We will briefly update on where that dynamic stood in the U.S. in the first quarter, frame that in a global context, and look out to the second quarter and beyond.
The Worst Yet As predicted by public health officials and economists alike, Covid-19 cases surged around the winter holiday season. This surge was particularly brutal, setting eye-popping daily case records and surpassing the grim daily death tolls observed in the early days of the pandemic. But, economically speaking, this surge was not the same as the terrifying experience last spring, or the mid-summer setback.
Since then, the knowledge and experience gained by the medical community and the general population, as well as the vaccine rollout, limited the economic impact of a public health issue that came close to spiralling out of control. To illustrate this point, let’s compare new jobless claims in each period. During the case surge last summer, there was a noticeable uptick in new job losses, peaking around 1.4 million jobs lost per week. By comparison, the holiday surge in virus cases is barely noticeable in the job loss figures, and the first quarter ended with the lowest level of new jobless claims since the pandemic began.
Simply put, and setting aside the tragic loss of life over the past year, the economic impact of Covid continues to fade.
Stimulus Supported Economic Activity While our collective experience with Covid has led to a rebound in economic activity, the positive impact of the continued economic stimulus in the U.S. is hard to overstate. The $900 billion package signed into law at the close of last year saw its stimulus distributed as the first quarter began. This bill featured checks to individuals, the extension of unemployment benefits, and support for small businesses (amongst other things). This flood of cash caused the second enormous bump up in Americans’ incomes since the economic shutdown began last March, as shown in the chart below.
Just as the unemployment benefits were set to expire in late March 2021, Congress passed another stimulus bill, this time with a price tag of $1.9 trillion. At the beginning of the year, many doubted that the Biden administration could pass another stimulus bill at all, much less one worth around 9% of GDP. Yet by the end of the first quarter, another round of stimulus checks were beginning to hit the bank accounts of consumers, adding another massive boost to incomes that are already running above their pre-pandemic trend.
In many ways, the U.S. response to this global pandemic has stood out from the rest of the world, and the first quarter was no exception. On the public health side, a higher tolerance for elevated Covid cases coupled with a speedy vaccine rollout have increased the baseline of economic activity. On top of that, outsized stimulus spending along with a recovering job market have further juiced economic activity. As can be seen from the chart below, the strength of the U.S. recovery stands out in terms of its upward momentum.
The strength of the U.S. economic recovery is the driver of much of the upward revisions to global GDP in 2021. Indeed, the Organization for Economic Cooperation and Development estimated that the impact of the $1.9 trillion stimulus package passed in March would increase 2021 world GDP by 1.1% compared to their prior baseline estimates (OECD Economic Outlook, Interim Report March 2021).
As the above chart makes clear, the impact of higher growth is not uniformly spread across the globe. Europe stands out as a particular laggard, while emerging economies are not currently expected to receive as much of a boost from higher global growth as they have historically.Much of that is due to the spread of Covid and lagging vaccination efforts, a lingering reminder that, while there is much to look forward to in the coming quarters, the global economy is still not completely back to normal.
Here are the things we are paying attention to in the coming months.
The outlook for inflation is currently the hottest topic of debate for economists, especially in light of the truly massive fiscal experiment the U.S. has undertaken. We tend to think the pandemic and the U.S. response to it will not permanently alter the low inflation world we have found ourselves in for the last ten or so years, but here is what we will be watching. First, pandemic effects will bias the upcoming year-over-year inflation prints higher; focus instead on the month-over-month data for a better view of the dynamics of inflation as the economy reopens. Next, the drivers of inflation matter. Supply bottlenecks, like the ship stuck in the Suez Canal in March, are eye catching but temporary. Higher labor costs, on the other hand, tend to be sticky and can create broad upward pressure on prices. Lastly, policy choices impact the medium term inflation backdrop. Monetary and fiscal policy, as well as trade and regulation, are all in flux and arguably more important to inflation and the real economy than the next few months of reopening.
Biden’s Next Move
President Biden surprised doubters by mustering his $1.9 trillion stimulus package through a divided Congress on a tight timetable. This was accomplished without major concessions to either moderates and or progressives, an impressive feat. But the path for his recently unveiled infrastructure package is less certain. Any additional spending by the government would be more permanent in nature than we have seen so far in the pandemic and also more spread out.That means the cumulative economic impact in the medium term could be much greater than that of stimulus checks. We will be paying close attention to the rumblings out of Washington to hone in on the longer-term outlook for growth.
Many, us included, expected the relationship between the U.S. and China to improve under the Biden Administration. Yet recent polling from Gallup1 indicates China’s favorability rating amongst Americans has recently plunged and sits at all-time lows, and public spats over human rights have soured relations at the national level. Economically, the current situation is unchanged from a few months ago, and Katherine Tai, the current U.S. Trade Representative, indicated that tariffs on China will remain in place. However, she did open the door to negotiations on trade as a prerequisite to a tariff rollback. Looking forward, there appears to be risks to both the upside and downside to the relationship between the two largest economies in the world.
Despite our collective wishes and the real progress made so far, Covid continues to have a huge impact on our lives. The U.S. vaccine rollout has been better than expected, and we will continue to monitor progress on that front. However, the recovery trajectory in Europe and many emerging market nations may continue to lag amid uncertain vaccine availability and the willingness of their populations to get a shot. Lastly, the spread of variants of Covid is worrying, and we will be closely monitoring the real-time data on vaccine effectiveness as more and more shots find their way into arms.
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