US shines as a beacon of economic recovery

• The US economy is expected to rebound spectacularly this year, with our growth forecast raised to 7.1%, as activity returns to pre-pandemic levels and with signs of more to come
• Pent-up demand and excess savings are likely to ignite consumer spending – helping to propel economic growth
• The US labour market has registered a remarkable turnaround with the unemployment rate forecast to fall to 4.6% in December after peaking at 14.7% in April 2020
• Aggressive government stimulus packages are positive for long-term growth prospects, although tax reforms are likely to create short-term challenges for companies.

The US economy is firing on all cylinders and activity is back at pre-pandemic levels. Buoyant consumer spending, ambitious government spending programmes and low rates are likely to keep the growth engines running for some time yet.

The US economy has expanded for the three quarters since October. A robust start to the year delivered growth of 6.4% between January and March with output returning to pre-pandemic levels in the second quarter.

The rapidly improving vaccination programme, healthy consumer spending and the proposed massive multi-year stimulus plan has encouraged us to raise our US growth forecast for this year (see table).

Source: Barclays Reasearch, Barclays Private Bank, June 2021

Improving public health situation

Coronavirus has taken a devastating toll on America, with more than half a million deaths recorded. However, the approval and administering of vaccines since December have lifted inoculation rates recently. With nearly 300m doses administered and close to 40% of the population fully vaccinated, hospitalisations and death rates have fallen dramatically, allowing authorities to ease restrictions.

US consumers fired-up and ready to spend

A mixture of improving labour market conditions, pent-up demand and $2.6tn of excess savings¹ are helping to boost consumer confidence and retail sales. Personal consumption expenditure grew at an annualised rate of 10.7% in the first quarter, its second strongest pace since the 1960s. Both headline and core sales are now substantially higher than their pre-pandemic levels. We expect private consumption growth of 8% this year, helping to propel the recovery.

Remarkable labour market recovery

The strength of the labour market directly affects consumption levels. Pre-pandemic, the US unemployment rate was at a multi-decade low of 3.5%. The locking down of the economy triggered a surge in job loses, with the unemployment rate hitting 14.7% in April 2020, the highest since the Great Depression.

Despite the recent slowing, the US labour market has recovered remarkably over the past year, with an unemployment rate back to 5.8% in May. As economic conditions normalise, we expect the rate to finish this year at 4.6% and next year at 4.1%.

Robust business confidence and booming housing market

With a 16.7% increase in spending on equipment in the first quarter, fixed business investment is supporting growth.

This corporate spending partially reflects the requirement to address the challenges and protocols created by the pandemic. It also suggests that companies are confident enough to commit to capital spending plans.

The US housing market has continued to demonstrate considerable strength over the last year. The S&P Case-Shiller 20-city composite index rose 13.3% in March², on a year-on-year basis, the tenth consecutive month of accelerating home prices and the largest gain in over 15 years. That said, future gains may be constrained by rising material costs as well as land and labour shortages, the latter of which is showing signs of holding back activity.

Biden administration is looking to reshape

American President Joe Biden’s victory and Democrat victories in the Senate runoff elections have created a moderate “blue wave” which is having a significant impact on domestic policy.

The president quickly enacted his ambitious $1.9tn relief plan. Its aim is threefold: control the virus, lift consumption and provide support for low paid workers, small businesses and state services.

President Biden has also turned his attention to the economic recovery with his once in a generation investment plan. The president seeks nearly $4tn in new federal spending and tax credits over eight years for his two-part stimulus programme. The spending is focused on a range of areas from surface transportation to elderly care to education. If fully enacted, the president’s American Jobs Plan (AJP) and American Families Plan (AFP) would reshape domestic spending, tax and broader domestic policy.

Part one of his “Build Back Better” initiative, the AJP, focuses on infrastructure and climate-related policies and comes with a $2.6tn price tag. Key measures include hundreds of billions of dollars for transportation, strengthening the electricity grid, boosting green energy, expanding high speed internet and funding for electric vehicle charging stations.

The second part of his recovery programme, the $1.8tn AFP, comprises of the expansion/extension of child care, paid leave, pre-school and college tuition along with the modernisation of the welfare and social security safety net.

Stimulus comes at a price

To fund these policies, the president proposes raising taxes on higher-income households and corporations over 15 years.

For corporates. Biden has called for the tax rate to rise to 28% from 21%. The legislation would also impose a 15% corporate minimum tax and impose penalties on companies that move assets/jobs offshore. For individuals, the top tax rate would go to 39.6% from 37%. For households earning more than $1m a year, the rate for dividends and capital gains would also rise to the higher rate.

Impact of stimulus and tax reform

The aggressive stimulus packages should support immediate and long-term growth prospects. They are designed to help revive the service sector, restore employment prospects and restructure the US economy to meet current and future economic and environmental challenges.

While the corporate tax reform will create a short-term headwind for companies, the proposed rate is still substantially less than the 35% rate it was before Donald Trump’s administration. Increased taxes could also be offset by the higher growth trajectory. A global minimum tax would help to stop profit shifting and discourage competition among countries developing into a race to the bottom. With the personal tax increase focused on wealthy households, the impact on overall consumption projections is limited.

Fed to look through transitory inflation

Base effects from the low readings a year ago, supply-chain bottlenecks in many industries and rising commodity prices have pushed inflation forecasts higher. The consumer price index (CPI) for May came in at 5%, its highest level since 2008. We expect the US Federal Reserve’s (Fed) preferred measure of price pressure, core PCE inflation, to peak over the next couple of months then start to drift lower through next year, averaging 2.0%.

The Fed has aligned its forward guidance with the intention to achieve maximum employment and 2% average inflation over time. This should give the central bank the flexibility to look through any above target inflation outcomes this year and keep rates on hold into 2023.

Given the magnitude of the recovery in both growth and inflation, the call for the tapering of asset purchases is getting louder. We expect the central bank to announce a tapering of asset purchases at their September meeting and begin slowing purchases at the November meeting. The reduction of purchases is likely to occur in a targeted and controlled way to avoid any tantrums playing out.

Spectacular rebound

While the growth rate may top out in the second quarter, the outlook for the remainder of 2021 suggests a period of vigorous recovery as companies rehire workers, consumer spending rebounds and activity is supported by overwhelming monetary and fiscal policy. From 2020’s low base, we forecast that the US economy will grow by 7.1% this year followed by 3.8% next.