US economic recovery in an international context

Authors: Benjamin Harris, Assistant Secretary for Economic Policy, Tara Sinclair, Assistant Secretary for Macroeconomic Policy

overview

As we approach the second anniversary of America’s relief plan on March 11, 2023, this blog post reviews the economic impact of the Biden administration’s pandemic response policies. The US economic recovery from the pandemic is historic compared to previous episodes, with employment recovering to pre-crisis levels much faster than after the recent recession. While it’s impossible to observe a counterfactual recovery, data suggests that the actions taken by the Biden administration contributed significantly to the pace of the recovery and the strength of the labor market. One way to put this recovery in context is by comparison with other developed country recoveries. Admitting that other developed countries have faced a range of economic shocks, European partners in particular were more adversely affected by Russia’s war against Ukraine. Evidence shows that the US economic recovery is very strong.

This blog will assess the US recovery along three key characteristics:

• The US economy is now over 5% larger than it was in 2019
• US core inflation now lower than many major developed economies
• US labor market recovery very strong

This is not to suggest that the current recovery is without challenges. Near-term inflation remains a concern, and long-term structural challenges remain. Still, many aspects of the U.S. recovery point to a stronger U.S. recovery compared to other economies.

U.S. Economic Recovery Is Fastest Among Comparable Developed Countries

Real GDP in many advanced economies is at or above what it was in Q4 2019, before the pandemic began. However, there is considerable variation from country to country. Not all his G7 economies have fully recovered to their pre-pandemic size. By contrast, US real GDP is now 5.1% higher than it was at the end of 2019.

Economic output continues to fall short compared to pre-pandemic trends. But the US is performing better than the rest of her G7 countries (and the Eurozone), with real GDP just 1.2% below trend.

The US’s rapid recovery reflects a more complete recovery in domestic consumption. In fact, US household consumption spending returned to pre-pandemic trends by the second quarter of 2021. However, household consumption remains below pre-pandemic trends in most other advanced economies as the recovery in final demand remains incomplete.

Despite high growth, US core inflation is now lower than many other major developed economies

Rapid growth in U.S. output was initially accompanied by rising inflation, which is rising rapidly around the world. In Europe, inflation rose sharply in 2022 due to higher natural gas prices and the reopening of European economies after severe Covid restrictions during the Delta and Omicron waves. Conversely, inflation improved significantly in the United States through 2022, while inflation continued to rise in Europe. Of course, European energy prices have been hit particularly hard by Russia’s illegal invasion of Ukraine. Excluding energy and food, core inflation (on a uniform basis) is less than 5% in the US, nearly 6% in the UK and over 7% in the Eurozone.^[1]

US labor market recovery very strong

Employment figures appear to show marked differences across the G7 economies in the Covid era. For example, unemployment rates spiked in the United States and Canada in April and May 2020, up 11.1 points and 7.6 points respectively from December 2019, while unemployment rates in much of Europe remained relatively flat. . Indeed, in France and Italy, unemployment rates dropped significantly in the first months of the pandemic.

Despite initial impressions, this did not reflect the great divergence of labor activity. Rather, these trends reflect differences in national labor institutions. Each government used existing institutions to support workers and businesses through the initial shutdowns due to Covid. In the United States and Canada, unemployment insurance was best suited for rapid and large-scale assistance. Many European economies are also leveraging social safety nets, often leading to continued employment in official statistics. This is similar to the little-used workshare program in the United States. A broader and stronger fiscal response has generally increased U.S. government deficits during the pandemic. However, by the third quarter of 2021, the budget deficit narrowed rapidly as pandemic support was largely exhausted. As of the end of 2022, the US had a comparable budget deficit as a percentage of GDP.

Official statistics for most other G7 economies show neither a sharp rise in unemployment in spring 2020 nor a correspondingly strong recovery. Again, this is partly due to differences in labor market institutions and pandemic-era policies rather than reflecting fundamental differences in labor activity. In January, the U.S. unemployment rate hit its lowest level in more than 50 years. Germany is hitting similar lows, with Canada and the UK nearing lows.

A similar recovery in the labor market will affect labor productivity despite uneven output recovery. U.S. labor productivity growth has outpaced Europe and Japan. Labor market policies may play a role here. The U.S. system, which is largely based on unemployment insurance, may have allowed a greater redistribution of the workforce compared to systems that maintained attachment to employers. In general, US jobs are being redistributed from low-wage industries to high-wage, high-productivity industries. Employment in the United States has also shifted to industries with longer average working hours, suggesting a stronger recovery in working hours than in employment. This redistribution of labor may lead to further improvements in labor productivity in the future.