The US economy is currently full of surprises: a non-Farm Payroll report largely above consensus expectations on Friday and a USD 1.9 trillion fiscal plan (~8% of GDP) that passed through a bipartisan Senate and House without much tribulation. The plan will significantly add to H2-2021 economic growth in the US (in the range of 6 to 8%) and will pull growth up for some of its main trading partners (China and Mexico).
Surprise #1: the US jobs market is recovering unequally, but faster than expected
US nonfarm payrolls rose by 379 thousand in February 2021 (versus. 195 thousand in January, revised up from +49 thousand). This was a stronger increase than expected (consensus 195 thousand), as many businesses in the leisure and hospitality sector reopened (+355 thousand jobs in the sector in February). The situation remains very challenging, with 9.5 million civilians remaining unemployed compared to pre-pandemic employment (a -6% versus. February 2020, cf. graph) and still four million drop outs from the labour force.
However, given the high proportion of job losses in pandemic-sensitive sectors, such as leisure and hospitality (over 35% of total nonfarm unemployed in February), the economic situation could change relatively quickly. Employment should rebound as the economy fully reopens.
Chart 1: The Biden Plan is aimed at low-income earners feeling the brunt of the crisis
Year-on-Year change in US employment by education attainment
Source: Employment Situation Summary - Bureau of Labor Statistics, Indosuez Wealth Management.
Surprise #2: the 1.9 trillion fiscal package passed the Senate relatively intact
The Senate passed a USD 1.9 trillion plan this weekend, followed by the house on Wednesday. In comparison with the proposed bill passed by the House of Representatives end of February, the final legislation:
- eliminated the minimum wage increase to USD 15 an hour;
- tightened the income limits for the direct aid;
- cut the additional unemployment benefits (from USD 400 to USD 300);
- Exempted certain unemployment benefits from income taxes.
Nevertheless, over half of the front-loaded stimulus bill is focused on the unemployed or low-income earners (USD 1 trillion in direct aid to families and vulnerable households). The new USD 1 400 direct economic impact payments (EIP) per eligible individual (with annual incomes up to USD 75,000) are expected to make US consumption soar in Q2-2021, especially as low-income earners generally have a higher-propensity to consume than richer families that can afford to save the amount. The USD 600 EIP sent out in early January had a significant impact on retail sales in January (+5.8% YoY), notably on general merchandise and non-store retailers.
Chart 2: US retail recovery - general merchandise and non-store retailers recover first
Year-on-Year change in retail sales
Source: US Census bureau, Indosuez Wealth Management.
Outcome: A consumption-led recovery in the US that will also pull-up main trading partners
All in all, US GDP growth is estimated between 6 and 8% in 2021, with fiscal stimulus accounting for 4% relative to projections with no additional fiscal support1. This is good news for US retailers, but also for US trading partners as over 20% of US consumption of durable goods (including cars and household electronics) is imported2. The US top two major trading partners for goods are China (19% of total US goods imports in January 2021) and Mexico (14%), and to a lesser extent Canada (12%) and finally Germany and Japan (both at 5%).
We expect the impact of increased US consumption to be particularly visible in Mexico where the weight of the US in total exports is 82% (versus. 17% in China). The Mexican economy will also benefit from increased remittances (3% of Mexican GDP).
Conclusion: Recovery with a capital R
US consumption-driven recovery hopes are soon to become reality. This has been the key driver of the current interest rate steepening movement (10Y US Treasury yields ~1.5%), as well as US dollar performance (DXY up more than 1% since the beginning of March) and even a part of the increase in oil prices (at USD 68 per barrel). It may also be a driver for certain equity markets that will benefit from the recovery in the US (China and Mexico), even if with emerging market assets we should proceed with caution in the current context of US dollar appreciation.
 The macroeconomic implications of Biden’s USD 1.9 trillion fiscal package – Brookings Institution - a non-profit public policy organisation based in Washington DC.  Federal Reserve Bank of San Francisco calculations, January-2019
March 11, 2021