U.S. Economic Trends and Prospects

June 25, 2020

During the 21st century the United States has experienced faster economic growth than Japan and Euroland more times than not. The Great Recession was less pronounced, and the subsequent recovery emerged sooner and proceeded more vigorously in America.

This year’s recession struck abruptly in the first quarter, but the 5.0% annualized contraction of U.S. GDP in that period was less severe than declines of 33.8% in China, 13.6% in the euro area, and 10.0% in Switzerland. Japanese GDP fell just 2.2% annualized but after a bigger 7.2% tumble in the final quarter of 2019. Moreover, year-on-year U.S. growth in the first quarter of +0.3% compares favorably with contractions of 1.7% in Japan, 6.8% in China, 3.1% in Euroland, 1.6% in Great Britain and 0.9% in Canada.

The consensus path for growth following the first quarter is similar for most Western economies. Lockdowns against the pandemic were in place for a much larger share of the second quarter than the first one, so economic conditions will suffer a considerably bigger hit in 2Q. However, an inflection point was passed in May or June, paving the way for moderate to solidly positive growth in the summer. While that’s the baseline, the unpredictability of the Covid-19 path creates huge uncertainty surrounding even that near-future time frame. Such uncertainty makes the final quarter of 2020 even more of a crap shoot. Even if the pandemic can be tolerated without renewed full shutdowns, there’s a heated debate between a V-shaped or U-shaped business cycle. If consumer and business psychology remain depressed but fiscal support is removed prematurely, the possibility comes into play of a fresh sharp contraction in the autumn tracing a W-shaped business cycle.

In the United States, there were some rays of hope in May data. Retail sales rose 17.7% on month, and industrial production rebounded 1.4%, but their levels remained very depressed with year-on-year declines of 6.1% in sales and 15.3% in production. Merchandise exports dropped 5.8% on month to 36.3% of their year-earlier level. Imports were down 26.1% on year. Consumer behavior is going to be critically determinant. All but 0.27 percentage points of the negative 5.0% growth in the first quarter was caused by the drop in personal consumption. Many consumer activities still carry enormous risks like going to the movies or a restaurant, taking public transportation, or traveling by air or on the road. The U.S. labor market is still enormously depressed. During the second quarter, new weekly jobless insurance claims averaged 5.03 million in the four weeks through April 25th, 2.61 million in the next four weeks to May 23, and 1.61 million in the four weeks to June 20. The 13.3% unemployment rate last month was unexpectedly lower than in April but otherwise the highest since WW2, and the broad rate of unemployment and under-employment was at a scarily toxic 21.6%.

From the outset of the pandemic, economic growth has taken its cue from Covid-19 developments. The choice between saving lives and saving livelihoods has been an oversimplification. Without a system to flatten the waves of the virus, sustainable growth is not really viable.¬† Governments have responded to the pandemic in different ways, not all equally successful. In part, growth didn’t fall as sharply during the first quarter in the United States as elsewhere because U.S. officials were slow to respond to the health threat. That initial delay and the politicization of the response subsequently have produced disastrous results, making America the chronic global epicenter of the pandemic even as hot spots within the country have bounced around from region to region. While many countries hit hard for a while managed to reduce their rates of new cases, the U.S. curves only flattened and are now rising again. Live free or die has too often become live free and die.

Looking ahead to the second half of 2020 and beyond until a widely available vaccine is distributed, growth is likely to remain highly dependent by the ebb and flo of the Covid-19 outbreaks. The comparatively bad U.S. health figures so far appear systemic and related to the U.S. government’s erratic and inconsistent reaction. That reality is not going to change this year, suggesting that U.S. growth in the second half of 2020 is likely to fall similarly short of how other major economies around the world will perform.

In spite of all this, the Dow Jones Industrial Average is still some 30% higher than when Trump took the presidential oath of office on January 20, 2017. That gain may sound robust, but then consider these increases posted during other presidential first terms as of June 25 in their fourth years: +57% for Obama, +76% for Clinton, and +47% for George Herbert Walker Bush.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express  permission.

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