Pandemic Woes Lead To Fiscal Spending Hopes

Posted By Scott Anderson In Economic Outlook,Featured | No Comments

This week’s U.S. economic data reminds us that the pandemic still has a tight grip on our economy.

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Initial jobless claims increased to just under one million last week for the largest weekly increase since March as tighter business restrictions and stay at home orders finally found their way into the labor market data. Just as during last spring, leisure and hospitality and other service businesses appear to be bearing the brunt of the layoffs.

We expect initial claims to stay at the highest levels since August at around 945k when next week’s data is released on Thursday. December nonfarm payrolls declined by 140k jobs, and we expect January payrolls to decline and the unemployment rate to rise as vaccine injections and mask wearing have yet to slow the pandemic’s spread.

The December retail sales report confirmed the pull-back in the consumer driven recovery. Retail sales dropped 0.7% to close out the last month of the year and November’s decline was revised to a larger 1.4% decline. Economists had been looking for a flat reading for December. As a result, we lowered our estimate for fourth quarter real consumer spending growth to 2.1% annualized, bringing our fourth quarter GDP growth estimate down to an even softer 2.9% annualized pace from a prior 4.0% growth forecast.

We saw large monthly declines in retail sales for non-store retailers (-5.8%), electronics stores (-4.9%), eating and drinking establishments (-4.5%), and department stores (-3.8%). Sales declined 1.4% for grocery stores as well.

It is clear that the $900B coronavirus relief package that was passed at the end of December will be a critical support for continued U.S. economic growth in the first quarter. We are forecasting another first quarter surge in real personal income and personal savings rates that will help keep modest 0.5% annualized consumer spending growth going this quarter and allow a faster pandemic recovery to begin as early as the second quarter. The extension of supplemental unemployment benefits and mortgage forbearance and eviction moratoriums will keep more folks housed and off the streets as the pandemic continues to rage. Real U.S. GDP growth in the first quarter is now forecast at very sluggish 1.6%

However, near-term gloom is giving way to medium-term optimism about the U.S. economy’s growth prospects helped along with a healthy dose of Federal government spending. President Elect Biden’s proposed $1.9 trillion additional spending package called the American Rescue Plan, equivalent to 8.6% of U.S. GDP, tilts the economic forecast to the upside starting as early as the second quarter of this year.

The package includes about $370B for state fiscal aid, $450B for additional $1,400 individual checks and child tax credits, another $200B for increasing and extended supplemental unemployment benefits,  $170B for K-12 schools and colleges and universities, $160B for public health, including $70B for  vaccinations and COVID testing.

While we don’t expect the final bill to be quite that large, another spending package over $1.0 trillion seems highly likely to pass in the February to March timeframe. We are raising our second half U.S. GDP growth estimates in response to an average of 4.5% with growth in the third quarter just shy of 5.0%.

These upwardly revised baseline estimates may also end up being too conservative, given the astronomical size of Biden’s new fiscal spending proposal and with better news on the vaccination and virus containment front.

Moreover, the Biden Administration is not done, they are expected to release another large tax and spending package in a few months that could be passed by this summer. These will include more of Biden’s Build Back Better proposals on infrastructure spending, education, health care, taxes, and climate change initiatives. Bottom-line, the risks on the U.S. growth outlook are rapidly shifting to the upside for late 2021 and 2022.

Our higher GDP forecasts for the second half of 2021 and into 2022 mean more job creation and a faster drop in the U.S. unemployment rate than we forecast before. We expect the U.S. unemployment rate to average 5.4% in the fourth quarter of this year and 4.6% by the fourth quarter of 2022. Faster growth will also lead to somewhat higher long-term interest rates over the forecast horizon than we projected prior to Biden’s announcement. The 10-Year Treasury yield is expect to average 1.25% in the fourth quarter of this year. We also expect the Fed to begin lifting interest rates by the second quarter of 2024, a full year earlier than we have been projecting as we now expect a swifter return to full-employment and 2.0% inflation.

To find out more details about our forecasts for the U.S. and markets, check out this week’s U.S. Outlook Report. [2]

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[2] U.S. Outlook Report.: https://changematters.bankofthewest.com/wp-content/uploads/2021/01/BankoftheWest_USOutlook_1_15_20.pdf

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