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The US economy comes roaring back: 2022 looks bright for America

Jan 3, 2022

The Appalachian mountain state of West Virginia is among the poorest in America with a high dependence on coal mining for its prosperity and energy needs.

It was in this state that John F Kennedy, armed with shed-loads of cash, first staked out his presidential credentials, persuading an electorate dominated by Protestant Evangelicals that it was possible for an Irish Catholic to win the White House.

Six decades on, West Virginia is as much in need of levelling up as ever, with 19 per cent of its population living in deep poverty, some in tar-paper shacks in the hollows among the hills. The death rate exceeds the birth rate.

Biden bounce? Arguably the economic renaissance is more a consequence of his predecessor¿s tax cuts for business and entrepreneurs

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Biden bounce? Arguably the economic renaissance is more a consequence of his predecessor's tax cuts for business and entrepreneurs

In spite of its economic struggles, politically West Virginia is deeply conservative and one of the first states to turn Republican red in general elections.

But one its Senators, Joe Manchin, is a fiscally conservative, maverick Democrat who is single-handedly turning the tide against Joe Biden's presidency.

At the core of Biden's electoral platform was a promise to 'Build Back Better', an echo of Boris Johnson's election-winning slogan.

Having initially supported the US economy through Covid-19 with cash giveaways, which put thousands of dollars of spending power into the hands of every American citizen, Biden had planned to change the US in the traditions of Democrat forerunners Franklin D Roosevelt's 'New Deal' and Lyndon Johnson's 'Great Society'.

This required Biden to mobilise the narrow Democratic mandate in the Senate, where his majority is dependent on the casting vote of Vice President Kamala Harris. 

All it needed was for one Democrat Senator to cross the floor and side with the Republicans to consign the centrepiece of Biden's £1.3 trillion infrastructure and social reform bill to the dustbin.

That is precisely what Manchin did when he told the White House he couldn't vote for the spending package, which would send an already ballooning federal budget deficit into the stratosphere and add to a startling inflation rate.

Paradoxically, the updating of America's crumbling infrastructure of poorly maintained bridges, rusting railway tracks and crumbling highways would have benefited West Virginia, as would four-week paid family medical leave and an extension of tax credits for households with children.

Biden's majority in the Senate is dependent on the casting vote of Vice President Kamala Harris (pictured)

Biden's majority in the Senate is dependent on the casting vote of Vice President Kamala Harris (pictured)

But Manchin couldn't bring himself to vote for a bill which also heavily invested in combating climate change – the enemy of king coal – and higher taxes on entrepreneurship and corporations. 'I cannot continue with this piece of legislation,' the Senator declared on Right-wing Fox News. 'I've tried everything humanly possible.'

In terms of immediate support for the US economy, as opposed to contributing to longer term productivity gains, the infrastructure and accompanying social legislation was probably unnecessary at the moment it bit the dust in December.

However, the rapid spread of Omicron across the Continental United States could well change American economic prospects and lead to a rethink at the White House and Capitol Hill should the stonking recovery from the pandemic be interrupted.

So far so good, with business-forecasting group the Conference Board reporting that confidence was still rising in mid-December.

But that survey will not fully reflect the dangerous Covid infection rates now being reported across the US.

Before Omicron, the US economy looked in fine fettle with output surging at an annualised rate of 7 per cent in the final quarter of the year. 

At the end of December 2021, GDP looked set to be higher than it was in the same quarter of 2019 and ahead of all other advanced economies with the exception of Australia, which is blessed with abundant natural resources.

The main worry on the horizon has been inflation, with economists divided as to whether consumer price increases of 6.2 per cent is a temporary phenomenon or a reappearance of the 1980s. 

Nobel prize winner Paul Krugman, writing in his New York Times column, is among those who believe the inflation hawks are over-reacting and that a little inflation, above the consensus central bank target of 2 per cent, is good for growth.

The danger, in his view, is coming down too hard – as Fed chairman Paul Volcker did in the early 1980s – causing a deep recession and unemployment which took many years to eradicate.

As it happens, the US has almost the opposite problem at present.

Private sector forecasters had been projecting annual growth of 4.5 per cent for 2021 before the collapse of Build Back and the emergence of Omicron.

As a result, forecasts are being lowered by as much as one full percentage point.

Before Omicron, the US economy looked in fine fettle with output surging at an annualised rate of 7 per cent in the final quarter of the year

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Before Omicron, the US economy looked in fine fettle with output surging at an annualised rate of 7 per cent in the final quarter of the year

That would leave output expanding by a still more than respectable 3.5 per cent. The Build Back Better Act would probably not have made a big difference in its first year anyway.

With its focus on infrastructure it was intended to feed through to productivity and output over the medium to longer term, leaving a lasting legacy for Biden's first and possibly only term of office.

The issue most unsettling the Federal Reserve, America's central bank, is the labour market.

Unemployment fell rapidly as the nation emerged from the pandemic with the jobless rate at 4.2 per cent (in November) but still above the pre-pandemic level of just 3.5 per cent.

The mystery about the US jobs market has become known as the 'Great Resignation'.

These are the 5m or so US citizens who were previously employed but who have voluntarily taken themselves out of the workforce.

As in the UK, some of these people have decided they are quite well able to survive on what they have in income and savings.

Others are taking the opportunity to start out on their own, in keeping with the nation's entrepreneurial traditions. A consequence is that the ratio of vacancies to unemployed people is at a record level.

Labour shortages forced hourly wage costs up 6 per cent in the third quarter. It is this trend which has most worried the Federal Reserve. 

For many American consumers, who spend heavily on services, labour costs are the biggest driver of higher prices.

To make economic sense the surge in wage levels would have to match productivity gains but so far that doesn't seem to be happening. 

In spite of all the crosswinds – from Omicron, political stalemate and surging earnings – the US has come roaring back and no longer looks to be losing its edge to China, as was the case pre-pandemic.

The scale of US expansion has seen overseas companies focusing inward investment on America when previously they might have looked to the Pacific and Europe.

Moreover, American consumer demand, driven partly by helicopter money paid into people's bank accounts, has been sucking in manufactured goods and scarce materials adding to supply problems elsewhere in the world.

Biden may be struggling to change the political direction of raw American capitalism with a more interventionist approach but, Omicron notwithstanding, he is presiding over an economic renaissance. 

This arguably is a consequence of much-derided predecessor Donald Trump's tax cuts for corporations and entrepreneurs.

That is something which the chattering classes would rather leave unsaid.

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