Looking past the present
Headwinds persist, but we forecast healthy 5.3% GDP growth in 2021.
Bottom Line The surge in coronavirus infections, the choppy rollout of vaccines, political uncertainty and the lack of an appropriately sized stimulus package have combined to negatively impact the labor market, consumer confidence and spending in recent months.
Initial weekly jobless claims backed up 35% to 965,000 over the past two months. That prompted nonfarm payrolls to decline for the first time in eight months, falling by 140,000 jobs in December. The leisure & hospitality industry took the biggest sector hit by far, losing a half million jobs last month and posting a 16.7% unemployment rate.
In our view, Congress’ $900 billion Phase 4 fiscal stimulus package passed in December was simply too little, too late. The economy desperately needed the $2 trillion package Congress was discussing in July. The spike in coronavirus infections and the disappointing pace of vaccinations contributed, as some cities and states tightened social-distancing rules. The restrictions often shut down bars and indoor dining at restaurants, which negatively affected leisure & hospitality employment.
Hourly wages jumped 5.1% year-over-year in December (from a 4.4% increase in November), but that was due to the significant shift in the labor-market mix associated with the sharp job losses in leisure & hospitality. The unemployment rate for individuals with less than a high school diploma soared to 9.8% in December (from 9.2% in November), compared with 6.7% for the overall economy. In contrast, the unemployment rate for those with a bachelor’s degree or higher declined to 3.8% in December (from 4.2% in November). So, as lower-wage workers lost their jobs and higher-wage workers found new employment, the average wage increased significantly.
As the vaccine rollout accelerates and additional fiscal stimulus courses its way through the veins of the economy, many lower-skilled unemployed persons likely will find work, boosting economic growth. That should reverse the decline in consumer confidence over the past two months and reduce the fourth-quarter softness in consumer spending.
On the positive side of the ledger, the overall economy appears to have recovered dramatically over the past eight months from the deepest recession in U.S. history. The turnaround has been led by strength in housing, now running at a 14-year high, and autos, up 90% from their April trough. Also, manufacturing activity has grown across the board, and inventory rebuilding began in earnest in last year’s second half.
Corporate profits were much better than expected in both the second and third quarters of 2020, and we expect fourth-quarter results to follow suit. The recession likely ended in May or June, though the National Bureau of Economic Research’s (NBER) has yet to date it. We here at Federated Hermes are decidedly not in the double-dip recession camp.
The financial markets largely have looked through the near-term hurdles, pricing in the positive fundamentals. The S&P 500 has soared 75% from its historic trough last March. As we approach critical mass and herd immunity with vaccine distribution by midyear, we expect synchronized global economic recovery in the second half. Benchmark 10-year Treasury yields have risen from 50 basis points last August to 1.16% this week, reflecting higher levels of inflation from stronger economic growth.
Raising our GDP estimates The equity, fixed-income and liquidity investment professionals who comprise Federated Hermes’ macroeconomic policy committee have weighed the near-term headwinds and long-term tailwinds that have the potential to impact the economy and financial markets in 2021 and made the following changes:
- The Commerce Department will flash fourth-quarter GDP on Thursday (Jan. 28). With better-than-expected trends in manufacturing, inventory restocking, housing and autos, and with the rollout of vaccine distribution in December, we raised our fourth-quarter 2020 GDP growth estimate from 5.1% to 5.7%, compared with third-quarter’s 33.4%. Blue Chip consensus lowered its estimate from 3.8% to 3.7% (within a range of 1.2% to 5.3%), the Bloomberg consensus is 4.5% and the Atlanta Fed’s GDPNow forecast is 8.7%.
- We raised our full-year 2020 growth estimate from a decline of 3.7% to a decline of 3.4%. Blue Chip consensus increased its from a decline of 3.7% to a decline of 3.5% (range of -3.7% to -3.4%).
- With President Biden’s victory and the Blue Wave in Congress, we expect a Congressional honeymoon resulting in a generous Phase 4 fiscal stimulus plan. We raised our first-quarter 2021 growth estimate from 3.4% to 3.9%. Blue Chip consensus reduced its from 3.6% to 2.3% (range of 0.2% to 4.9%).
- We remain confident Biden will orchestrate an infrastructure spending plan and sharply improve vaccine distribution. We increased our second-quarter 2021 growth forecast from 5.3% to 5.9%. Blue Chip consensus raised its from 3.6% to 4.4% (range of 2.2% to 7.6%).
- With vaccine distribution accelerating into midyear 2021, we likely will approach herd immunity, which should start to normalize personal and business behavior and economic activity. We increased our third-quarter 2021 growth estimate from 4% to 4.7%. Blue Chip consensus raised its forecast from 3.4% to 4.8% (range of 2.6% to 6.9%).
- We also increased our fourth-quarter 2021 estimate from 4% to 4.7%. Blue Chip consensus raised its estimate from 3.2% to 4.2% (range of 2.5% to 6%).
- These adjustments raised our full-year 2021 GDP growth estimate from 4.5% to 5.3%. Blue Chip consensus forecast was unchanged at 4% (range of 2.9% to 5%).