Moody’s Investors Service has revised its projections for the US economy with real GDP growth forecast at 6.5% in 2021 and 4.5% in 2022 in its May 2021 Outlook. This represents a significant improvement over February’s estimates of 4.7% and 5.0% for 2021 and 2022 respectively.

According to Moody’s, the US economy has improved significantly since the start of the year. As a result, the rating agency indicated that the outlook for the US economy has “turned decidedly optimistic”. It attributed the up-tick in the US economy to mass vaccination exercise and the earlier-than expected removal of restrictions across US states.

“Vaccination progress, together with significant fiscal stimulus, has placed the economy on a stronger growth path. Consumer and business confidence have improved”.

Meanwhile, Moody’s warned that if the Biden administration implement its additional spending plans, that would have a limited effect on the US growth rate. The Agency expects this minimal effect to linger “over our two-year forecast horizon”. The Biden administration’s major programs include the American Jobs Plan and the American Families Plan under the Build Back Better agenda.

However, Moody’s noted that these programs would bolster the longer-term US economic outlook. This is because the plans’ objectives are to enhance long-term growth potential through upgrading of infrastructure. Also, the programs aim to incentivize investment in new technologies, increase labor force participation and boost productivity.

Up-tick in economic activity

Economic activity has picked up pace since March due to a surge in stimulus-fueled consumer demand. The combination of a rapidly improving public health situation and strong household balance sheets will likely continue to drive momentum.

Additionally, Moody’s noted that the US economy has expanded at an annualized rate of 6.4% in the first quarter. With this growth rate, aggregate output is now just below the pre-pandemic level. Also, it is now 3.3% below where it would have been without the COVID-19 shock.

Thus, Moody’s is optimistic that the output gap will likely close by the end of this year. Based on this positive development, Moody’s expects unemployment to decline significantly over the next two years.

“We also expect the unemployment rate to steadily fall, reaching 4% in 2022. The economy is rapidly adding jobs in high-contact sectors, which had experienced severe job losses because of pandemic disruption. Employment in the leisure and hospitality sector rose by 331,000 in April, even as the overall economy added only 266,000 jobs”.

Boost in demand

Also, Moody’s expects the demand for services to pick up as more people get vaccinated in the coming months. Household spending on goods is well above the pre-pandemic level, while spending on services has lagged.

Retail sales surged 19.4% in March. Moody’s said the disbursement of stimulus checks from the $1.9 trillion American Rescue Plan is supporting this spending.

Strikingly, Moody’s revealed that there is pent-up demand for services, as people put a hold on activities such as vacations, gym memberships, doctor’s appointments and visits to the theater. Provided that the pandemic can be controlled, this pent-up demand for services will drive growth in the coming quarters.

Strong household balance sheets will support household consumption. US households are holding an inordinate amount of cash. According to Moody’s, household cash balances in the form of currency and checkable deposits stood at more than $3 trillion in Q4 2020. This is $2 trillion more than in the year-earlier period, even before the disbursement of the two rounds of stimulus checks in 2021.

Moreover, Moody’s noted that households have accumulated about $2.3 trillion in savings in excess of what they would have normally saved since March last year. This is as a result of the cutbacks in aggregate household consumption.