“WHEN AMERICANS vote in November, unemployment will be below 6%,” declared Lars Christensen, a maverick economist, in May. Given that lockdowns had sent the unemployment rate soaring to 14.7% only the month before, it was a bold prediction. In June at least 14 of the Federal Reserve’s 17 interest-rate-setters forecast that quarterly unemployment at the end of the year would still be above 9%. Most other prognosticators were equally gloomy. They expected American GDP to collapse in 2020 and recover relatively slowly. Mr Christensen insisted that natural disasters, unlike financial crashes and recessions brought on by economic policy mistakes, are typically followed by rapid recoveries.
He may be proven right. Over the summer the unemployment rate fell fast, to 8.4% in August. And economists have scrambled to upgrade their growth forecasts (see chart). On September 16th the OECD, a rich-country think-tank, predicted that the American economy would shrink by 3.8% this year, rather than the 7.3% expected in June. The outlook was upgraded across the rich world, but nowhere by as much. America still faces a recession about half as deep again as the one it endured after the financial crisis. But expectations are not as apocalyptic as they were—and look better than they do in most of Europe.
The upgrades in America can be attributed to three factors. First, the spread of the coronavirus in the southern “sunbelt states”, which rode a wave of the epidemic in the summer, has slowed. Second, America’s economic stimulus, the world’s largest both in absolute terms and as a proportion of GDP, has been potent. Thanks to one-time stimulus cheques worth up to $1,200 per person and an extra $600 a week in unemployment-insurance (UI) payments, households’ disposable income has risen since the pandemic began. Americans did not spend the money all at once, meaning that it continues to support consumption today, even though most of the emergency funding has expired. In early September UI recipients were still spending more than they did before the pandemic hit.