The US economy, like nearly every other economy, was partially paralysed in spring 2020 due to lockdown measures introduced to contain the Covid-19 pandemic. US GDP plummeted by an unprecedented 9.1% in Q2 2020 (an annualised rate of 31.7%). Business nonetheless managed to recover thanks to the brief respite offered by the disease and massive support from the Federal government, with transfers of roughly USD 2,200 billion over the past six months, nearly the equivalent of France’s GDP[1]. As fall approaches, household and corporate economic surveys have returned to quasi-normal levels. According to estimates by the Atlanta and New York Federal Reserve Banks, GDP rebounded between 6% and 7% in the third quarter.
An incomplete and inequitable recovery
That leaves a shortfall of 4-5 percentage points of GDP relative to 2019 levels, which is less than in Europe but still a considerable gap to close. Whereas unemployment figures need to be approached with caution (see box), job statistics probably paint the most realistic picture of the severity of the shock. Available through August, it shows that only half of the 22 million jobs destroyed between March and April have been restored. Although it cannot be compared with the 2008 financial crisis, the Covid-19 pandemic has had similarly profound and inequitable repercussions on the labour market.
GROWTH AND INFLATION (%)
ACTIVE POPULATION WITHOUT A COLLEGE DIPLOMATwo thirds of the job losses reported since February have hit unskilled and low-income populations. This is also where we find the highest concentration of people experiencing difficulties enrolling in the unemployment insurance system[2]. As a result, numerous low-income Americans have been excluded from the labour force. Data from the Bureau of Labor Statistics (BLS) shows an historic decline in the participation rate for adults without a diploma[3], and this decline cannot be seen in the rest of the population, at least not to the same extent. Since February, nearly 4 million people have already left the labour market (see chart), and this exodus from the radar screen can have unexpected effects on certain macroeconomic variables. This is the case for hourly wages, for example, where the buoyant rise recently (+6.6% year-on-year in Q2) is due less to the enrichment of American workers than to a reduction in working hours and to the underrepresentation of the poorest categories[4]. There are no inflationary pressures, to the contrary: increasingly fierce competition and the need to slash inventory have tended to pull down consumer prices in recent months[5].
The recovery is also unequal not only by population but also by sector. Unsurprisingly, the sectors that have preserved or returned to quasi-normal levels of business and employment are those with a large domestic footprint (residential construction, utilities, food retailing etc.), or specifically requested during the crisis (computer equipment, financial services, telecommunications, etc.). In contrast, the situation is still very difficult in sectors that depend on international trade and/or imply large crowds or physical contact. Hotel and food services, leisure and the performing arts, transport industries and services, and clothing together account for 15% of total US employment, but about half of the job losses since February.
Monetary easing, political unease
A full recovery should not be expected soon. Most countries are experiencing resurgence in Covid-19 cases and international trade is far from showing a return to normal. Aware of difficulties, the Fed has embarked on a policy shift. At the Jackson Hole Symposium in late August, Fed chairman Jerome Powell unveiled new longer-term monetary policy targets and strategy that seem to herald in a system of unlimited monetary easing. The inflation target is still set at 2%, but will now be assessed “over time”, a manner of indicating greater tolerance of overshoots. The job mandate will become asymmetric. It aims explicitly to eliminate any shortfalls, but will no longer attenuate any labour market tensions, a decision that de facto disqualifies the Taylor Rule.
THE DIFFICULTY OF MEASURING UNEMPLOYMENTPresented as the end of a long process of disinflation and the lowering of the neutral rate, this new strategy is also shaped by exceptional circumstances which require the Fed to monetise considerable quantities of public debt. In counterpart, the Fed is creating an unprecedented amount of central bank liquidity, which risks feeding asset bubbles (see chart). Another inconvenience is a loss of precision in forward guidance. In the end, assuming the situation will return to better fortunes, it is hard to see what might trigger a change of course. Monetary policy committee members have just updated their macroeconomic projections, and they do not foresee any rate increases before 2024.
MAGIC MONEYThat year will also mark the end of the 4-year term of the next US president. Who the winner will be is still an open question, and one that risks dominating the headlines well beyond Election Day on 3 November. The most likely winner, at least theoretically, is the Democrat Joe Biden, who has a significant and stable lead in the national polls (50% of voting intentions, compared to 43% for the incumbent Republican, Donald Trump). Yet the results will hinge on a few swing states (which could swing to one candidate or the other). Under the “winner takes all” principle, the candidate that receives the most votes in a state will receive all of that state’s electoral college votes, which are the only votes that count when electing the president. A candidate who receives the most popular votes can still lose the election, as was the case with Hillary Clinton, who had nearly 3 million more popular votes than her rival Donald Trump.
If the results are tight, they are bound to be contested by one of the two parties, a scenario that Donald Trump has already espoused. Mail-in ballots lie at the heart of the upcoming battle: though welcomed in the midst of a health crisis, they risk slowing down the vote counting process. Donald Trump also sees them as a source of fraud, without which his victory is basically assured[6]. If he fails to win the presidential election on 3 November, the current occupant of the White House may well be reluctant to concede.
