Economic Analysis and Policy Outlook of the U.S. in November 2021
Conclusions
Latest data show that the U.S. economy recovered less strongly than expected in the third quarter, but that the economy is overall in good state. The negative impact of the pandemic on the U.S. economy is gradually receding, with the domestic economy and living conditions in general returning to normal. The main reason for the sharp decline in U.S. GDP growth in the third quarter compared to the second quarter was a base effect, rather than a significant slowdown in economic growth. Both the U.S. manufacturing and service sectors continued to expand, but supply chain disruptions and structural issues in the labour market continued to constrain growth. As bottlenecks on the production side, such as logistics, caused difficulties on the supply side to meet strong market demands. Inflation in the U.S. picked up again in September, with prices of some products remaining at high levels. The Fed has indicated that the inflationary phenomenon will last longer than expected, but this situation is mainly the result of short-term disruptive factors on the supply side caused by the pandemic and is unlikely to evolve into long-term inflation. The Fed is expected to start reducing its monthly asset purchases as early as November, but it will not rush to raise interest rates as the current inflation is mainly caused by constraints on the production side and rate hikes will not solve this type of inflation problem. We expect the Fed to leave the federal funds rate unchanged at its November meeting, with the first rate hike to come at least in the second half of 2022 or even at the end of the year.
Global Pandemic
Since the emergence and global spread of the Delta variant strain, major countries around the world, including the U.S., Japan, Germany, the UK, France and Italy, experienced a resurgence of cases in October, but the number of cases gradually declined in early November. Vaccination in the U.S. steadily increased, with the number of new cases, hospitalizations and deaths falling again in most areas. According to the latest data from the Centers for Disease Control and Prevention (CDC), 66.8% of the U.S. population has received at least one dose of vaccine, 58% have completed vaccination and 10% have completed a booster dose. According to data from 28 October 2021, the 7-day average of vaccine doses in the U.S. was 969,270, an increase of 21.9% from the previous week; the 7-day average of new daily cases decreased by 7.4%; and the 7-day moving average of deaths decreased by 9.4%.
Policy Outlook
Based on current data, the U.S. economy recovered less strongly than expected in the third quarter, but is still gradually warming up. The sharp decline in GDP for the quarter was largely attributable to base effects. Pressure on urban housing supply intensified as industries returned to work and schools reopened. While the manufacturing and service sectors maintained their expansionary trends, supply chain disruptions led to shortages of raw materials, transportation hurdles, slow deliveries, order backlogs and labour vacancies, all of which amplified inflationary pressures in the U.S. The Fed said inflation will last longer than expected, but it is still a temporary phenomenon. As the pandemic is brought under control, inflationary pressures will be released and are unlikely to become a long-term phenomenon. If inflation continues to be high then it could start tapering monthly asset purchases as early as November. Given that inflation is currently driven by short-term factors such as supply-side bottlenecks and labour supply constraints caused by the epidemic, the Fed is unlikely to implement rate hikes anytime soon. Therefore, it is expected that the Fed will keep the federal funds rate unchanged at the November open market meeting.
