U.S. Economic Outlook

Remain complacent – but only about monetary policy, not the pandemic

Recent developments on the vaccination front in the United States look quite promising. According to the Center for Disease Control and Prevention (CDC) around 22% of the overall U.S. population has received at least one dose and around 12% of the population can now be classified as fully vaccinated against the virus.[1] An important landmark, 100 million administered doses, has been reached and President Biden has promised to make all adults eligible for the jab by May 1.[2] It seems as though nothing can go wrong. But precisely this, excess optimism on the virus front based on initial successes, might be dangerous.

The reality is that so far vaccinations have focused on the elderly: 38% of the U.S. population older than 65 years are now fully vaccinated compared to just 12% of people between the age of 18 and 64 years.[1] While it is certainly rational to immunize the most vulnerable cohort first, this should not be grounds for the rest of the population to act as though normality has already been achieved. Still worse would be to believe there is no need to get the jab at all. Dr. Fauci[3] made these points in well-known Sunday news formats.[4]

Chart 1: New cases bottomed out while the share of prime-age hospitalizations increased again

Chart_1.png

Source: Centers for Disease Control and Prevention as of 3/15/21
* Seven-day moving average

A quick reality check reveals that the United States is far from out of the woods. Despite the fast progress on vaccinations, new cases recently bottomed out at still high levels of around 60,000 per day. The decline in new cases since the beginning of 2021 may also reflect cautious behavior in the past few months and could be less directly linked to the distribution of vaccines – given the relatively low overall vaccination rates. Moreover, since more and more elderly people have now acquired a high degree of immunity, hospitalizations of people in their prime have increased steeply again (Chart 1). Admittedly the total number of hospitalizations is declining steadily but the point to be made is that vaccinating the elderly is simply not enough, especially if new variants of the virus prove to be more aggressive than those we have seen so far. Therefore, broad acceptance of the vaccines will be key to return to normal. And this acceptance level has unfortunately declined in the United States since the beginning of 2021 from around 70% to current approval rates of 55% (Chart 2).

Chart 2: Share of people who would choose to get vaccinated if a shot would be available

Chart_2.png

Source: MIT (covidsurvey.mit.edu) as of 3/15/21

It is not quite clear whether negative news on possible vaccine-side effects has affected the willingness to take the shot or if simply the overall attitude of the population to Covid-19 has changed. Recurring patterns of restrictive measures or local temporary lockdowns would be the likely consequence, especially if the virus is here to stay, as the latest research suggests.[5] The implications of the virus becoming endemic and following a regular pattern, like the seasonal flu, are far reaching. In such a scenario, an updated jab might be needed once a year – at least for some time. This is not very promising if the reluctance to be vaccinated persists. But we expect the willingness to be jabbed to rise in the course of the year as vaccinations go ahead, hopefully without complications. The freedom enjoyed by vaccinated people might become visible and social pressure to have the jab could increase. Anyhow, reluctance now could jeopardize the progress we have made so far toward a fast recovery.

We agree that the recent passing of another round of fiscal stimulus will most likely produce impressive growth rates in 2021 – and for our growth forecast we do see significant risk to the upside. However, fiscal support of this kind typically works only as a one-time boost and follow-up gains are hard to realize if people are still unable to go back to work. And the gap between the current position of the economy and the desired destination is still quite large – especially judging by the labor markets. Since the U.S. Federal Reserve (Fed) has effectively abandoned the standard unemployment rate as a key metric for their judgement of the economic recovery, much attention has been drawn to the so-called employment-to-population ratio and labor-force-participation rate (see Chart 3).[6]

Chart 3: Participation is key

Chart_3.png

Sources: Bureau of Labor Statistics and Haver Analytics as of 3/15/21

The employment-to-population ratio, in particular, quite dramatically demonstrates the gap that the economy must still close in order to recover fully. Needless to add that most of the losses have been in service sector jobs – the biggest sector and the one most reliant on a fast resolution of the pandemic via a rapid vaccination campaign. Jobs that involve a lot of human contact, like those in leisure and hospitality, are lagging behind in the recent recovery and account for almost half of all losses to date (Chart 4).

Chart 4: Number of jobs compared to February 2020

Chart_4.png

Sources: Bureau of Labor Statistics, Haver Analytics and DWS Investment GmbH as of 3/15/21

Average hourly earnings in leisure and hospitality, currently at around 17 U.S. dollars, also lag far behind the overall average salary in the service sector or the private sector in general (both are around 30 U.S. dollars). That helps to explain just what the Fed has in mind when it talks about "a broad-based and inclusive recovery"[7] – a recovery that benefits everyone. And the Fed stuck to this well-telegraphed stance in its March Federal-Open-Market-Committee (FOMC) meeting: near-term expected higher inflation is judged as transitory and it will make major changes of monetary policy dependent on healing of the labor market – which is likely to take quite a while. However, their updated growth outlook paints a very rosy picture, at least for 2021. Median U.S. gross-domestic-product (GDP) growth expectations for 2021 have been revised up to 6.5% from 4.2%, reflecting the likely impact of another round of sizable fiscal stimulus and good progress on vaccinations. Meanwhile inflation is now expected to rise above 2% this year before ticking down to 2% in 2022 and up a little bit to 2.1% in 2023 as the outlook on the labor market brightens. The unemployment rate is expected to decline somewhat faster to 3.5% in 2023: a region compatible with the broad based and inclusive goal of maximum employment. FOMC participants remain dovish despite these big optimistic upgrades: the median dot plot for 2023 still does not indicate a rate hike, though some participants do foresee a slightly steeper path for policy interest rates.

In the press conference, however, Fed Chair Powell laid out one major condition for the Fed's optimism. Somewhat echoing Dr. Fauci, he reminded us that "no one should be complacent," and that vaccinations offer "hope" but that mask-wearing will still be necessary until the job is done.[8] On adjusting the Fed's policies he gave the usual current answer: the calibration of their tools is outcome based and it is not yet the time to think about tapering. Beyond that, Powell spent quite some time underlining that longer-term economic forecasts are highly uncertain and that he wants to abstain from relying too much on them.

And so the Fed's message might be summed up as this: remain complacent – but only about monetary policy, not the pandemic.

Overview: key economic indicators

2021

 

 

 

2022

 

 

 

Q1F**

Q2F

Q3F

Q4F

Q1F

Q2F

Q3

Q4F

GDP (% qoq, annualized)

3.2

6.6

4.9

4.1

3.6

2.4

2.8

4.1

Core inflation (% yoy)*

1.4

1.6

1.7

2.0

2.0

2.1

2.1

2.2

Headline inflation (% yoy)*

1.6

1.7

1.8

2.1

2.1

2.2

2.2

2.3

Unemployment rate (%) (EOP)

6.8

6.0

5.5

5.0

5.0

4.7

4.4

4.2

Fiscal balance (% of GDP) (EOP)

/

/

/

-14.6

/

/

/

-4.5

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

*PCE Price Index
** Forecast

 

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All opinions and claims are based upon data on 3/17/21 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

080648_3 (03/2021)

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