The US economy contracted much less than initially feared last year and it is on train to rebound this year as the rapid rollout of highly effective vaccines, substantial levels of fiscal spending and a rundown of household savings boosts growth.
As the latest GDP report showed, the US economy expanded at a 6.4% annualised rate in the quarter, driven by a large rise in consumer spending.
The data for March were particularly strong: President Joe Biden's fiscal package began to take effect; retail sales increased by 9.7% in the month as consumer spending jumped, and sales, as measured by value, leapt above pre-Covid levels.
Other indicators also grew strongly, including housing starts which rebounded in March and are well over a third higher from a year earlier. Industrial production did less well, however, as shortages of semiconductors and severe storms disrupted supply chains and production.
The limited amount of survey data available for April suggest that growth has continued to accelerate, with both the manufacturing and services indicators moving even higher. Manufacturing output as measured by the US purchasing managers' index was at its highest level in April since the series began 14 years ago, and the equivalent index for US services also jumped, driven by stronger customer demand and the reopening of businesses.
Nonetheless, the labour market recovery is far from complete, with payrolls still some 8.4 million below their pre-pandemic level. Indeed, the underemployment rate, a broader measure of joblessness, remains elevated at 10.7%, highlighting the degree of slack in the economy and the scope for a sharp rebound.
This all means that forecasters are turning increasingly optimistic. The IMF recently revised upwards its forecast for US growth for this year to 6.4% and the Organisation for Economic Cooperation and Development is projecting something similar. Both are forecasting further strong growth of between 3.5% to 4% in 2022, which would mark the strongest back-to-back growth rates in nearly 40 forty years, suggesting the US economy is on the cusp of a boom.
Longer-term, President Biden’s proposed infrastructure spend may provide a further boon to growth, but higher taxes could act as a headwind. For now, though, the US economy looks well on its way to overcoming the Covid pandemic. Let’s hope that as usual, the US is leading the way for the rest of the world.
- Oliver Mangan is chief economist at AIB