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Review of U.S. Economy 2021

Dec 24, 2021
  • Yu Xiang

    Senior Fellow, China Construction Bank Research Institute

This year, COVID-19 and its evolving variants cast a long shadow on the U.S. economy, leading to profound economic and social fallout. As year’s end approaches, the trajectory of the U.S. economy will likely be characterized by some expected outcomes — and a few unexpected ones.  

First, while it was expected that the U.S. economy would to slow relative to the second half of last year, nobody expected it to throw fiscal and macroeconomic principles out the window by resorting to a massive stimulus. In 2020, the U.S. economy was brought to its knees by the surging COVID-19 pandemic. It expanded at 33.8 percent and 4.5 percent, respectively, in the third and fourth quarters last year, and this year by 6.3 percent (Q1), 6.7 percent (Q2) and 2.1 percent (Q3).      

It is apparent that the rapid recovery from the pandemic was attributable to the massive stimulus programs on both fiscal and monetary fronts, driven in no small part by the infrastructure- and welfare-focused projects advanced by President Joe Biden. It was penciled in that a new round of economic stimulus would come and a bipartisan consensus would emerge regarding a common denominator.

What was not expected was that the common denominator would be so huge. As various interest groups wanted to jump on the stimulus bandwagon, it is no wonder the stimulus programs ballooned.

Second, while inflation was expected to rise, persistent inflation is not expected.

Since the 2020 coronavirus outbreak, the U.S. has rolled out astronomical monetary and fiscal stimuli on the order of 30 percent of U.S. GDP. Compounding the problem, a disrupted supply chain takes time to heal, so the massive stimulus only swelled liquidity in a tight market. This will naturally result in high inflation. 

Inflation reached an inflection point in August. Unexpectedly, however, after an initial decline in September and October on the back of economic hits posed by new virus variants, inflation sprialed all the way to 6.3 percent in October, a historic high for CPI figures in the U.S. A survey by the Philadelphia Federal Reserve Bank showed that the cost of raw materials for U.S. domestic factories in November had jumped to the second-highest level since 1979.

This reveals two problems:

Constrained by its domestic political agenda, the Biden administration has not been at its most efficient when it comes to managing the economy, resulting in N-shaped inflation, rather than an inverted-V shape, for this year, indicating that the Biden administration has not invested substantially in domestic supply chains since taking office. 

The composites of inflation also indicate that the main drivers of energy prices are energy, used cars and low-end chips, which are mainly imported to the U.S. Inflation in November stood at 6.8 percent, with energy prices rising by 33.3 percent, including oil prices by 58 percent and used car prices by 31.4 percent. Net imports continued to increase.

It also exposes the failure of Donald Trump’s foreign trade policy. Be it the trade war that spanned his four years in office, the “America first” strategy or the reshoring of the manufacturing, nothing delivered — not to mention the onslaught of the pandemic.  

Third, while it was expected that Biden would actively strive to fulfill his campaign promises, what was not expected was that the administration would fail to address key challenges in the domestic economy, such as spinoffs of technology companies, taxing the rich, rejoining the CPTPP, reform at the WTO and other things. Regarding the CPTPP, Biden caved to domestic pressure and simply announced that the U.S. would not return to the framework.

Biden set high goals for tax reform and tightened regulations on technology companies during the campaign. However, in the past year we have not seen any systematic adjustments to the tax regime. Congress did not agree to raise the corporate tax from 21 percent to 28 percent but approved the $3.5 trillion budget proposed by the Biden administration and left the threshold for personal income tax unchanged for most high earners.

None of the Biden administration’s previous proposals for a significant increase in tax rates for high incomes were approved by Congress. The lawsuits and spinoffs regarding technology companies that Biden’s campaign highlighted have not made any substantial progress.

At the beginning of the year, we predicted that Biden might reshape the rules of international trade after taking office. The initial prediction was that he might make a few moves in three areas:

• A return to CPTPP

• WTO reforms

• A push for a 15 percent global minimum effective corporate tax rate.

But a year into his administration, Biden only managed to deliver the third item, largely through reaching a consensus with Europe on a 15 percent global minimum corporate tax.

Fourth, it was expected that the Biden administration would increase investment in science and technology to make good on his campaign promises. What was not expected was that the government would directly set targets for the development of new-energy vehicles directly through executive orders. And the U.S. has become the largest producer of virtual currencies.

The world economy in the pandemic era is driven by two major forces: the digital economy and a low-carbon economic transition. The Biden administration is seeking leadership and business opportunities. On Oct.13, the Alternative Finance Center at Cambridge University released data suggesting that the U.S. has replaced China as the world’s largest bitcoin mining country after China banned bitcoin mining.

Bear in mind that the U.S. has announced that it intends to be carbon-neutral by 2050. To seize leadership and opportunities in low-carbon development, Biden issued executive orders to promote the development of new-energy vehicles and subsidize photovoltaic manufacturing. Meanwhile, the clean energy investment portion of Rebuilding a Better Future, approved by Congress in November, was largely retained at about $555 billion to achieve the goal of reducing greenhouse gas emissions by 50 to 52 percent by 2030, and to raise the new-energy vehicle tax credit from the current $7,500 to a maximum of $125,000. New-energy vehicles are expected to multiply significantly. In addition, ITC policy for photovoltaic projects will continue all the way into 2026, while tax relief will increase by 4 percentage points on the basis of the current 26 percent. This means that from 2022 to 2026, eligible photovoltaic power generation investment companies will receive a 30 percent tax credit. Therefore, a photovoltaic boom is expected to continue in the U.S., with installed capacity on track to overshooting expectations.

Fifth, we initially expected the Fed to remain accommodative of financing to guard against uncertainties posed by the pandemic. As inflation rose in the second half of the year, it will tighten monetary policy. But what was not expected was that the Fed’s quantitative easing would have only a limited short-term impact on the market.

At the beginning of this year, we expected the Fed to tighten monetary policy. Tapering may trigger a tumble in U.S. stocks. But so far there have been only two big drops, one in September-October and the other in November, on the order of about 10 percent, which is below the 15 percent considered to be significant. It was not expected that U.S. stock market would hold up so well.

There are two important reasons underpinning the resilience. One is that investors are optimistic about U.S. market sentiment; another is that the market believes U.S. economic fundamentals are sound.

Sixth, it was expected that Biden would continue Trump’s economic and trade policy on China, and that the tariffs already in place would not be significantly changed. Still, there might have been a window of opportunity for China-U.S. relations to warm up between September and October this year. What was not expected was that it would take so long for Biden to cancel even a small portion of the tariff increases against China.

Throughout the year, China-U.S. economic and trade relations did move in the direction previously predicted. High-level officials on both sides had frank and friendly exchanges through phone calls and video meetings. But the warming of relations at the political level was not expected to alter the rigid tariffs on China, and it was not expected that the Biden administration would be so slow to remove them.

The U.S. economy is emerging from the pandemic and has entered a new growth cycle, judging by prevailing economic trends and the Biden administration’s economic agenda through the year. The smooth and orderly growth of the economy next year depends on the Biden administration’s fiscal policy and how it coordinates with monetary policy. The administration will have limited room for economic maneuvering next year, as it is constrained by domestic non-economic issues and the midterm election. Therefore, next year will see continued growth of the U.S. economy (at a modest rate) on one hand, and more market volatility on the other.

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