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What lies ahead for the US economy?
Darrell Spence
Economist
KEY TAKEAWAYS
  • Fiscal stimulus and the Fed’s indefinitely easy policy stance position the economy for long-term growth, but we may see economic data weaken in coming months. The official unemployment rate does not fully reflect the staggering drop in the labour force during the pandemic
  • Stock valuations are high, reflecting vaccine-related optimism. The consensus expects earnings to return to their prior peak in 2021, which would be an unusually fast recovery.

It really is different this time. While this is not the first pandemic the US has faced, our reaction to it — the restrictions placed on portions of the US economy, and the policy response — are truly unprecedented.


First, there are lots of reasons to be optimistic about the US economy over the longer term. Official productivity statistics likely understate the impact of innovation occurring in the US, and the economy’s flexibility and dynamism have allowed it, again and again, to rebound from difficult times. This will be the case again.


Then there is 2021. The most important variables for the economic outlook are the virus itself (which has been the case for a while), and now, the vaccine. While vaccine approvals and early immunisations are encouraging, it could still be six to nine months before it is widely distributed enough to allow a broad-based “return to normal”. That is still a long time for the economy to function under the cloud of the virus, particularly with some of the current restrictions in place and no further fiscal support.


Fiscal policy is really the only thing that can fill the demand and income gap created by the virus’s resurgence and enhanced restrictions. Large-scale coronavirus relief legislation has a greater chance of passing under a Biden administration and a Democratic majority in both houses of Congress. Nevertheless, any near-term growth hiccup will likely elicit a “whatever it takes“ monetary policy easing by the Federal Reserve. However, there is a limit to what monetary policy can do to mitigate the impact of business closures and lost income. Even with the $900 billion package passed in December, we still need to see if the money reaches those who need it most, and is large enough to get us to the vaccine-created finish line that we are all longing to reach. In short — the first half of 2021 could still be bumpy.


In the first half of 2020, fiscal stimulus did a good job of supporting the economy when activity was severely hampered by government-ordered shutdowns of businesses. People received payments of $1,200 or $2,400 whether they were employed or not. If they were unemployed, they received an additional $600 a week in unemployment benefits up to July. The Paycheck Protection Program (PPP) provided financial support to small businesses in the form of grants. All of that came together to create a huge surge in disposable income. In fact, disposable income grew faster in mid-2020 than it would have had the pandemic never occurred!

 

Government stimulus has helped keep US consumers afloat


Sources: Federal Reserve Bank of St. Louis, U.S. Bureau of Economic Analysis. As of 31/10/20.


 


That support was meant to get the economy through the pandemic, but clearly, the virus is still here. Unfortunately, the recovery is beginning to take on a ‘W’-shape: portions of the economy reopen, only to be shut down again, which prevents the economy from generating the type of momentum that ultimately feeds on itself and builds a robust recovery. It also makes it difficult for businesses to plan. They will be reluctant to hire, build inventory, et cetera if they believe they may be shut down again. Thus, it would not surprise me to see some of the economic data weaken in coming months. My baseline expectation for annualised US gross domestic product growth for 2021 is around 3%, with most of the growth coming in the second half of the year.
 


 

Risk factors you should consider before investing:
  • This material is not intended to provide investment advice or be considered a personal recommendation.
  • The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
  • Past results are not a guide to future results.
  • If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease.
  • Depending on the strategy, risks may be associated with investing in fixed income, derivatives, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.


Darrell R. Spence  is an economist at Capital Group. He has 28 years of investment industry experience, all with Capital Group. He holds a bachelor’s degree with honors in economics from Occidental College graduating cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the National Association for Business Economics.


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Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.