US Economy During and Post Pandemic Era (2020-2023): Assessment and Policy

Nurjihan Khairunisa – IES
Meita Rosa Indah – IES

Executive Summary: 

The COVID-19 pandemic had a significant impact on the US economy, especially in the first and second quarters of 2020. The economy contracted, the unemployment rate soared, the trade deficit ballooned, and demand for goods and services plummeted, causing inflation to decline. Financial markets experienced a sharp decline, with the S&P 500 Index plummeting in March 2020. Gold prices surged at the start of the pandemic, while oil prices plummeted due to a drop in global demand.

The US economic policy response has positive implications. Fiscal and monetary stimulus policies from the US government and the Fed at the beginning of the pandemic supported the improvement of the economy and financial markets in the 3rd quarter of 2020 and continued into 2021. The US economic recovery continued, although inflation began to rise in April 2021, so that a tight policy was considered, namely tapering off starting in November 2021.

Economic challenges occurred in 2022, with the US economy characterized by high inflation, volatile financial markets, geopolitical issues, continued tapering off and Fed rate hikes. Inflation peaked at 9.1% in June 2022. High inflation expectations and recession fears resulted in financial market uncertainty and gold prices increased. Geopolitical conflicts add to the drama in 2022. The Fed raised interest rates 7 times by 425 bps to curb inflation and the government continued tapering off.

Entering 2023, US economic growth recovered with inflation declining further and financial markets improving. The US economy showed resilience despite challenges and uncertainties. Amidst the normalization of government and Fed policies, economic growth of 2.5% (yoy) showed better performance compared to 2022 with relatively low inflation although still above target. Along with these developments, the market also turned positive compared to 2022.

This analysis aims to evaluate the effectiveness of economic policies implemented by the United States (US) Government during the 2020-2023 period:

1. Effectiveness of economic policies in order to maintain a balance of economic growth and inflation

2. The relationship between fundamental aspects of the economy and market conditions in the US.

Comparison of US Inflation, Interest Rates and GDP  2020-2023

 

US Economic Development, Policy Response and Policy Impact.

Episode 2020

The COVID-19 pandemic has triggered a huge wave of economic impact around the world, and the United States is no exception. US economic activity has decreased dramatically due to falling demand. Government revenues have also decreased drastically due to the implementation of massive business closures to suppress the spread of the Coronavirus. The decline in business activity had a direct impact on the country’s tax revenue, resulting in the budget deficit ballooning from -4.7% of GDP in 2019 to -15% of GDP in 2020. For comparison, the trade deficit in the first quarter of 2020, before the pandemic, was around USD -40 billion. However, the deficit continued to rise above USD -50 billion in the following months due to increased government spending to deal with the economic turmoil in the US.

Economic growth contracted for two consecutive quarters followed by a surge in unemployment. Q1 economic growth plunged to -5.3% qoq, followed by a -28% qoq decline in Q2. These quarterly declines were the largest in US history. As a consequence, many companies were forced to make layoffs, cut costs, and delay investments. This triggered a significant spike in the unemployment rate, from 3.5% in February 2020 to 14.7% in April 2020, the highest rate since the Great Depression. The tourism, hospitality, restaurant and offline retail sectors were the hardest hit. This high unemployment rate contributed to low inflation.

In March 2020, inflation reached 1.5%, a 14-year low and the US Dollar strengthened. Throughout 2020 inflation was at its lowest level compared to previous years. Low inflation is caused by lower demand for goods and services, which results in lower sales and corporate profits. The US Dollar throughout March-May 2020 strengthened due to low inflation and positive expectations of the US Dollar in other countries due to the implementation of loose monetary policy in those countries. The strengthening of the US Dollar was also caused by the demand for US dollars for international transactions, such as international trade and debt payments.

Economic volatility resulted in a decline in stock and housing prices, while investors sought safe-haven assets such as US Treasuries, gold. The decline in global demand and market volatility also impacted other sectors such as housing and energy. The S&P 500 Index slumped -35.03% in March 2020, while demand for US Treasuries increased. The 10-year US Treasury yield in March hit a record low below 0.6%. Gold prices hit an all-time high above $2,000 per ounce in August 2020. New home sales fell significantly at the start of the year, as potential buyers were hesitant to enter the market. Oil prices fell in early 2020 due to the pandemic-induced drop in global demand, but rose later in the year due to demand recovery and the OPEC+ deal. 

Policy Response 2020

The main US economic policy response to the pandemic shock was to increase government spending and lower the Fed funds rate. The CARES Act was passed in response to the COVID-19 pandemic, providing $2.2 trillion in economic stimulus. This comprehensive package includes a range of measures designed to support individuals, businesses and sectors severely impacted by the crisis. In response to the economic impact of the pandemic, the Fed also cut interest rates from 1.75% to 0%-0.25% in March 2020, This rate cut is designed to prevent bad debts and financial market disruptions and is the lowest level in history. In addition to the interest rate cut, in order to increase liquidity in the financial market, the Fed conducted Quantitative Easing (QE) through the purchase of US Treasuries / government bonds and other securities. Every month the Fed purchases USD 80 billion worth of US Treasuries and USD 40 billion worth of Mortgage-Backed Securities (MBS). The US government uses the money from the sale of US Treasuries and MBS to fund people to restart their business activities. The Fed also provides emergency loans to banks, businesses, and state and local governments. 

Policy impact

The stimulus policies of the Government and the Fed had a significant impact on the US economy. These policies helped in preventing a more severe economic downturn. US GDP began to recover in the third and fourth quarters of 2020, and the unemployment rate began to fall. The US unemployment rate fell from 14.7% in April 2020 to 6.3% yoy in December 2020, Potential deflation did not occur as the consumer price index (CPI) rose 1.2% yoy.

On the other hand, there is a trade off of stimulus policies provided by the Government and the Fed. Improved economic growth was followed by an almost threefold increase in the US budget deficit to US$3.13 trillion yoy in 2020, triggered by increased allocation of funds for social security, health, and defense programs. Declining exports and increasing imports of consumer goods and medical equipment caused the 2020 trade deficit to reach -$685.5 billion yoy (3.2% of GDP), up 10.7% compared to 2019. The Fed’s government bond buying program increased liquidity in the economy and encouraged cheap credit, triggering prices (inflation) to start moving up. 

Government and Fed policies had mixed impacts on financial markets. The US stock market showed a strong recovery, while the bond market experienced turmoil. Quick and measured economic stimulus measures were able to turn around the S&P 500 which had fallen around 20% in March, the S&P 500 managed to bounce back and ended the year with a gain of around 16% yoy. The bond market also started to pick up with yields reaching 1% by the end of the year. Meanwhile, demand for the US dollar as an investment instrument declined and closed 2020, at a lower level. 

S&P 500 and US Dollar Movement

The housing sector saw a rapid recovery, while the gold and oil markets saw declines. The housing market recovered strongly in the second half of 2020, Low mortgage rates and consumers’ desire for larger homes during the pandemic pushed up house prices by around 8% by the end of the year. The gold market declined, as did the price of oil, which declined -21.6% throughout 2020 as people’s mobility declined.

Episode 2021

2021 has been a year of recovery for the United States (US) economy after being hit hard in 2020 due to the COVID-19 pandemic. The US economy showed promising signs of recovery in Q1 2021, with growth of 5.2% qoq. This positive trend continued throughout Q2-Q4, where US economic growth remained positive. Fiscal stimulus and accommodative monetary policy from the Fed played an important role in driving GDP growth and increasing people’s purchasing power.

Q1-Q2 employment data has improved compared to 2020. Along with the economic recovery and the launch of the vaccination program, the unemployment rate showed a significant improvement trend. The unemployment rate recorded a decline from 6.7% in December 2020 to 3.9% in December 2021. This decline indicates a rapid recovery of the labor market, although there are still some sectors that have not fully recovered.

Amid the positive performance of economic growth, the US budget deficit and trade deficit increased. The budget deficit reached USD 1 trillion in the first five months of the 2021 fiscal year, jumping 68% of GDP compared to the same period the previous year. The increase in the budget deficit was due to various factors, such as the COVID-19 pandemic stimulus program, declining tax revenue, and increased spending on social programs. The Q1 2021 trade deficit also increased from January to March, from -62.331 USD Billion to -65.941 USD Billion.

Inflation accelerated throughout 2021, reaching 7% in December 2021. The CPI started to move up from 1.7% yoy in February to 2.6% yoy in March 2021 and continued to do so until 2022. This increase in inflation is due to increased demand for goods and services, close monitoring of virus transmission that led to global supply chain disruptions, and rising energy prices. 

Economic Growth and rising Inflation are the drivers of the strengthening of the US Dollar in 2021. Economic growth and rising inflation trends throughout 2021 triggered a rise in USD value due to rising market expectations and fiscal policy expectations (tapering off).  When the Fed reduces asset purchases, the amount of US dollars circulating in the market decreases resulting in USD strengthening against other currencies. 

Market developments were characterized by positively growing stock markets, declining 10-year US Treasury yields, gold volatility, rising oil prices and rising house prices. The US stock market continued its positive growth trend from the previous year. The S&P 500 and Nasdaq posted record highs driven by optimism of economic recovery, mass vaccinations, and continued stimulus policies. The 10-year Treasury yield in early 2021 was around 1%, the low interest rate environment maintained by the Federal Reserve was one of the main factors driving down the 10-year Treasury yield in that period. At the beginning of 2021, crude oil prices slowly recovered, and skyrocketed since the beginning of this year, due to improved prospects for global economic growth, resulting in increased demand for crude oil. The S&P Case-Shiller Home Price Index in early 2021 continued to rise since 2020 due to high demand and limited inventory, while low mortgage rates influenced purchasing decisions.

2021 Policy Response

In March 2021, the US Government passed a fiscal stimulus policy and the Fed implemented an expansionary monetary policy. The American Rescue Plan Act, proposed by Joe Biden and Minister of Finance Janet Yellen, was passed with a US$1.9 trillion stimulus package. The Fed is also implementing an expansionary policy, and has not changed its policy of maintaining low benchmark interest rates and continuing asset purchases since the end of August 2020. Data from Statista reveals that as of June 2021 quantitative easing to finance economic stimulation has reached USD 8.1 trillion. The program was designed to increase liquidity in the financial market and push lending rates down. 

At the end of November 2021, the Fed reduced bond purchases or tapering-off. Bond purchases were cut by US$ 15 billion per month from the current purchase value of US$ 120 billion. This policy was pursued by the US GDP because it had shown strengthening. However, this policy has not been followed by an increase in interest rates, given that the unemployment rate has not returned to pre-pandemic levels.  

Policy Impact

Stimulus policies in the United States in 2021 had a positive impact on boosting economic growth and creating jobs. Fiscal stimulus, driven by the American Rescue Plan Act stimulus package provided a major boost to economic growth. US GDP Q4 2021 grew 5.4% (yoy), the labor market also showed a significant recovery, the unemployment rate gradually fell since the beginning of the year and ended at 3.9% in December 2021, close to pre-pandemic levels. The widespread administration of vaccines influenced the increase in working hours as well as boosted hiring to meet the surge in consumer demand.

The persistently high budget deficit and rising inflation became the basis for the Government’s policy to start considering a reduction in asset purchases in November 2021. The American Rescue Plan Act significantly increased government spending, although the 2021 US budget deficit fell from 15% of GDP in 2020, it was still high at 12.4% of GDP. The stimulus also boosted inflation by increasing demand for goods and services. The inflation position in October 2021 reached 6.2%, a significant increase compared to the beginning of the year in January 2021 of 1.4%. It is feared that this increase in inflation will continue if it is not controlled immediately.

The United States’ international trade deficit increased in 2021. It increased from $676.7 billion in 2020 to $861.4 billion in 2021. Inflation played a role in the surge as US imports increased more than exports. The trade deficit increased by $169.4 billion in 2021 to $1,091.4 billion. The services surplus decreased by $15.3 billion in 2021 to $230 billion. The goods and services deficit was 3.7% of GDP in 2021, up from 3.2% in 2020. 

The S&P 500 Index, which includes stocks of large companies in the US, recorded a gain of about 28.1% ytd during 2021. This performance reflects investors’ optimism about economic recovery, corporate profit growth, and fiscal policy support. The Nasdaq Index, which focuses on technology stocks, has risen more than 40% ytd. Technology companies, especially those related to digital transformation, are receiving significant attention from investors.

The Fed has communicated its tapering plan well in advance, so the market has anticipated this policy and no significant turmoil occurred. The Fed also clearly stated that there is no plan to raise interest rates at least until the tapering process is complete. This provides clarity for the market that interest rates will remain low to support economic recovery. Global bond market conditions were relatively stable after the Fed’s tapering announcement. 10-year US Treasury yields stabilized in the range of 1.5%-1.6%.

The global economic recovery and extreme winter have exacerbated the global energy crisis. High electricity demand triggered a shortage of natural gas, pushing natural gas prices higher and contributing to higher crude oil prices. This caused utilities to switch to coal resulting in increased demand for coal worldwide.

The S&P Case-Shiller Home Price Index recorded an increase in national home prices of about 19% compared to the previous year. High demand, limited availability, and low mortgage rates continue to drive up property prices. The median home sales price was $346,900 in 2021, up 16.9% from 2020, and a record high since 1999, according to the National Association of Realtors. Home sales had their strongest year since 2006, with 6.12 million homes sold, up 8.5% from the previous year.

Gold prices fell by about 4% in 2021. This is due to the global economic recovery encouraging investors to shift into riskier assets. The economic recovery also reduced interest in safe-haven assets such as gold bullion. Tapering off and a rising dollar also contributed to the decline in gold prices. Although gold is still considered a traditional safe haven, low interest rates and a shift to riskier assets are affecting its performance.

Episode 2022

The US economy faces two consecutive quarters of contraction, suggesting a potential recession, yet the labor market remains strong. The United States faces serious challenges in Q1-Q2 economic growth of -2% and -0.6% respectively. Despite the economic challenges, the labor market in the United States remains stable, with a low unemployment rate. The unemployment rate continued its downward trend at the beginning of the year, standing at 4%.

US inflation peaked in June before gradually declining in the second half. The CPI from the beginning of 2022 to the middle of the year continued to increase until it peaked at 9.1% in June 2022. One of the factors for this increase in inflation is due to the stimulus that lasted from 2020 to 2021. Another factor is that the strong labor market helped boost people’s purchasing power amid limited production activities. Towards the second half of 2022, inflation moved down but still far from the desired level. 

The budget deficit showed improvement after the fiscal stimulus began to stop at the end of 2021, in contrast to 2020 and 2021 which were characterized by fiscal and monetary stimulus. The termination of the stimulus program was followed by a decrease in government spending. On the other hand, seeing the declining trend of unemployment rate, it also increased government revenue.

Throughout 2022 the US dollar experienced fluctuations and reversal of the strengthening trend to weakening. Changes in policy direction also moved the US dollar, although the policy pursued was not for the exchange rate. The US dollar reached its peak in September 2022. Improved economic growth and muted inflation towards the end of the year brought the US dollar down from its peak.

The US trade deficit hit a record high in Q1 2022, but managed to show an improving trend in the rest of the year. The US trade deficit peaked in March 2023 at USD 101.9 billion. However, after that the trade deficit showed an improving trend throughout the rest of 2022, as domestic demand slowed amid rising interest rates that curbed people’s spending. This improvement can be seen from the shrinking trade deficit for four consecutive months since July 2022. This downward trend continued until towards the end of 2022, although the movement was fluctuating.

Policy response

Persistently peaking inflation is the basis for the Government and the Fed to decide on the normalization of its monetary policy. US fiscal and monetary policy in 2022 shows serious efforts to tackle inflation and maintain long-term economic stability. Interest rate hikes and the withdrawal of fiscal stimulus are bold moves that could potentially have consequences on economic growth. However, the Fed is committed to achieving its 2% inflation target and believes that these steps are necessary to maintain long-term economic stability. The Fed began raising interest rates in March 2022 (50 bps) and continued with 7 subsequent increases, so that cumulatively during March-December 2022 the Fed’s interest rates have risen 425 bps.

Policy Impact

The Fed’s policy of increasing interest rates succeeded in bringing down Inflation from its peak in June 2022 (9.1%), eased and closed at 6.5%. Inflation that peaked since 2021 was exacerbated by the conflict in Ukraine that disrupted the supply of several commodities, and increased food and energy prices significantly. Disruptions in global supply chains as well as soaring logistics costs hurt corporate productivity, especially in the manufacturing sector, hampering production, reducing output and productivity. 

US economic growth slowed in Q2 2022 but the labor market managed to return to pre-pandemic levels. The United States (US) economy experienced slowing growth in Q2 2022, with Gross Domestic Product (GDP) contracting by -0.6% (qoq). This suggests a technical recession for the US, after previously experiencing negative growth of -2% qoq in Q1 2022. This slowdown was triggered by the Fed’s tapering off policy in November 2021 and interest rate hike in March 2022. Despite the slowing economic growth, the US labor market is showing strong signs of recovery. By the end of 2022, the US unemployment rate reached 3.5%, close to pre-pandemic levels. Nonfarm payrolls (NFP) additions also showed a positive trend, totaling 3.9 million new jobs throughout 2022.

The US economy shows contrasts in fiscal and trade performance in 2022, with a declining budget deficit and a surging trade deficit, accompanied by a strengthening US dollar exchange rate. The US budget deficit in 2022 declined to 5.8% of GDP indicating that the US government managed to reduce spending as fiscal stimulus policies were scaled back, however, the US trade deficit jumped 12.2% in 2022 due to stronger exports and imports, reaching $948.1 billion. The Fed’s interest rate hike also made the US dollar more attractive to investors, increasing demand and strengthening the US dollar exchange rate. The US dollar exchange rate has strengthened against other major currencies, such as the euro and yen, since the Fed began raising interest rates in March 2022. The 2022 DXY in Q2-Q3 reached its highest peak, showing the strength of the dollar currency compared to the other six major currencies and then in Q4 the DXY gradually declined. 

The United States financial markets experienced fluctuations in 2022. The S&P 500 Index, declined significantly, recording the biggest drop since 2008. The 10-year US government bond saw its yield rise from 1.51% at the beginning of the year to 3.88%. The main factor for this increase was high inflation. Inflation in the United States reached 7% in December 2022, recording a 40-year high. High inflation makes investors worried about the economic outlook and causes them to withdraw investments from financial markets. 

2022 was a challenging year for the energy market, gold and the US housing sector. Prices experienced high volatility due to various global and domestic factors. Although prices fell in the second half of the year, most energy and gold commodities were still trading at higher prices compared to 2021. Home prices in the United States also declined from mid to late 2022 due to several factors, including rising interest rates as rising inflation made mortgage rates more expensive, and the conflict in Ukraine caused uncertainty in the housing market. On the other hand, gold prices increased in 2022 due to uncertainty in the global market, and rising inflation. 

Episode 2023

The US economy during 2023 was better than 2022. The economy accelerated by 2.5% on an annualized basis and was better than the 1.9% increase in 2022. The strong pace of consumer spending helped drive the expansion. Personal consumption expenditure increased 2.8% in the 4th quarter, down slightly from the previous period.

US inflation 2023 is on a downward trend. Inflation showed a continuous downward trend from the beginning of the year. This decline managed to bring inflation to 3% in the first half of 2023. In the 2nd half of 2023, there were fluctuations in inflation, with some months being above 3%. The decline in inflation was due to the normalization of government and Fed policies, the decline in global energy prices and the improvement in global supply chains. 

The labor market continued its strong trend throughout 2023. Unemployment was below 4 percent in January and gradually fell to 3.5 percent in December 2023, bringing the 2023 average to 3.6 percent, the same average level as 2022. The unemployment rate has been below 4 percent for 23 consecutive months, indicating a continued strong labor market.

The 2023 trade deficit improved compared to previous years. Through 2023, the overall trade gap was US$773.4 billion, down 18.7 percent from the $951.2 billion figure in the previous year. Exports continued to do well and benefited from the weak dollar as US goods became relatively cheaper overseas. Commerce Department data also showed that the United States purchased more goods from Mexico than China in 2023, a first in about two decades. In 2023, imports from Mexico jumped by $20.8 billion to $475.6 billion, while those from China fell to $427.2 billion.

The DXY fell about 4.31% from the beginning of the year to the end of 2023. The DXY started to weaken at the beginning of the year, especially after the Fed indicated that it would slow down the pace of interest rate hikes. This decline was also influenced by improving global economic conditions and declining safe-haven dollar demand. On July 16, 2023, the DXY bottomed out at 95.72. The DXY ended 2023 slightly higher at around 101.36. This rise was driven by global economic uncertainty and resurgent safe-haven dollar demand.

The S&P 500 had an improved 2023 compared to a turbulent 2022.  The S&P 500 Index gained more than 24% in 2023. This is a significant increase and shows the strong performance of the stock market as a whole. The index started the year with strong growth and peaked in January 2023 at around 4,769.83. Amid the inflationary turmoil, rising interest rates and the banking sector collapse, the S&P 500 closed at the end of 2023 at around 5,360.79, reflecting a positive overall performance.

Home prices rose, US Treasuries fluctuated, and gold increased on investor anticipation. The Case Shiller Home Price Index experienced a 5.5% annualized increase in December 2023 due to a spike in mortgage rates. US Treasury yields fluctuate throughout the year and closed unchanged compared to year-end 2022, at 3.88%, Gold increased 13.67 yoy, the weakening of the US dollar made the purchase price of precious metals cheaper for investors holding other currencies.

The US debt ceiling (US$31.4 trillion) breached its limit. The US Treasury warned that it will not be able to pay all its bills by June 5, 2023, if Congress fails to reach an agreement. Joe Biden eventually signed a debt payment delay on June 3, 2023. The ballooning US government spending is due to new foreign aid requests and US$100 billion in security spending, including US$60 billion for Ukraine, US$14 billion for Israel, as well as funding for US border security and the Indo-Pacific region.

The year 2023 also saw a banking crisis, characterized by the failure of several major banks, causing turmoil in the financial sector. The decline in crypto, the decline in bond portfolio values, and commercial real estate, as well as the collapse of several banks such as Silvergate Bank and Silicon Valley Bank, triggered the banking crisis of 2023. Prompt action from the Federal Reserve, including providing emergency loans and ensuring deposit continuity, was instrumental in easing the crisis in the financial sector that year. 

Policy response

The government set aside $25 billion to mitigate the further impact of the bank collapse. The US government also took steps to prevent similar bank crises in the future through the Bank Term Funding Program by sending financing programs to 12 Reserve Banks to provide loans to banks that needed more liquidity. The program allows interested banks to sell their holdings and rights to liabilities that have long-term value to obtain loans from the bank.

Policy normalization by the Fed continues in 2023. Federal Reserve policy and inflation-related concerns are still the main focus. The Fed’s caution in increasing interest rates in 2023 reflects the Federal Reserve’s seriousness in managing policies to maintain economic stability and ease tensions in the market.

Policy Impact

The Fed’s aggressive policy of raising benchmark interest rates had an impact on banking sector turmoil. The banking crisis that occurred in early 2023 was caused by the failure of several major banks and losses in bond portfolios and commercial real estate. Since March 2022 from 15 meetings, the Fed has raised the benchmark interest rate 11 times with an accumulative increase of 525 basis points. The last rate hike was made by the US central bank in July 2023. 

US inflation was brought under control at 3.4% by the end of 2023. Proactive interest rate hikes by the Fed starting from March 2022 succeeded in lowering inflation. Throughout 2023, the Fed continued its policy of raising interest rates. This is a continuation of the strategy that has been implemented since 2022 to combat surging inflation. As inflation approached the Fed’s desired target, rate hikes were more cautious, with the FOMC making only four 25 basis point hikes during 2023 and halting further hikes after July.

The US working economy performed well in 2023 amid rising interest rates. US GDP rose moderately at 2.5%, indicating that the US economy continued to grow amid rising interest rates. Other factors driving economic growth in 2023 include a strong labor market. 

The development of the labor market this year showed interesting phenomena.  Inflation continued to decline and the unemployment rate remained historically low. There was an assumption that lower inflation should be achieved with recession and high unemployment, but unemployment has barely changed over the past three months and Inflation has fallen from around 7% to around 3%.

The budget deficit reached -6.3% of GDP in 2023, which is slightly higher than the -5.8% of GDP deficit in 2022. This deficit is due to revenues falling by US$457 billion compared to last year, while spending only fell by US$137 billion. A factor in the high level of spending is also due to debt financing which has become much more expensive over the past year as the Federal Reserve raised benchmark interest rates in an effort to combat inflation.

Government and Fed policies in 2023 had an impact on the movement of the US dollar. The strong performance of economic fundamentals brought the US dollar down towards the end of the year as fears of economic uncertainty eased. On the other hand, economic growth in other countries picked up, reducing demand for the safe-haven dollar.

The interest rate policy implemented by the Fed will be a key determinant of market movements in 2023. On January 6, the S&P 500 saw the largest increase of 2.28%, responding positively to the Fed’s actions that were effective in controlling the economy without triggering a recession. However, the market also felt the impact of concerns regarding rising interest rates, which was seen on February 21 when the S&P 500 fell by 2.00%, marking the worst performance of the year, mainly due to fears of further interest rate hikes. The close of 2023 saw the S&P 500 bounce back from the difficult conditions of 2022 which saw a decline of over 19%.

S&P Movement Against Fed Rate Hike Policy

Turbulence in the banking sector occurred on March 9, when the S&P 500 experienced a significant drop of 1.85%. This decline was largely triggered by heightened concerns over the value of US banks’ bond portfolios, which was further exacerbated by SVB Financial Group’s announcement of a $1.75 billion public offering and $500 million convertible preferred stock. 

The Fed’s policy of holding interest rates at high levels made the US dollar and 10-year treasury yields fluctuate. DXY since July 14, 2023 was at 99.91 while as of September 6, 2023 it was recorded at 104.83 or has risen nearly 5% in just less than two months. The DXY position also touched 107 which is the highest position in the past year. High interest rates were also followed by US Treasury yields which briefly surged above 5% in October, before finally dropping to around 3.88% in the last week of 2023 due to speculation of an end to rate hikes and cuts in the new year.

2023 has been a difficult year for US homebuyers and gold continued its upward trend. Rising mortgage rates and high home prices made the housing market the least affordable since 2013. Gold prices ended 2023 on a positive note. The rise was supported by the weakness of the Dollar, which has fallen since September 2023 against six other world currencies.

Summary and Lesson Learnt:

1. 2020-2023 Summary

Despite being hit by the pandemic storm, the US economy showed its resilience with a strong recovery. Targeted and effective fiscal and monetary policies proved to be key in minimizing the negative impact of the pandemic. The financial market showed its resilience in the face of the crisis, albeit accompanied by high volatility. The strong economic recovery was accompanied by manageable inflation. Positive GDP growth and low unemployment rate are positive indicators of economic recovery. On the other hand, inflation was brought under control despite a high spike in 2022. Factors such as Geopolitics, energy crisis, and climate change may affect the future economic outlook. The trade deficit has continued to rise since the pandemic and was highest in March 2022. In the following months, the deficit gradually improved until 2023, although it has not returned to pre-pandemic levels. The budget deficit experienced a similar movement, spiking since 2020 and gradually improving in 2023.

	2020	2021	2022	2023
Fiscal	UU CARES Act: The USD 2.2 trillion fiscal stimulus, including direct aid to individuals and businesses, expansion of unemployment benefits, and loans to local governments and businesses.	UU American Rescue Plan Act: The USD 1.9 trillion fiscal stimulus, including additional direct aid, expansion of child tax credits, and investments in infrastructure and social programs.	Reduced fiscal stimulus: Government spending began to be reduced.	Normalized fiscal policy:Government spending stabilized, focusing on deficit reduction.
Moneter	Expansionary monetary policy: Lowering the benchmark interest rate to 0%, large-scale asset purchases (quantitative easing), and emergency lending programs.	Accommodative monetary policy: Accommodative monetary policy by the Fed: Benchmark interest rates remain low, asset purchases continue.	Contractionary monetary policy by the Fed: Gradual increase in benchmark interest rates (total of 425 basis points over the year), reduction in asset purchases.	Cautious monetary policy by the Fed: Slower and measured rate hikes, focus on economic data.
Policy Objectives	Preventing a severe recession due to the COVID-19 pandemic.	Resuming economic recovery and addressing the long-term impacts of the pandemic.	Control soaring inflation without hampering economic recovery.	Maintain economic stability and achieve moderate inflation (around 2%).
Economy	Preventing a deeper recession, promoting economic recovery, improving unemployment.	Strong GDP growth, unemployment falls, but inflation starts to rise.	Economic growth slows, inflation eases, but financial markets experience turmoil.	Moderate economic growth, inflation falls to 3.4% by year-end, financial markets stabilize.
Budget deficit	Increased sharply to USD 3.13 trillion. -15% of GDP	Remained high at over USD 1 trillion.-12.4% of GDP	Significant decline.-5.8% of GDP	Rising at the level of-6.3% of GDP
Inflation	Low, below 2%.	Jumped to 7% by the end of the year.	Dropped to around 6.5% by the end of the year.	Above the Fed’s target (2%), but showing a downward trend.

2. Lesson Learnt Throughout the 2020-2023 Period 

The economic policies implemented by the US to address the pandemic’s impact entail trade-offs, being effective on one hand but creating burdens on the other. The US fiscal and monetary stimulus has proven effective in sustaining the economy in times of crisis, promoting economic recovery, and reducing the unemployment rate. But on the other hand, this policy also brought consequences in the form of an increase in the budget deficit, trade deficit and an increase in inflation. High inflation in 2021 led the United States to implement fiscal policy normalization followed by monetary policy tightening in 2022. The withdrawal of fiscal stimulus from November 2021 helped reduce the budget deficit but slowed economic growth. In Q1-Q2 2022 an economic slowdown is inevitable. On the other hand, interest rate hikes also caused turmoil in the financial markets in the April-December period. 

The implementation of fiscal and monetary stimulus also increased investors’ sense of security and confidence. Investor confidence encourages the flow of funds into high-risk investment instruments, such as stocks, in the hope of earning greater profits. However, investor sentiment is dynamic and easily influenced by changes in policy and economic conditions. These shifts in sentiment can trigger significant market price movements.

The movement of the US Dollar is more triggered by expectations and sentiment from countries outside the US, rather than economic fundamentals. At the beginning of the economic stimulus era (May 2020-May 2021), economic growth which had experienced negative growth then reversed direction (unstable) but was accompanied by high inflation, causing the USD to weaken. Still in the stimulus era (May 2021-November 2021), economic growth triggered an increase in the value of USD due to rising market expectations and expectations of fiscal policy (tapering off). Post tapering off Nov 2021 and monetary tightening (March 2022), the USD strengthened in the November 2021-September 2022 period, amid slowing economic growth. Although the labor market is still strong, economic growth is showing a slowdown accompanied by high inflation. The Fed signaled that it would raise interest rates further to combat inflation, driving investors’ expectations of a stronger US dollar, as investors seek safe and profitable assets in an uncertain economic environment. 

The economic fundamentals of the United States in 2023 show solid performance. Prudent fiscal and monetary policies have managed to control inflation with stable economic growth and a strong labor market, although the US dollar exchange rate fluctuated due to the banking crisis which affected market expectations. America has learned from previous crisis experiences such as The Great Depression and other economic crises, the key to overcoming the shock by increasing the liquidity of the economy without sacrificing deeper budget deficits. The economic crisis in 2020 is different from previous crises in the 20th century, the government is better prepared to issue policies whose impact can be controlled during the recovery process. From 2020 to 2023 the economic recovery process is still ongoing, America is still trying to curb inflation, the expanding trade deficit and the swelling budget deficit. 

The United States has experienced two major issues: diseases that triggered deep wounds across numerous sectors, and requiring a lengthy recovery. The Spanish flu (1920’s) and the COVID-19 pandemics (2020), both causing widespread economic disruption and significant social consequences, but differed in complexity. Geopolitical tensions together with trade wars and rising commodity prices exacerbated the challenges of COVID-19 recovery. These crises usually take a long time, around 5 to 10 years. The government has implemented policies and programs to increase public confidence and encourage consumption in order to reignite the engine of the economy. Despite ongoing economic recovery, the long-term impacts of these crises still occur. The Gini index, a measure of income inequality, shows a steady upward trajectory in the United States between 2019 and 2022. This widening gap between the wealthy and the rest of the population would ultimately undermine social cohesion and economic stability.