U.S. Economic Outlook

Recovery – after the winter

As the U.S. presidential election finally concludes, and the picture on what to expect in the near future gradually sharpens, we have updated our economic forecasts. The good news first: we are quite optimistic on the prospects for the economy in the next two years. The caveat is that a highly critical phase of the sad story of the global pandemic remains ahead of us – hopefully, its final chapter.

Research from Swiss and Swedish scientists indicates that the seasonal pattern of infections is highly elevated during the colder months, peaking in December before gradually declining towards summer (see Chart 1).[1]

Seasonality of positive test rates of endemic coronaviruses

202011 U.S. Economic Outlook_CHART 1_EN_300dpi.png

Source: Neher Richard A., Dyrdak Robert, Druelle Valentin, Hodcroft Emma B., Albert Jan (2020): Potential impact of seasonal forcing on a SARS-CoV-2 pandemic

Based on past experience, we expect that restrictions on daily life are likely to track closely the virus’s seasonal pattern. The implication is that economic activity may weaken again in the coming months as businesses that involve a high level of personal contact once again close their doors, and more and more people stay at home. However, we do not expect another major hit to gross domestic product (GDP) similar to that seen in the 2nd quarter. People and businesses may have learned how to cope with the restrictions – at least to some extent. So, too, have the authorities. We expect countries to be rather flexible, responding to what they find in different communities. And there is of course the great hope, previously on the horizon but now coming close: the prospect that vaccines will begin to be available in the next few months. This could well break the seasonal pattern of the virus and perhaps reduce the amount of restrictions needed to fight it. Of course, it will take time to distribute the vaccine. But figuratively, and soon literally the medicine is a shot in the arm.

Even the optimist must, however, remain cautious. The seasonal pattern of infections coincides with another important recurring phenomenon: the spending season at the end of the year. Most consumption takes place in the final quarter. But with limited ways to go out and celebrate, we expect that a large proportion of growth will once again rely on personal goods consumption. From the third quarter of 2020 we might infer that the U.S. consumer shops until the postman drops. But an important factor may be missing: fresh fiscal support. In the third quarter households were largely overcompensated for their loss of income. Then, too, the prevailing expectation that the pandemic would quickly be resolved may have animated spending. But now, immersed in the pandemic’s deep second wave and without fresh fiscal stimulus, consumers are left hoping the incoming administration will be as generous as the last one.

But is another round of household support really needed? Still elevated savings and a partial recovery in the labor market might well float consumption, one could argue. But the savings rate has already declined, to 13.6% in October from its 33.7% peak in April.[2] The latest reading of aggregated personal income as well points to cracks in the recovery – before the pandemic was back in the headlines personal income declined slightly, by 0.7% month on month, in October.[2] Also, about 20 million Americans still depend on government transfers and, should the pandemic progress as expected, this number could increase again (see Chart 2).

Americans dependent on government unemployment programs

202011 U.S. Economic Outlook_CHART 2_EN_300dpi.png

Sources: Department of Labor, Haver Analytics as of 11/2020

It is also important to realize that support programs like the Pandemic Unemployment Assistance (PUA) are set to expire by the end of the year while others like the Pandemic Emergency Unemployment Compensation (PEUC) have limited funding.[3] These are all issues the new administration has to deal with as any resolution before the end of the year seems unlikely. However, the key takeaway would appear to be that another round of fiscal stimulus is indeed needed, though probably a smaller and much more targeted one could suffice.

Another factor that limits the scope for a very big fiscal ticket is a divided Congress. And the choice of the former U.S. Federal Reserve (Fed) Chair Janet Yellen to become the next Treasury Secretary may not necessarily mean the Fed does some more of the heavy lifting. But as a profiled labor-market economist she may put her full weight behind policies eventually creating jobs and supporting the recovery. She certainly has advantages, too, when dealing with the Fed. Just recently we had an example of how important such skills are. Treasury Secretary Mnuchin recalled unused funds from various Fed facilities by announcing that the programs would not extend past their current end date of December 31. Not without protest, the Fed agreed to return the funds.[4] It’s not shocking news per se. The administration has long flirted with the idea of using the money otherwise. But the timing was a bit of a surprise. Backstop facilities, in order to be able to step in when the environment turns sour, are an important pillar of the Fed’s strategy. However, the facilities have to date played a minor active role, with only a small fraction of the overall $454 billion used so far. The move to recall the funds thus only targets a soft layer of the Fed’s strategy. The consequence might be that Large Scale Asset Purchases (LSAP)See [5] will be an even more important tool for the Fed to control financial conditions. The minutes of the November Federal Open Market Committee (FOMC) indicate that.[6] And this supports the idea that the Fed may eventually start to buy longer-term maturities.

Overall, we could indeed see a muted or even negative final quarter in terms of economic growth after the impressive bounce-back of the economy during late summer. Looking further ahead though, targeted fiscal spending should be in the pipeline. This could indeed help to turn around economic activity in the first quarter of 2021 – provided the new administration acts quickly. In general, another round of fiscal spending and pent-up demand could well boost growth in 2021 and thereafter – probably not by the magnitude we witnessed in the third quarter of 2020 but we believe it could still be enough to keep the recovery on track in the medium term. And sooner or later we expect inflation to be back as higher demand should meet somewhat lower supply. However, this is most likely an issue for 2022 and beyond, and the Fed will be in no rush to respond in our view.

Overview: key economic indicators

2020

 

2021

 

 

 

2022

 

 

 

Q3

Q4F

Q1F

Q2F

Q3F

Q4F

Q1F

Q2F

Q3

Q4F

GDP (% qoq, annualized)

33.1

-4.7

5.3

6.6

4.9

3.2

2.0

2.0

2.0

2.0

Core inflation (% yoy)*

1.5

1.6

1.5

1.7

1.8

1.8

1.8

1.9

2.0

2.0

Headline inflation (% yoy)*

1.4

1.5

1.6

1.8

1.8

1.9

1.9

2.0

2.0

2.1

Unemployment rate (%) (EOP)

7.9

6.5

6.5

6.3

6.0

5.5

5.3

5.2

5.1

4.9

Fiscal balance (% of GDP) (EOP)

/

-18

/

/

/

-15

/

/

/

-5

Federal funds rate (%)

0.0-0.25

0.0-0.25

0.0-0.25

0.0-0.25

0.0-0.25

0.0-0.25

0.0-0.25

0.0-0.25

0.0-0.25

0.0-0.25

*PCE Price Index
F = Forecast, EOP = End of period

 

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All opinions and claims are based upon data on 11/26/20 and may not come to pass. This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation. Past performance is not indicative of future returns. Forecasts are not a reliable indicator of future performance. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect. Source: DWS Investment GmbH

CRC 079928 (11/2020)

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