rate is likely to be much smaller than recently.

Monetary policy will remain expansionary – partly because the central bank’s revised monetary policy strategy in August 2020 will allow inflation to overshoot moderately above the average target of two percent. This year, inflation is likely to temporarily overshoot this target by a significant margin. However, much of the higher inflation is due to temporary factors such as higher oil prices compared with 2020, as well as supply bottlenecks and associated price increases for various goods – such as semiconductors and raw materials. For example, a shortage of semiconductors has caused production delays in car manufacturing, which led to exceedingly sharp price increases in the market for used cars in the spring of 2021. The index of personal consumption expenditures published by the Bureau of Economic Analysis, which the U.S. Federal Reserve primarily uses for its monetary policy decisions, is expected to increase by nearly four percent this year. The consumer price index published by the Bureau of Labor Statistics is also expected to rise temporarily to roughly four percent on average for the year 2021. As the temporary influences on prices gradually fade, the inflation rate will also gradually decline. However, in view of continued dynamic domestic demand for the time being, inflation is likely to remain above two percent in 2022 and not return to below two percent until 2023.

In view of the favorable economic recovery and somewhat higher inflation, it is to be expected that the U.S. Federal Reserve will gradually begin to make its monetary policy less expansionary at the end of the current year. This will probably initially involve a gradual reduction in monthly securities purchases, which currently amount to $120 billion. The first interest rate increases may then be expected towards the end of 2022. All in all, the US economy will probably grow by 6.0 percent in the current year. In 2022 and 2023, growth rates are likely to be 3.9 and 2.1 percent respectively. 

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