Economic Recovery is flagging and risks are tilted towards the downside
Although the US economy witnessed a better than expected bounce-back in July from the unprecedented pandemic induced downturn in Q2 2020 (where GDP contracted by 31.4% annualized rate), latest high frequency data (such as retail sales, consumer spending, payrolls and other labour market data, exports, trade deficit, industrial production among others) seems to suggest that economic recovery is flagging in the US and risks are tilted towards the downside.
US Real GDP, Annualized Rate (% Growth)
Source: Bureau of Economic Analysis, US
Consumer spending, which had contracted at an annualized rate of 33.2% (according to BEA data) and accounts for around 70% of US GDP, grew by only 1% m/m in August, compared to 1.9% in July. With fading fiscal stimulus, we expect growth in the same to have decelerated in September too.
Consumer Spending (% Growth)
Source: Bureau of Economic Analysis, US
What does not augur well for consumer spending, and consequently US growth prospects, over the coming quarters is that the labour market recovery is not yet on a firm footing. Even though employers in the US added 1.4 million jobs in August, the same rose by the least in four months. Moreover, even though the unemployment rate declined to 8.4% in August, from 10.2% in July, the same remains elevated. The latest economic data on unemployment claims suggests that improvement in the labour market has stalled.
All Employees, Total Non-Farm (Million) and Unemployment Rate (%)
Source: Federal Reserve Bank of St. Louis
Without the enactment of another fiscal stimulus, the US labour market could be in for a frustratingly slower recovery over the next two quarters, along with a possible marked fall in incomes. The downside implications for consumer speeding are obvious.
We project consumer spending in the US to contract by 4.4% in 2020 and thereafter recover by 4.9% in 2021, assuming that new fiscal stimulus is announced soon and Biden wins the Presidential elections.
Regarding business investment, the same seems to be on a recovery path (despite the pandemic) after contracting for three consecutive quarters (Q4 2019 - Q2 2020) and plummeting by 27.2% annualized rate in Q2 2020. However, the pace of growth is decelerating. Two high frequency indicators attest to this: durable goods orders increased by 0.4% m/m in August 2020, compared to 11.7% in July. Further, new orders for non-defense capital goods excluding aircraft, which is a closely watched proxy for business investment, rose by 1.8% in August, compared to 2.5% in July.
Business Investment (% Growth)
Source: Bureau of Economic Analysis, US
Going forward, the trajectory of business investment in the following quarters will depend substantially on the outcome of the US Presidential elections, US and global economic outlook, oil prices, how US-China trade related frictions are managed (though we expect the US-China trade decoupling to continue, there is likely to be less hostility between the two countries if Biden wins and is elected President), trajectory of government debt (which has soared), financial conditions, evolution of the pandemic and enactment of further fiscal stimulus.
Having stated the above, we expect business investment to remain relatively subdued until firms are convinced of or witness steady economic recovery - which we don’t expect until at least the middle of 2022. Our projection for business investment is - 5.5% for 2020 and 2.6% growth in 2021.
Turning to the external sector, exports rose by 2.8% m/m in August (to US$ 118.3 billion), compared to 12% in July - according to U.S. Census Bureau data. However, exports are still around 13% below when compared to pre-pandemic levels. The recovery in exports is also flagging. With the onset of the second wave of corona virus globally and US-China trade and technology related frictions, we expect the recovery in US exports to be protracted and bumpy over the coming quarters.
Exports and Imports, M/M (Growth)
Source: US Census Bureau
With reference to trade deficit, the same rose by 3.5% m/m in August to a record US$ 82.9 billion, compared to US$ 80.1 billion in July - according to US Census Bureau Data. It might be noted that a larger trade deficit subtracts from GDP growth. Further, the larger trade deficit is reflective of a more subdued recovery in exports.
Having stated the above, we expect US GDP to contract by 3.8% in 2020 and grow by 4.0% in 2021.
Turning to the federal budget deficit, the same was 4.6% in 2019. The deficit has surged following the fiscal stimulus measures to counter the pandemic. It is expected to shoot up further over the coming quarters and years, given the imperative of further stimulus to support economic recovery and possibility of higher government spending on infrastructure, education etc. over the next four years if Biden gets elected as President of the United States and is able to implement his spending plans. He has pledged significant investment (US$ 2 trillion) over four years.
Federal Budget Deficit (% of GDP)
Source: Federal Reserve Bank of St. Louis
Biden’s tax and spending policies make sense and if implemented should result in growth getting on to a higher trajectory over the long term. However, in the short-term (2021) and medium-term the US economy faces stupendous challenges - such as a mountain of non-financial corporate sector debt, large budget and current account deficits, wage stagnation, deteriorating infrastructure among others, which are all likely to seriously inhibit growth. Between 2020-2024, we expect growth to average 1.4%.
Next, public debt in the US will soar, primarily due to the pandemic related borrowing, increase in discretionary spending by the government and slower growth prospects of the US economy (as a result of factors already stated above).
What is particularly worrying is that soaring public debt might result in weaker business investment and productivity in the US over the coming decade, unless Biden is elected as President and he is able to fully implement his tax and spending policies, which in turn should boost business confidence to spend and invest.
Having stated the above, even if Joe Biden is elected as President of the United States, we expect the US economy to grow at a relatively slower rate over 2020-2029 compared to 2010-2019 (where US growth averaged 2.46%) - due to several reasons (some of which have already been stated above).
Disclaimer: This article is for informational and non-commercial purposes only and should not be used as professional or investment related advice.
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