“I’ve never seen an economy as good as this one today,” Mark Zandi, chief economist at Moody’s Analytics, told CNN Business. “The economy is booming. It is bursting everywhere.”
The story of the American comeback may be just beginning. Oxford Economics predicts that U.S. GDP will grow at an average rate of 7.5% in 2021 – a breakneck pace unprecedented since 1951.
The strong recovery is being driven by the powerful double boost from the unprecedented stimulus from Washington and the rollout of vaccines, which is a form of stimulus in and of itself.
‘The K turns into a V’
And yet the rebound is incomplete and uneven, leaving millions of Americans on the outside to look inward.
There are nearly 8 million fewer jobs today than before the pandemic started. More than 2.5 million women have left the labor market. Working poor and people who relied on travel, entertainment and restaurants for a living are struggling.
The good news is that there is growing conviction that a more inclusive recovery could take hold as the pandemic potentially comes to an end.
“The K turns into a V – very quickly,” Zandi said. “We were in this deep, dark hole a year ago, but now we can clearly see it coming out and out of it quickly.”
The rapid vaccination campaign allows states and cities to lift health restrictions and should give Americans the confidence to return to restaurants, ball parks and airplanes.
“Reopening the economy will really benefit those hardest hit: the lower leg of the K-shaped economy,” said Kristina Hooper, chief global market strategist at Invesco.
Shortage of chips, workers and materials
Part of the optimism is driven by signs of huge pent-up demand to reopen businesses and consumers overflowing with cash.
David Gitlin, the CEO of air conditioning maker Carrier, was bracing for a sharp rebound. Still, he was surprised at its scale.
“We’ve entered this year very, very optimistic about the US economy. We’re even more optimistic as we sit here today,” Gitlin told CNN Business.
Carrier’s residential HVAC sales were up 50% year over year in North America. Organic sales are now 6% above the level of two years ago.
At the same time, the cost of copper, wood and other raw materials has increased sharply. And businesses are having serious difficulty finding the skilled workers needed to grow.
“There is a lot of competition for talent,” said Gitlin, who added that Carrier hires hundreds of workers in Tennessee alone. “It’s a tough environment to hire at the moment. We have to try very hard.”
The growing pains make sense given the rapid nature of the rebound after the historic collapse. It’s not easy to go from zero to 60.
“We have never seen a recovery as rapid as the one we are seeing now,” said David Kelly, chief global strategist at JPMorgan Funds.
The problem of inequalities
All of this begs the question: Does the US economy really need the extra help pushed by the White House?
Despite his extreme optimism about the near-term outlook for the United States, Zandi, the economist at Moody’s, believes these investments make sense because they would boost long-term economic growth.
The U.S. Jobs Plan is designed to boost the nation’s lackluster productivity growth by improving infrastructure and making U.S. businesses more competitive. And the Families Plan aims to get more Americans into the workforce by helping low-income families provide child care and senior care.
“It’s about making the economy move faster in the long run,” says Zandi.
Biden’s economic agenda squarely targets the problem of inequality in the United States, which has helped fuel the rise of populism. The gap between the rich and the poor, and the shrinking middle class, is not sustainable.
“Reducing inequality can lessen the argument, both left and right, that the system is so bad you have to burn the building down,” said Kelly of JPMorgan.
Bubbles and inflation risks persist
None of this is to say that the U.S. economy doesn’t face risks, known and unknown (after all, few people have seen a pandemic happen before it’s too late).
The pandemic is not over and the explosion in the number of cases in India is a reminder of lingering health risks, especially variants that could escape vaccines.
There are also legitimate concerns that any stimulus from the Federal Reserve and Congress, in addition to reopening the economy, could fuel soaring inflation. Severe overheating would force the Fed to put out the fire by raising interest rates so quickly that the recovery itself would be threatened.
If the Fed keeps its foot on the pedal for too long, it could also inflate asset bubbles (if it hasn’t already) that derail the recovery when they burst.
Kelly is concerned that the Fed is waiting too long to remove the punch bowl, as we know. He warns that asset prices are reaching unsustainable levels that will pave the way for a “crash” when interest rates rise.
“I feel like the party is in full swing,” Kelly said, “and the Federal Reserve just arrived with more cases of champagne.”