A closer look at the US economic recovery
The coronavirus pandemic, in 2020, has created a devastating public health crisis in the world's largest economy with over 33 million people infected that pushed the US health system to its limits and a death toll of nearly 600,000, around three times higher than that of Vietnam.
The pandemic has also disrupted millions of lives and teared up a $20-trillion-worth economy, causing an unprecedented economic crisis with financial, supply and demand shocks all at once.
The US economy reached a peak in monthly economic activities in February 2020 which marked the end of the longest recorded economic expansion and shifted to a sharp decline after the first coronavirus wave resulted in a lockdown, shutting most businesses, schools, and transportation, and bringing the economy to a near-standstill.
GDP
As a result of the strict lockdown in March and April 2020, that shut all non-essential businesses, restaurants and bars as well as gatherings, events and all public activities, the US gross domestic product dropped by a record 31.4% in the first quarter, in an unprecedented move not seen in the post-Great Depression America.
The US economy started to gradually reopen in May and the activity accelerated through the summer and the record GDP drop turned to a record 33.4% expansion during the July-September 2020 period, but the period of strong growth proved to be short-lived as the virus returned.
The fresh restrictive measures slowed the economic activity again which resulted in an annual gross domestic product drop of 3.5% in 2020.
But the US economy quickly regained ground and turned a significant contraction into fast recovery in just the first three months of 2021. With a 6.4% growth rate in the first quarter, it marked the fastest pace for growth since the third quarter of 2003.
The falling number of new COVID-19 infections due to a widespread vaccination and a massive financial help from the government revived production, increased consumer spending, which accounts for 68.2% of the economy, new investments and government spending that resulted in an economic activity boom at the start of 2021.
The impressive results of the first quarter signal the economy returned to a recovery path and is running on a boosted optimism for an upbeat performance in 2021.
Economists were divided over the shape of the recovery as some expected rapid rebound in so-called 'V' shape, while the other favored the 'K' shape, where the different parts of the economy diverge and recover from the crisis at different pace, times and magnitude, with both scenarios being included in the current recovery process.
Despite the recovery, in 2021, accelerating in some sectors and struggling to gain momentum in other sectors, the economists agree that the economy would grow by 6-7% this year and return to pre-pandemic levels in coming months.
Inflation and monetary policy
Inflation was generally weaker than the Federal Reserve's target for over a decade prior to the pandemic, as the US economy recovered from the 2007/2009 recession and fell further during the pandemic.
Persistently, an inflation too low is a sign that the economy is below its capacity and that leaves monetary policy with less scope to support the economy.
The policymakers expect inflation to rise somewhat in the coming months, mainly due to three factors: pent-up demand, supply chain disruptions and base effects. Yet the rise of inflation is expected to be transitory, and its impact should fade over time as the economy recovers from pandemic.
The US Federal Reserve stepped in with a broad array of actions to limit economic damage from the pandemic, as the crisis caused huge business closures that resulted in a deep economic downturn.
The Central Bank has launched a few financial aid packages, worth total over $6 trillion to support companies, households, financial markets as well as state and local governments, promising to use all available tools and act proactively, forcefully, and aggressively until seeing signs that the economy is firmly on the way to recovery.
The Fed also cut its benchmark federal funds rate to a range of 0% to 0.25% at the beginning of the pandemic, to reduce borrowing cost to the minimum and help the pandemic-hit economy. Additionally, the Fed continued purchasing massive amounts of securities -the tool that was employed during the Great Recession.
The Fed offered forward guidance on the future path of its key interest rate, saying that ultra-low rates will remain until labor market conditions have reached the levels that are consistent with the Central Bank's assessment of maximum employment while inflation has risen to the 2% target and is on track to moderately exceed 2% in some time, something that may prolong the US economic recovery process.
The labor market
The year of 2020 was very painful for the US labor market as the pandemic devastated the economy, causing loss of over 20 million jobs during the first wave of coronavirus that nearly fully stopped the US economy.
The immediate response of the government with the massive fiscal stimulus and the monetary policy adjustment both helped to put some people back to work during the late spring and summer, but the process was slowed during late 2020 and early 2021 as pandemic worsened.
The unemployment that peaked in 14.8% in April 2020 fell as a number of people returned to work but remains high (6.1% in April 2021) and still above pre-pandemic levels 3.5% in February 2020).
The US weekly jobless claims that show the number of Americans filing for unemployment benefits have significantly dropped from a record 6.1 million in early April 2020 and hit the lowest in 14 months below 500,000 in early May 2021 but remain well above the range of 200,000 to 250,000 that is viewed as indication of healthy labor market.
An unexpected sudden drop in creating new jobs in April (266,000) after the economy added 770,000 jobs in March, signals that the situation in the US labor market remains fragile and that the recovery may take more time despite encouraging figures from the industrial sector and the large services sector returning to work, signaling that the US economy is still not out of crisis and the process may take more time. It is, however, on the way to fully emerge from the crisis caused by the COVID-19 pandemic.
This article was submitted by Windsor Brokers.
