Vaccination and policy support allow to look at the other side of the valley.
Economic outlook USA: a vigorous economic recovery
Even as the United States passed the tragic threshold of 560,000 Covid-19 deaths, the acceleration of the vaccination campaign (40% of the population has already been covered) raises hopes that the crisis is nearing an end. In a televised speech, President Biden set the symbolic date of July 4th – Independence Day – for a possible return to normal. Google Mobility indicators are already showing signs of improvement: with the rebound in employment (nearly a million jobs were created in March alone), they confirm that the consumption growth engine has started up again, after stalling in winter 2020.
Growth surges to more than 6%
This growth engine will have no shortage of fuel. The American Rescue Plan Act, adopted on 11 March 2021, is a gigantic, USD 1.9 trillion stimulus package (9 points of GDP) promoted by the Biden administration that essentially targets households through stimulus checks, the extension of unemployment benefits and tax credits. It is still too early to say whether Americans will have a greater propensity to spend or to save this financial windfall. Either way, the impulse is so strong that the GDP growth rate can only be revised upwards. In its World Economic Outlook, the International Monetary Fund (IMF) did not hesitate to double its 2021 forecast to 6.4%.
At this rate, the US economy will soon make up its 2020 losses and close the output gap – the production shortfall that keeps the economy from reaching its full potential. By fall, the US growth engine could be nearing full cruising speed. By then, it’s reasonable to assume that the sectors currently paralysed by the pandemic (hotel and restaurant services, entertainment industry) will be operating more normally and will have begun hiring again. The return to full employment should be fairly rapid. For Treasury Secretary Janet Yellen, full employment could be reached as early as 2022.
By fall, the US growth engine could be nearing full cruising speed.
Consumer demand rebounds, so does inflation
Along with the upturn in commodity prices (oil prices have risen roughly 150% over the past year, and metals are up by 60%), growing tensions across the US economy are fuelling inflation expectations, notably in the markets, where 10-year indexed swap rates have risen to nearly 2.5%. Consumer prices are, de facto, picking up, if for no other reason than heavier energy and food bills. They also signal a catching-up effect. With the easing of lockdown restrictions, consumers are now able to make certain purchases that they had been putting off. There is strong household demand for travel and durable goods (automobiles, household furnishings), which is contributing to the rebound in prices. In March and the months thereafter, when statistics will be compared with the depressed figures of spring 2020, inflation will rise well above the Fed’s 2% target, and could even reach 3%.
Yet the surge in inflation will be short lived. In the United States, as elsewhere, wages and prices are subject to global forces, possibly even more so since the Covid crisis has accelerated the digital revolution in the services sector. They are no longer reacting as they did before to labour market slacks, a phenomenon known as the “flattening” of the Phillips curve. Inflation, which was already remarkably stable at around 2% during the historical decline of unemployment in 2010-2020, has little reason to accelerate over the long term.
A tight balancing act
This is the analysis of the FOMC (Federal Open Market Committee), which decided not to deviate from its accommodating stance at its 17 March monetary policy committee meeting: the Fed funds target rate will be maintained near zero and it will continue to make net securities purchases at a rate of USD 120 billion a month, including USD 80 billion in US Treasury securities and USD 40 billion in agency MBS. The Fed intends to continue expanding its balance sheet, which already exceeds the Federal deficit and has swollen to USD 3,500 billion (16.5% of GDP) since the beginning of the pandemic.
the US authorities have begun strengthening their oversight mechanisms, but to prevent the risk of an economic relapse, they are keeping open the monetary floodgates. A very tight balancing act.
Such profligacy is bound to have an impact on the markets: the trillions of dollars created in counterparty to the Fed’s asset purchases are being recycled far and wide, in housing, infrastructure, cryptocurrencies and the stock market, among others. Asset prices began climbing on 23 March 2020, the precise date when the monetary floodgates were opened wide, and some have even skyrocketed. Tech stocks listed on Nasdaq, for example, have doubled in value, performances that have not been seen since the early 2000s and the euphoria of the dot.com boom. The price of bitcoin, which soared above USD 60,000 as we wrote these lines, has increased 10-fold. Faced with the risks of excessive behaviour, the US authorities have begun strengthening their oversight mechanisms, but to prevent the risk of an economic relapse, they are keeping open the monetary floodgates. A very tight balancing act.
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