OECD Americas 2021

OECD Americas
US – Update on the latest developments

While the 3Q21 GDP growth level was revised up slightly, the latest numbers for retail sales and US industrial production pointed to a slowing effect in December. GDP growth in 3Q21 was revised up to 2.3% q-o-q on a seasonally adjusted annualized rate (SAAR), compared with 2.1% q-o-q SAAR in the previous estimate by the Bureau of Economic Analysis (BEA). Central bank policies point to continued tapering of the current monthly

$120 billion quantitative easing measures after the US Federal Reserve (the Fed) announced an increase of the monthly $15 billion tapering to $30 billion. Thus it is now expected to end in March, when the first key interest rate rise will materialise, given that the latest inflation number has reached over 7% y-o-y. Moreover, no agreement was found on the latest fiscal stimulus initiative of the US administration, called the Build Back Better plan. However, the overarching topic remains the new Omicron COVID-19 variant and how it might impact growth in the near term.

Consumer confidence recovered well in December, despite the rise of the Omicron variant. The index provided by the Conference Board rose to 115.1 in December, compared with 111.9 in November. US inflation continued rising to stand at 7% in December, after reaching 6.9% y-o-y in November. The strongest appreciation came once again from the sub-sector of transportation, pointing to the possibility of a transitory effect after the reopening of the economy. Prices in the transportation sector rose by 21.4% y-o-y in December, compared with 21.3% y-o-y in November. Excluding the volatile components of energy and food, inflation stood at 5.5% y-o-y in December, compared with 5% y-o-y in November.

The unemployment rate fell again to stand at only 3.9% in December, compared with 4.2% in November. The participation rate remained low, standing at 61.9% in December, the same as in November, though a lower level of 61.7% was seen in October and September, a signal that tightness in the labour market may gradually start easing. The participation rate before the pandemic stood at almost 63%.

Non-farm payrolls improved less in December than expected, marking an increase of 199,000 job additions compared with an upwardly revised increase of 249,000 in November. With ongoing tightness in the labour market, wage developments need close monitoring as they could materially lift inflation. Hourly earnings rose by 4.7% y-o-y inDecember, compared with 5.1% y-o-y in November, continuing a rising trend substantially above pre-COVID- 19 yearly growth of between 2% and 3%.

Near-term expectations

Near-term expectations remain relatively bright in the US, albeit with a slightly negative impact due to Omicron-related developments and associated slowing in 1Q22. A slow-down in domestic demand was already seen in the latest decline in December retail sales levels due, it would seem, mainly to Omicron-related social distancing. In addition, some uncertainty remains about the Build Back Better stimulus package. It remains to be seen if it will be implemented at all, as negotiations are stalling. Finally, tightness in the US labour market continued, limiting expansion. Some labour market-related disruptions may be expected in the health care sector with respect to mandatory vaccination for healthcare workers, as recently confirmed by the Supreme Court. Hence, 1Q21 growth expectations were revised down slightly.

Another uncertainty is an ongoing rise in inflation. US inflation is at the centre of an ongoing inflation debate, given the importance of US interest rates and consequent repercussions an interest rate rise cycle may have on capital markets, global investment and the US dollar value. Inflationary momentum is forecast to decelerate somewhat in the coming months, though the magnitude of the retraction remains to be seen. Reopening effects, including rising demand for leisure, hospitality and transportation after the 2020 and 2021 lockdowns may wane and supply chain bottlenecks are gradually easing. However, a rise in wages and salaries, as well as rent and rent equivalents, which accounts for around 40% of US core inflation, may keep inflation at above the 2% to 2.5% range. Also, potentially rising taxes on fossil fuel-related energy products due to the energy transition may further lift inflationary trends. Hence, while the Fed’s near-term path in hiking interest rates and tapering quantitative easing measures has been well communicated, numerous uncertainties remain.

In terms of quarterly growth developments, 1Q22 GDP growth is now forecast at a slightly lower rate than anticipated the previous month, now standing at 3.5% q-o-q SAAR, compared with expected growth of 4% q-o-q SAAR the previous month, held back by the impact of Omicron, delayed fiscal stimulus and the associated effects of lower-than-anticipated consumption and investment in 1Q22. In 2Q22, growth is forecast to remain unchanged at 4.5% q-o-q SAAR, followed by a slight slowdown to 4.1% q-o-q SAAR in 3Q22. Growth in 4Q22 is expected to reach 2.3% q-o-q SAAR.

December PMI levels, as provided by the Institute for Supply Management (ISM), point to an ongoing recovery, albeit at a slowing rate amid the latest COVID-19 developments, continued labour market tightness and the political challenges facing implementation of a further fiscal stimulus package. The index level for the services sector, representing around 70% of the US economy, retracted significantly to stand at 62, compared with 69.1 in November and 66.7 in October. The manufacturing PMI also fell in December to stand at 58.7, after reaching 61.1 in November and 60.8 in October.

While the forecast for 2021 US GDP growth remains unchanged at 5.5%, 2022’s forecast was revised down slightly. Following a slight downward revision in 1Q22 growth, the full year forecast was revised down to stand at 4%, compared with last month’s forecast of 4.1%.