Economic forecasting, never an activity for the faint of heart, is particularly tricky these days given the collision of renewed business lockdowns against unprecedented, but waning, fiscal and monetary stimulus designed to keep asset prices supported and consumers and businesses solvent long enough to outlast this coronavirus pandemic.
With Congress still bickering over the elements and size of another coronavirus relief bill and millions of Americans at imminent risk of losing pandemic unemployment benefits, and facing an end to eviction moratoriums and mortgage forbearance assistance, the stakes for the U.S. economic outlook couldn’t be higher. Throw in a year-end Federal Open Market Committee (FOMC) meeting next week, and there is plenty of room for policy missteps that could send asset prices and the economy reeling as we enter January 2021.
Now is probably a good time to review how our baseline U.S. economic forecast is evolving, given the latest economic indicators, the timing of recent regional business shutdowns (including California), and the much anticipated fiscal relief.
First, we expect far slower economic growth to take hold in the first quarter of 2021 and linger into the second quarter. We took down our U.S. GDP growth forecast for the first and second quarter of 2021 to 1.3% and 2.6% annualized from a previous forecast of 1.9% and 2.8%. This brings our 2021 year/year GDP growth forecast down to 3.3% from 3.5% previously. This follows an anticipated 3.5% annual contraction in GDP in 2020 as Q4 GDP growth slows to around 4.0% from a 33.1% annualized growth rate in Q3.
Optimists will point out we are still forecasting growth in the first half of 2021 and not a double-dip recession from the recent business lockdowns – a better outcome than we saw in March and April of this year. But imbedded in these lower growth estimates are some fairly robust assumptions that another coronavirus relief bill will be passed by Congress and signed by the President before the end of the year and that it will include extensions on pandemic unemployment benefits as well as additional help for small businesses. Without a sizable relief package of around a trillion dollars or more, we will likely have to make additional haircuts to these already lowered growth forecasts. We are also somewhat less sanguine about a V-shaped recovery in the second half of the year as vaccination production, distribution, and injection of a significant percentage of the U.S. population may not get completed by the end of the second quarter. By then there could be more permanent scarring in the labor market that won’t just magically disappear with the vaccine.
The damage to the U.S. labor market remains substantial. The U.S. economy is still down 9.8 million jobs – more net jobs than were lost during the Great Recession. And there is growing evidence that the progress that has been made over the past seven months is beginning to reverse. Initial jobless claims jumped to 853k last week, their highest level since September and a 137k increase from the week before. We are forecasting another increase in initial claims next week to around 885k as more layoffs start to show up in the claims data from states like California that have locked down hard once again. I would not be surprised to see non-farm payrolls decline in December and the U.S. unemployment rate begin to rise. We are forecasting U.S. unemployment will average 7.0% in Q1 2021, three tenths higher than in November.
The Fed is starting to discuss whether it needs to do more to support economic growth. The FOMC minutes from their last meeting suggested many participants thought they would need to enhance their guidance for asset purchases “fairly soon”, including extending and expanding their monthly asset purchases, and targeting the longer-end of the Treasury curve. In Fed speak this means over the next couple of scheduled meetings, and perhaps at the end of next week’s meeting.
While, it’s a close call, I think the FOMC may actually hold off for another month to announce any changes until they see the extent of any additional fiscal stimulus. Risk taking on Wall Street has been rampant, and equity prices are near record highs. Too big of an additional dose of fiscal and monetary medicine could only feed into what may be the early formation of an asset price bubble that is increasingly divorced from economic fundamentals. Moreover, targeted fiscal policy support could provide more immediate relief for the economy without the nasty side effects additional monetary policy action could bring.
To find out more, check out this week’s U.S. Outlook Report.
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