United States: Upswin loses momentum

United States: Upswing loses momentum

Economic development

After taking a hard hit from the Covid crisis in 2020, the U.S. economy seemed to be recovering at the start of 2021. In the first two quarters of the year, GDP increased by an annualised rate of 6.3 and 6.7 percent respectively. According to preliminary estimates by the Bureau of Economic Analysis (BEA), growth in the third quarter then dropped down to an annualised growth rate of 2.3 percent. This is a result of Covid cases increasing again, bringing new restrictions and prompting some companies to postpone openings. At the same time, government aid to companies and private households decreased (BEA 2021a). In May 2021, the OECD had predicted growth rates of 6.9 percent for the year 2021 but in December 2021 it revised its forecast down to 5.6 percent. Forecasts for 2022 and 2023 are 3.7 percent and 2.4 percent respectively (OECD 2021). For 2021, the International Monetary Fund (IMF) and the European Commission are also expecting strong growth of six and 5.8 percent respectively. For 2022, the IMF also forecasts robust growth of 4 percent, while the European Commission’s forecast is at 4.5 percent (IMF 2021, European Commission 2021). We expect real growth of 3.75 percent.

The unemployment figures in the United States underline the dramatic impact the Covid pandemic has had on the U.S. economy. While in February 2020, unemployment was at 3.5 percent, by April it had shot up to 14.8 percent. Although unemployment has still not decreased to pre-crisis levels, it had gone down to 4.2 percent by November 2021 (Bureau of Labor Statistics 2021a). The unemployment rate among several minority groups and young people is well above the average level (Bureau of Labor Statistics 2021b). OECD predicts that the unemployment rate will continue to fall to 3.8 percent in 2022 and to 3.4 percent in 2023, which would be even lower than pre-pandemic levels (OECD 2021).

Following a clear drop in sentiment among U.S. consumers in 2020, it improved tangibly, climbing up to over 120 points by the middle of September according to the consumer sentiment barometer, the U.S. Consumer Confidence Survey. During the year, the index dropped again, standing at 115.8 points in December 2021 slightly below its highest level in that year. Compared to the previous month, sentiment nonetheless improved slightly (111.9 points) (The Conference Board 2021). U.S. consumer spending also increased steadily, with an increase of 0.6 percent recorded in November compared to the previous month. In October 2021, the upturn in sentiment was even clearer with a plus of 1.4 percent compared to the previous month. The disposable income of private households rose by just 0.4 percent in both October and November after losing 1.3 percent in September (figures month on month in each case (BEA 2021b)).

Prices and inflation have been increasing considerably in the United States since spring 2021. According to the Bureau of Labor Statistics, the Consumer Price Index rose by almost 6.9 percent in November 2021 compared to November 2020. This is the largest 12-month increase recorded since June 1982. Steep increases in commodity prices are particularly responsible for the strong upward pressure on inflation. In November 2021, prices for gasoline were up by 58.1 percent and prices for fuel oil by 59.3 percent year on year (Bureau of Labor Statistics 2021c).

Government debt

In view of the size and number of fiscal measures taken, it is not surprising that the budget deficit of the United States has increased. In July 2021, the Congressional Budget Office (CBO) published a revised estimate of public finances for the fiscal year 2021. According to this report, U.S. debt will

exceed the economic output of the country, reaching a debt ratio of 103 percent of GDP at the end of 2021, which corresponds to a budget deficit of 13.4 percent of U.S. GDP. This would be the secondhighest relative deficit since 1945. The Covid stimulus package at the end of 2020 had pushed the budget deficit for 2020 up to 14.9 percent of U.S. GDP. In CBO’s projections, annual deficits will decrease until 2024 (2.9 percent of GDP in 2024), before increasing again to reach 5.5 percent of U.S. GDP by 2031, which is well above the 50-year average of 3.3 percent (CBO 2021).

Foreign trade

U.S. foreign trade was also marked by a steep decline in the Covid crisis year of 2020. In the third quarter, the downward trend then turned around with both imports and exports rising constantly since. According to BEA figures, U.S. exports of goods and services amounted to around 632 billion U.S. dollars in the third quarter 2021 following seasonal adjustment, which represents a hefty year on year increase of 20.9 percent. U.S. imports of goods and services totalled over 857 billion U.S. dollars in the third quarter 2021 which also represents a substantial year on year increase of 20.7 percent (BEA 2021c). For 2021, the OECD forecasts an increase in U.S. exports of goods and services of 3.8 percent in 2021 and 3.4 percent in 2022. For U.S. imports of goods and services, the OECD expects a rise of 13.4 percent in 2021 and six percent in 2022 (OECD 2021).

Fiscal measures under the Biden administration

Some of the fiscal measures and emergency packages to support both private households and businesses during the Covid pandemic under the Trump and Biden Administrations have either expired or been reduced, including the Child Tax Credit in January 2022, the expansion of unemployment insurance benefits in September 2021 and the Paycheck Protection Program in September 2021 (New York Times 2022). These changes also affect the economic output of the country.

Alongside a series of emergency packages, U.S. President Joe Biden presented several legislative packages in his first year in office unleashing an unprecedented scale of social and infrastructure spending. Some of these legislative packages have already passed Congress and became law. These include the American Rescue Plan, which entered into force in March 2021 and has a total volume of around 1.9 trillion U.S. dollars and a focus on social spending (White House 2021a).

Following months of negotiations, the Infrastructure Investment and Jobs Act was passed in November 2021 with a broad majority in both parties. According to information from the White House, the legislative package will help mitigate inflationary pressure, strengthen supply chains, and create jobs. The package has a total volume of more than one trillion U.S. dollars for infrastructure and social spending, including the following investment in infrastructure:

▪ 110 billion U.S. dollars for the reconstruction and expansion of roads and bridges and a total of 42 billion U.S. dollars for the modernisation of the country’s port and airport infrastructure, ▪ a total of 120 billion U.S. dollars for the expansion of the water supply and broadband infrastructure, ▪ 39 billion U.S. dollars for the modernisation and expansion of public transport and 66 billion

U.S. dollars for the expansion of rail transport in the United States, ▪ 65 billion U.S. dollars for the modernisation of power grids, ▪ 50 billion U.S. dollars to strengthen U.S. infrastructure protection against the consequences of climate change, weather events and cyberattacks (White House 2021b).

In October, President Biden presented his proposal for the so-called Build Back Better Act. This legislative package has a total volume of 1.75 trillion U.S. dollars. The centrepiece of the legislative package is spending on childcare and healthcare as well as investment in climate protection, including the following spending and investment:

▪ 400 billion U.S. dollars for childcare and preschool, ▪ 200 billion U.S. dollars for tax credits, particularly for families, ▪ 555 billion U.S. dollars for investment in clean energy and climate protection, ▪ 130 billion U.S. dollars for the expansion of the Affordable Care Acts (ACA).

Plans are to finance this package by increasing tax rates for large companies and top earners, who benefited particularly from the tax cuts of the Trump administration. Personal income under 400,000 U.S. dollars will not be subject to higher tax.

While the House of Representatives has already passed the legislative package, it has not been passed by the Senate yet, after Senator Joe Manchin (a democrat from West Virginia) announced shortly before Christmas that he would not vote for the package in its current form. He justified his move with concerns about further escalating government debt and increasing inflation (New York Times 2021). It is therefore currently unclear when and in what form this legislative package, which forms a central part of President Biden’s domestic policy agenda, will be passed.

U.S. GDP growth, quarterly (annualised)

40

30

20

10

0

-10

-20

-30

-40 33.8

-5.1 4.5 6.3 6.7 2.3

-31.2

Q1 Q2 Q3 Q4 Q1 Q2 Q3 2020 2021

Source: Bureau for Economic Analysis