2 July 2021
More than a year has now passed since the first COVID-19 related stay-at-home orders were put in place in the US, and the economic recovery period following the pandemic appears to be moving in a positive direction. As businesses across the country re-open and in-person gatherings resume, Macquarie Head of North America Economics David Doyle examines the factors that are driving this and the challenges that remain as the country enters a ‘new normal’.
Vaccination remains one of the most effective means by which to reduce the spread of COVID-19, and the rapid implementation of public health protocols to support their rollout continues to drive positive momentum across the nation. Over 60 per cent of the eligible US population has already received at least one dose1, a figure that continues to prove effective in slowing the spread of the virus. “The impact of the vaccine rollout is instrumental in the US economic recovery, Doyle says. “As immunizations increase, Americans are likely to feel a greater level of safety in resuming a wide range of social and economic activities.”
Additionally, at the end of June, the seven-day moving average of cases was 11,707 compared to January 2020 figures that exceeded 250,0002. Daily new cases continue to decline despite the pace of vaccinations recently slowing. Nationally, active COVID-19 hospitalizations are at their lowest rate since March 2020 and these patterns continue to contribute to the “strong re-opening impulse,” Doyle says.
Over the course of the pandemic, the US government provided a significant level of fiscal stimulus - in this calendar year alone, nearly $US3 trillion in support measures have been implemented. A significant component of this relief comprised of near-term immediate relief in the form of $US1400 checks per household, of which approximately $US335 billion was distributed in March 2021. From government assistance payments to expanded unemployment benefits and Paycheck Protection Program loans, this stimulus has contributed to the recovery as US GDP increased at an annual rate of 6.4 per cent in the first quarter of 20213.
Real personal consumption has also increased driven by a surge in durable goods spending among items such as cars, home appliances and consumer electronics. And as re-openings continue across the US and regulations around social distancing ease within various jurisdictions, the services sector will help maintain that going forward. “There have been positive signs of momentum related to spending in sectors which have been particularly depressed due to COVID-19 regulations, including gaming, lodging, transportation and in-person leisure activities,” said Doyle. One can simply look to air travel during to see this shift from last year. The Transportation Security Administration screened nearly 4.1 million passengers at airports in the US this weekend – the start of the summer travel period – a near-fourfold increase on 2020, and the highest number since the pandemic began.4
Additionally, according to Doyle, consumer fundamentals remain strong – perhaps at their best position in decades - with the savings rate currently sitting well above its pre-pandemic level, debt service payments falling one-third from their peak following the global financial crisis and household debt as a share of disposable income is at its lowest levels since the mid-1990s.
For anyone who has tried to buy a house over the last year or been caught in a bidding war, it would come as no surprise that activity and prices remained strong in the US housing market throughout the pandemic and continued through the first quarter of 2021. “We expect robust activity to continue in this sector in the years to come,” noted Doyle. “This boom follows a period of historical underinvestment in the sector for the past 15 years. We see demographics supporting this shift as seen by them being the strongest they have been in decades.” Despite recent increases in interest rates, throughout the pandemic the housing sector continued to remain active - 2020 saw a record surge in first-time home buyers and levels of new construction reached their highest levels in over a decade in January 2021. Though activity may have moderated in the second quarter, this has been driven by supply related challenges as demand indicators remain firm.
While the spread of COVID-19 in the US has been greatly reduced in the first half of this year, the total number of vaccines administered daily has declined significantly. According to Doyle, if the pace of first dose recipients slows to 300,000 vaccinations per day, 75 per cent of the adult US population would only receive at least one dose by the fourth quarter of this year. In addition to this slowing pace, vaccine hesitancy remains a concern with recent surveys suggesting approximately one-third of the adult US population are uncertain about inoculation. “This combined with the potential for new variants poses a risk to recovery,” says Doyle.
Although the US economy has benefitted from strong growth in the first half of 2021, concerns surrounding inflation continue to stay in focus. During the Federal Reserve’s Open Market Committee (FOMC) meeting in mid-June, inflation forecasts for 2021 through 2023 were revised upwards. “The key question for the coming months will be what is meant by the FOMC’s ‘substantial further progress’ test for commencing tapering,” says Doyle. It is expected that the focus here will rest largely on employment figures. When this guidance was introduced in December 2020, the shortfall from pre-pandemic employment levels was approximately 10 million jobs; however, this figure has declined since that date. “In our view, it is likely that a taper signal would occur at the September or October meetings.” However, Doyle also notes that there will likely be a time gap – four to six months - between when a taper signal is delivered by the FOMC and when the taper occurs. As a result, all eyes will remain on the Federal Reserve as the US continues in its post-COVID 19 recovery.