U.S. economy: subdued growth in fall as harbinger of the new normal after Corona?

In the fall, the U.S. economy hit the brakes. Against the backdrop of problems with international supply chains and higher Corona infection numbers, economic output increased only slightly by 0.5 percent. In October, however, the U.S. economy seems to have regained some momentum. Consumers have become more optimistic and the situation on the labor market has also improved more rapidly than in the summer. Even though GDP is expected to grow somewhat faster again at the end of the year, the coming months will remain difficult. The strong recovery following the Corona slump has been halted for the time being. This year, the U.S. economy is likely to grow by slightly more than five percent. For 2022 and 2023, I then expect growth rates of 3.7 and 2.8 percent. Inflation will probably average about 4.5 percent in 2021 and might be a little over three percent next year. Is this the new normal after Corona? Moderate growth with somewhat higher inflation?

In the United States, gross domestic product in the third quarter of the current year increased by only an annualized 2.0 percent compared with the previous quarter (not annualized 0.5 percent). Although economic output had already returned to pre-pandemic levels by the summer, momentum has slowed considerably compared with the first half of the year. Against the backdrop of problems with international supply chains and higher Corona infection rates, private consumption in particular increased only slightly. Business investment also increased only moderately.

The economy is expected to pick up again somewhat in the fourth quarter. Corona case numbers have recently fallen again, although there are likely to be repeated increases in the coming months. The fiscal packages passed in December and March, as well as savings from the lockdown periods, continue to support private consumption.

The purchasing manager indices from the Institute for Supply Management and IHS Markit were recently still well above the expansion threshold of 50 index points, but have not reached the highs of early summer. The picture is similar for consumer sentiment. Consumers remain optimistic, but less so than in the summer. In particular, higher inflation is worrying many people.

The fiscal packages adopted in December and March are still having a stimulating effect. With a volume of around 13 percent of GDP, they have injected a great deal of liquid funds into households – in particular via one-off payments and the temporary increase in unemployment benefits until September. Even if the stimulating effect of the fiscal packages is now gradually fading, consumer demand is likely to remain the main driver of growth in the US economy in the coming quarters. In the course of 2022 and 2023, growth in private consumer spending will then gradually weaken. The recovery of the US economy will also continue to improve the situation on the labor market. The unemployment rate in October was only 4.6 percent, down from 6.9 in October 2020 and 14.7 percent in April 2020. It is expected that further fiscal packages will be adopted by the end of the year, but these will be mainly medium-term oriented and include spending on infrastructure, renewable energy sources and education and social purposes.

Monetary policy remains expansionary – also because the central bank is temporarily allowing higher inflation due to its revised monetary policy strategy.  In the current year, inflation is likely to average around 4.5 percent. However, this is partly due to temporary factors. For example, there has been a slowdown in production in various sectors due to delays in the supply of semiconductors and other intermediate goods. Even after the gradual fading of temporary influences, inflation is likely to remain above the medium-term inflation target of two percent in 2022, given continued dynamic domestic demand.

Against this backdrop, the U.S. Federal Reserve will now begin to gradually make its monetary policy less expansionary in November. This will initially involve a gradual reduction in monthly securities purchases, which currently amount to $120 billion. This process is expected to be completed by mid-2022. The first key interest rate increases are expected from summer 2022. All in all, the U.S. economy is likely to expand by 5.4 percent in the current year, which is somewhat less than I had recently expected. In 2022 and 2023, economic growth rates are likely to be 3.7 and 2.8 percent.  Inflation is likely to average around 4.5 percent in 2021 and is also likely to be slightly above three percent in the coming year.

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