U.S. economy: Lower but still solid growth and higher inflation

The U.S. economy probably grew by a significant annualized 5 to 7 percent in the fourth quarter of 2021 compared with the previous quarter (we will have the exact figures at the end of January). The economic recovery after the pandemic-related slump in the first half of 2020 thus continued. By the summer of 2021, U.S. economic output had already returned to the level of the final quarter of 2019 before the pandemic. In the fourth quarter of 2021, private consumption in particular is likely to have increased at a solid rate, but corporate investment activity is also likely to have picked up. In the wake of strong domestic demand, imports have probably increased at a faster rate than exports, as was the case throughout last year; the trade deficit has therefore probably widened. Many infection control measures in the states had already been relaxed in the summer of 2021. This probably benefited personal services in particular.

At the beginning of the current year, the U.S. economy is now likely to grow less dynamically. The Omicron mutation has led to an enormous number of corona cases. Although hospital admissions and deaths have risen much less sharply than in previous corona waves, the U.S. healthcare system is nevertheless being strained. Pandemic containment measures have been stepped up again regionally. As in previous waves, personal services are suffering the most economically as a result. Although strict containment measures are unlikely as they were last winter, economic recovery will nevertheless be dampened by the spread of the omicron variant.

In addition, the stimulating effect of the fiscal packages adopted in December 2020 and March 2021, which boosted private consumption in particular via cash payments to households and a temporary increase in unemployment benefits, is now gradually coming to an end. Given the high level of savings accumulated during the pandemic, consumer demand is nevertheless likely to be the main growth driver of the U.S. economy in the coming quarters. In the course of 2022 and 2023, however, growth in private consumer spending will gradually weaken. Against this background, business investment will also increase noticeably over the forecast period. Although corporate financing conditions will become somewhat less favorable than recently, they will continue to support the propensity of companies to invest.

The dynamic recovery of the U.S. economy has also steadily improved the situation on the labor market. The unemployment rate was only 3.9 percent in December, down from 6.0 percent in March 2021 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 December was still 1.5 percentage points lower than before the pandemic in February 2020, so the official unemployment rate probably underestimates the true extent of unemployment by 1 to 1 ½ percentage points. The labor market situation will continue to improve over the forecast period. In 2022 and 2023, however, the decline in the unemployment rate is likely to be much smaller than recently. In view of increasing labor market shortages, wages are likely to increase noticeably more than before the pandemic.

Inflation has picked up significantly in 2021, reaching a temporary high of an annual 7.0 percent in December 2021. Monetary policy will gradually become less expansionary in the face of this higher inflation and continued economic recovery. Inflation is also expected to be well above three percent this year. The personal consumption expenditures index published by the Bureau of Economic Analysis, which the U.S. Federal Reserve primarily uses for its monetary policy decisions, will also increase by more than three percent in 2022 before price increases might approach the central bank’s average inflation target of two percent in 2023. While much of the higher inflation at the beginning of 2021 was still attributable to temporary factors such as higher oil prices as well as supply bottlenecks and associated price increases for various goods – such as semiconductors and raw materials – a somewhat higher price increase is now visible for a broader number of goods. Against this backdrop, the U.S. Federal Reserve began gradually reducing its securities purchases as early as November 2021 and phasing them out by March 2022. The first increase in key interest rates is expected in March 2022. Two to three further interest rate steps are likely to be added in the current year. In addition, the central bank will probably announce its plans to gradually reduce its balance sheet – i.e. sell U.S. government bonds and mortgage securities – in the coming months. I expect it to start shrinking its balance sheet before the summer. All in all, the U.S. economy will probably grow by 3.8 percent this year. In 2023, the growth rate should be 2.6 percent.

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