The rapid growth of the US economy is about to hit a wall
A National Park Service employee replaces a flag at the Washington Monument, which reopened today after a six-month closure due to COVID-19 security measures, in Washington, United States, July 14, 2021.
Kevin Lemarque | Reuters
The US economy is expected to post another meteoric growth spurt in the second quarter, before a slow and steady dose of reality begins to set in.
Gross domestic product is expected to accelerate 9.2% for the April to June period, according to a FactSet survey. The Commerce Department will release its first estimate of second-quarter GDP on Thursday.
In a pre-pandemic world, this would have placed annualized growth at its fastest level since the second quarter of 1983. However, current circumstances and the disproportionate policy response they have generated make it simply the third consecutive quarter of GDP. which is well above the post-Great Recession trend.
Things are about to change, however.
The economy is slowly returning to normal, the open checkbook of Congress is on the verge of tightening, and millions of sidelined American workers will return to work. This means a gradual reversion to the mean for an economy more accustomed to growing closer to 2% than the much stronger levels it reached when reopening.
“Growth has peaked, the economy will slow down a bit in the second half of this year and then much more noticeably in the first half of 2022 as budget support wanes,” said Mark Zandi, chief economist at Moody’s Analytics. “The contours of growth are going to be shaped in large part by fiscal policy over the next 18 months. The tailwinds are just blowing less strongly and could come to a complete stop around the same time next year.”
It has been a long road to get here, but the economy has become very close to its pre-pandemic state.
In fact, according to a current gauge that Jefferies maintains, overall production is at 98.6% of its “normal” level before Covid-19 turns everything upside down. The company uses a plethora of metrics to measure the times versus today and finds that while some areas such as employment and air travel are lagging behind, retail and housing have contributed to push overall activity to just below the 2019 level, at 98.6%.
“When I take a holistic look at income dynamics and household balance sheets, I see a very, very positive picture, very healthy fundamentals, and it’s hard to be pessimistic about the outlook,” said Aneta Markowska, Chief Financial Economist at Jefferies.
Indeed, household net worth totaled $ 136.9 trillion at the end of the first quarter, a 16% increase from its 2019 level, according to the Federal Reserve. At the same time, household debt repayment relative to personal disposable income fell to 8.2%, a record high dating back to 1980.
But much of that net worth has been due to the increase in financial assets such as stocks, and personal income has increased due to government stimulus payments which are slowing down and will eventually come to a halt.
Demographics hold back growth
Maintaining such a rapid rate of growth will be difficult in an economy that has long been held back by an aging population and poor productivity. These problems will be exacerbated by dwindling political support as well as an ongoing battle against Covid-19 and its variants, although few economists expect widespread lockdowns and the slump in activity that has taken hold. produced between early and mid-2020.
“What we are seeing is a robust growing economy above the trend, but at a slower pace through 2023,” said Joseph Brusuelas, chief economist at consultancy firm RSM. “In the absence of any political support that improves productivity, we will eventually revert to the trend as there is little we can do against demographic headwinds, which will eventually pull growth back to the long-term trend.”
But there are also short-term headwinds that should temper these garish growth figures.
An aggressive inflation spurt caused by supply constraints and huge demand linked to economic reopening will affect production. While many economists, including those at the Federal Reserve, are prepared to view inflation as temporary, with soaring prices for used cars and trucks contributing a large part, officials including the Treasury Secretary Janet Yellen, have warned that price increases are expected to continue for at least several months.
Gasoline prices at a Royal Dutch Shell Plc gas station in San Francisco, California, United States on Wednesday, July 7, 2021.
David Paul Morris | Bloomberg | Getty Images
Inflation combined with weakening budget support will then also act as a limit on growth.
“The economy is facing supply constraints with residential investment likely a drag and inventory change remaining negative,” Bank of America US economist Alexander Lin said in a note. “Looking ahead, this is probably the peak, with growth slowing in the next few quarters.”
Capital Economics forecasts GDP 8% below consensus for the second quarter, then decline to 3.5% in the following period.
“With soaring prices squeezing real incomes, we believe the pace of monthly growth will remain lackluster, paving the way for a sharp slowdown in consumption and GDP growth in the third quarter,” wrote Paul Ashworth, North American Chief Economist at Capital Economics.
The pandemic is another wild card.
Cases of the delta variant are increasing in a handful of states, and health officials fear the United States may be facing a wave like the one hitting some European and Asian countries. Few, if any, economists expect another wave of lockdowns or similar constraints in the United States, but pressure from abroad could affect domestic growth.
“Export platforms like Vietnam are now locked down,” Brusuelas said. “Vietnam is becoming an increasingly important cog in the global supply chain, so we are monitoring this closely.
Brusuelas added that debt ceiling negotiations could shake things up in the United States as well. Yellen said on Friday that the extraordinary steps the United States may need to take to continue paying its debts could cause problems as early as October.
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