What are the current drags slowing the US economy?

World Trade Center

What are the current drags slowing the US economy?

While the whole world has seen its own individual economies falling into a hard and fast recession in 2020, it is perhaps the US’s recession that catches the most market interest. The US has the largest economy in the world so the focus on its GDP is to be expected. So, what prospects does it have at the moment for a recovery? What are the current drags on its economy that will slow any growth? And, what are the factors which could promote a better than expected recovery? 

The Drags Which Will Slow The Us Recovery

Despite a Twitter mad president that is only happy to share economic good news, there are a number of crucial forces at play that will act as a significant drag on the US’s economy and its productivity. They are:

Political Instability

With a looming election that is too tight to call, the political instability that characterises the US at the moment should not be overlooked in terms of its effect on the economy. When political instability looms, capital investment tends to slow which curtails the amount the businesses can consequently grow. While it is difficult to say outright whether Biden and the Democrats will successfully oust Trump and the Republicans from office, what is clear to see is that political differences in the country are rife. That can be seen in the civil unrest caused by racial outcry in addition to the divisive rhetoric that surrounds much of both side’s election campaigns. The lack of stability has larger ramifications on the potential of the economy. 

Stimulus Package Uncertainty

In addition to the election campaign causing a huge unknown for the future of the US and its economy as a consequence, is the fact that congress is slow to act when it comes to implementing new laws and policies. Of particular importance to the economy, as well as the wider population, is Congress’s inaction in passing the latest stimulus package bill which will affect so many. While it cannot be underestimated how much the first COVID stimulus package supported the economy in the first half of 2020 and stopped it from plummeting to unprecedented levels, the virus is still present in the population. Substantial parts of the economy have not been able to open fully again, causing a huge drag itself on the economy, so that the slow reaction from Congress only seeks to exacerbate the situation. 

Widespread COVID

As briefly alluded to, COVID19 is still prevalent in many towns, cities and states in the US. While numbers are finally starting to subside, it must not be forgotten that they are falling from a huge height. The virus is still at large in the community and that materially affects the population’s ability to return to work or to activities that help boost the economy. Until a vaccine is found or the authorities have the virus under control, it will continue to plague the country’s GDP and its ability to be at pre-pandemic levels. 

Permanent Job Loss

The virus also sought to quicken the pace of job loss in some industries that were arguably still struggling. Importantly, the result of this is permanent job loss in some industries that will not return once COVID19 is under control. Recent job numbers, according to the Economist, pointed out that 3.4milliion jobs were cut permanently. As a matter of comparison, that was more than the amount of permanent jobs which were lost in the wake of the financial crisis of 2008, just after Lehman Brothers went bankrupt. Unemployment numbers are always faster to rise and slower to fall, so permanent job loss cannot be turned into job reallocation at pace, acting as a significant drag on overall GDP growth. 

Reasons The US Economy Can Recover Quickly

There are a number of reasons to be hopeful however about the chances of a V shaped recovery in the US. They are:

Natural Disaster

COVID19 was a natural disaster. It was not one borne out of systemic problems or bad policy decisions by the government. Why is this important? Well, historically, recessions that were caused by natural disasters in the past are followed by a much quicker rebound than those that require structural shifts – like times after the Great Depression or the aforementioned financial crisis. 

Flexible Labour Market

One of the most encouraging points to note around the US recovery is the fact that the country as a whole has one of the most flexible labour markets in the world. For that reason, it is far easier for the economy to rebound as jobs are not only created more easily than in other countries, jobs are also found more easily. While some of the permanent job losses are not to be dismissed, it is important to remember that COVID19 may have simply sped up the jobs that were always going to be lost anyway. Conversely, it has also sped up job reallocation too. Much of the jobs data coming out of the US points to the fact that falls in unemployment rates from its 2020 highs have come from new job creation. 

Newly Motivated Fed

The Fed has recently taken action that made its reaction to the financial crisis in 2008 look half-hearted. They undertook a large securities purchase program, in addition to lending to securities firms and encouraging banks to lend to ensure liquidity was never an issue – amongst many other economic stimulus tactics. Plus, they have additionally changed their approach to hitting a 2% inflation target by allowing inflation to rise above 2% at times if needed. Prior to this, the Fed would have taken measures to ensure that inflation did not rise above this point. In conjunction with their other actions in the first half of 2020, the newly motivated Fed can be seen as a big force that will help the US economy reach higher productivity sooner than some market commentators would have previously thought. 

The Future Of The US Economy

There is much to be said about the good news coming from the US with respect to its economic prospects. Better than expected employment numbers are reasons to be optimistic about its future. However, the drags on its economic growth cannot be underestimated. Plus ultimately, it should not and cannot be forgotten just how far the economy fell in the first place. The recession caused by the pandemic has been deeper and faster than any seen in since the Great Depression. While any growth is therefore welcomed, it will still be a long while yet until the economy is back at pre-pandemic levels. 

Related Posts
No Comments

Sorry, the comment form is closed at this time.