Deteriorating Fundamentals vs. Rising Expectations

Scott Anderson
Posted by Scott Anderson
Chief Economist

Are you a glass “half-full” or a glass “half-empty” investor these days?

Over the near-term, U.S. economic growth fundamentals look set to deteriorate. Yet U.S. stock prices remain close to record highs and long-term Treasury yields have moved up 10 to 15 basis points in the last week alone on prospects for sizable fiscal stimulus and a new Democratic administration. The markets are clearly trying to look past near-term signs of trouble, while focusing on a brighter 2021.

While we remain hopeful that 2021 will be a better year from a public health and economic perspective, we still have some sizable headwinds to clear out of the way to get there.

An important driver of our slowdown forecast in the fourth quarter is the resurgence of coronavirus cases and hospitalizations that are now impacting 40 of the 50 states with 33 states experiencing high and rising case counts, according to the New York Times. The U.S. had 75,064 new cases yesterday, the second highest number since the pandemic began, and a 32% increase over the last 14 days. (The highest number of new cases was back on July 16th at 75,687.) Hospitalizations are up 40% over the last month as well.

While we are not forecasting another national shutdown of restaurants and bars and other service businesses that could precipitate a double-dip U.S. recession, the increases in case counts alone will stifle budding demand even without government restrictions, and we certainly can’t rule out the possibility of regional roll-backs and tightening of public health policies like we saw last summer. Restaurant reservations and TSA checkpoint visits are already moving in the wrong direction compared to September.

The other major near-term threat to the growth outlook is the delay of new pandemic fiscal relief from Washington D.C. While Pelosi and Mnuchin continue to work toward another rescue package agreement, the Senate looks unlikely to take up the measure until after the election. If Democrats sweep on Election Day, only a limited package of unemployment assistance and PPP assistance might be passed in a lame-duck session, so the economy might have to wait until early next year for comprehensive relief once the new Congress is seated.

The CARES Act and Federal Reserve have been invaluable in getting the U.S. economic recovery to this point. We expect an unprecedented 31% annualized growth rate in U.S. GDP in Q3 when it is first reported next week. But past performance is no indication of future results. The fiscal and monetary impact of government stimulus is already fading, and more will need to be done to get this economic recovery over the finish line. A survey from Morning Consult shows by late August, 50% of jobless workers reported that their jobless benefits wouldn’t even cover their basic expenses up from 19% who said so in the middle of June.

Moreover, at the end of September, almost 45.8% of renters saw eviction over the next two months as “very likely” or “somewhat likely”, according to the Census Bureau.

We have marked our Q4 GDP growth forecast lower in recent weeks to just 2.9% on the dimming outlook due mainly to the coronavirus resurgence and the political delay in additional fiscal stimulus from Congress.

To learn more, check out this week’s U.S. Outlook Report.

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