The United States is showing resiliency and strength compared to other leading economies worldwide.
The effects of the CCP virus-related shutdown crisis are less in the United States than in Japan, Germany, France, the average of the European Union 27, and euro-area countries.
The recovery is also stronger and more sustainable.
This doesn’t mean that the economic impact is small. Recession is severe, and its effect on jobs and growth can’t be underestimated, but it’s important to show how other economies with larger government spending plans and important entitlement programs are showing a much weaker performance.
This comparison is important because most mainstream economists believe that higher government and public sector spending help offset the blow of a recession. They don’t. The U.S. quarterly GDP fall, at -9.5 percent, is small compared to Germany’s -10.1 percent, France’s -13.8 percent, Italy’s -12.4 percent, Spain’s -18.5 percent, and the European Union 27’s at -11.9 percent.
You may have read the quarterly annualized -32.9 percent figure for the United States, but it’s misleading to compare it with the European published figures, which aren’t annualized. Annualized rates estimate how much the economy would grow or shrink if the rate of change seen in the quarter continued at the same pace for four consecutive quarters. If we compared apples with apples, the -32.9 percent U.S. quarterly annualized GDP collapse would be from -40 percent in Germany to -55 percent in Spain.
In any case, it seems relevant to insist on three points: 1) The U.S. GDP decline was smaller than consensus estimates; 2) it’s notably lower than the eurozone figure, which was worse than the consensus expected; and 3) the advanced U.S. data points to one of the strongest recoveries in the world.
The improvement in domestic demand that we already began to observe in the month of May has been confirmed in June. Retail sales registered an increase of +7.5 percent per month, the second-highest number in the historical series after the May data, and this time with a less relevant “base effect.” In year-on-year terms, retail sales are already growing at +1.1 percent, and, eliminating vehicle sales, this increase amounts to +7.3 percent year-on-year. Still a lot to improve, though.
Advanced and leading indicators in the United States point to a third-quarter GDP rise of 18 percent to 20 percent in annualized terms, recovering more than half of the first half’s decline in three months.
There’s a lot to do and no one can be complacent. The U.S. economy could close the year at flat growth and 6 percent unemployment in the most optimistic scenario, if consumption and investment progressed within potential. However, it’s more likely that the economy may end down 5 percent and unemployment at 8.5 percent, all according to our estimates. This compares with a eurozone that may likely fall more than 9 percent in 2020 with official unemployment and furloughed jobs reaching an average of 12.5 percent, according to Bloomberg.
There are important warning signs to consider. Consumer sentiment continues weak, at 73.2 basis points in July 2020, a decrease of 5 points compared to June of this year and far from levels above 100 shown during the month of February.
Employment is improving, but admittedly at a slower pace than would be desired. Jobless claims remain stubbornly above 1 million, and continuing jobless claims are falling at a slower pace than expected. Still, continuing jobless claims have fallen from a record 25 million to 17 million in two months. These need to fall faster, and decisive supply-side measures are needed to attract new jobs and investment.
Debt in the United States is a big challenge, but—again—metrics show a better situation than the eurozone. The accumulated deficit through June already exceeds $2.74 trillion, more than 10 percent of U.S. GDP. Interestingly, debt to GDP in the United States is likely to rise to 98.5 percent, according to Bloomberg consensus, but not even close to the levels of the euro area, at 103 percent, according to the European Central Bank.
These figures contradict the calls for a stronger euro versus the U.S. dollar. Despite the headline-grabbing U.S. figures, growth, debt, and employment are likely to show a better evolution than in the euro area, and monetary metrics also show a stronger situation. The European Central Bank already has negative real rates, and its balance sheet exceeds 53 percent of GDP compared to the Federal Reserve balance sheet of 33 percent of GDP.
The U.S. dollar global demand is high and rising, and the world still has a U.S. dollar shortage. That’s not the case for the euro, where demand is stable but much smaller, according to the Bank for International Settlements, and supply is rising much faster than the U.S. dollar.
A stable and solid recovery will only be achieved with the right policies. Copying the European Union will only lead the United States to stagnation. The poor performance of the European economies in this crisis is also a reminder of why the United States shouldn’t implement similar policies.
If the U.S. government decides to raise taxes and increase intervention, the recovery will be slower and more painful than it is.
