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There’s conflicting evidence about the buoyancy of the U.S. economy. On one hand, cases of Covid-19 are spiking as winter approaches, and with a Democratic president poised to take office, Republicans are showing no willingness to spend the kind of money on a relief package that Democrats say is necessary. On the other, the news isn’t all bad—employment is recovering from pandemic-induced lows and the manufacturing and housing sectors are thriving.
Since all that makes it difficult to know what kind of economy President-elect Joe Biden will inherit on Jan. 20, the best you can do is consider scenarios. The median forecast of 62 economists surveyed by Bloomberg News is for the economy to grow at an annual rate of 3.7% in the first quarter. But the median of the five most recently updated forecasts is only 2.7%. And Bloomberg’s own economists see an air pocket ahead, with the economy shrinking at an annual rate of 0.5% in the first quarter before accelerating for the rest of the year.
The pandemic is a big potential negative, of course. The seven-day average of new cases in the U.S. has more than doubled in the past month, to 117,000 a day as of Nov. 9. The daily death toll has risen by a third, though it’s still less than half its peak in April. Federal Reserve Chair Jerome Powell warned at a press conference on Nov. 5 that “the outlook for the economy is extraordinarily uncertain and will depend in large part on the success of efforts to keep the virus in check.”
What’s unclear is whether the U.S. can survive the wave of infections without shutting down again. Most state and local authorities are taking a surgical approach, stopping only activities that are known to be problematic, such as indoor dining in some states. “It’s not going to be the widespread lockdown that we saw earlier in the year,” says Blerina Uruci, senior U.S. economist for Barclays PLC.
But this pandemic has fooled people more than once. Laissez faire may not be possible if the cases and fatalities continue to build. “Europe today is the prime example of how quickly a resurgence of the virus can reverse economic gains,” Steve Blitz, chief U.S. economist of TS Lombard, wrote in a client note on Nov. 6.
Senate Majority Leader Mitch McConnell said the day after the election that he hoped “partisan passions” wouldn’t prevent a coronavirus relief package from being enacted by yearend. But on Nov. 9 the Kentucky Republican reiterated his reluctance to go big when he said “targeted” relief should be sufficient, pointing to favorable news from Pfizer Inc. on its Covid-19 vaccine and the drop in the unemployment rate in October to 6.9%, from 7.9% in September and a high of 14.7% in April. Republicans are talking about a $500 billion package, while Democrats want $2.4 trillion, including aid to state and local governments.
Economists agree that manufacturing and housing should remain strong at least through Inauguration Day because demand is robust and inventories are low. There’s disagreement about consumer spending. Jim Paulsen, chief investment strategist for Minneapolis-based Leuthold Group LLC, wrote in a note to clients on Nov. 2 that during the pandemic consumers have built up more than $2.5 trillion in extra savings that’s “the fuel for a growth bomb waiting to explode.”
Even if there isn’t another relief bill this year, “personal income will rise 6.5% in 2020, which is the largest annual gain since a 7.4% increase back in 2006, and the peak of that cycle’s housing boom,” Michael Englund, chief economist of Action Economics LLC, wrote in a Nov. 6 email.
But Aneta Markowska, chief economist of Jefferies LLC, worries consumption spending will eventually be dragged down. “The 20+ mln individuals collecting unemployment benefits have experienced a 60% drop in income in the past 3 months, and we believe they are close to running out of savings,” she wrote in a Nov. 9 client note with her colleague, money-market economist Thomas Simons. The economy isn’t out of the woods yet.
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