Wall Street is tempering its hopes for the US recovery. A handful of big banks say it’s the American people who spoiled the party.
With the Delta wave on the rise, causing a dip in consumer spending and confidence, Goldman Sachs slashed its forecast for third-quarter gross domestic product growth to 5.5% from 9% on Wednesday. Bank of America followed on Friday, cutting its GDP estimate to 4.5% growth from 7% and officially implying the recovery peaked in the second quarter.
Bank economists aren’t the only ones on Wall Street growing more pessimistic toward the recovery. Only 27% of fund managers expect growth to improve over the next 12 months, according to a survey conducted by BofA earlier in August. That’s the smallest share since April 2020, when lockdowns just started to freeze the US economy. That print also came before retail sales data showed spending slow more than expected in July.
That spending slowdown sits in the center of Wall Street’s gloomier outlook. The surge in Delta cases prompted a resumption of mask-wearing rules across the country and revived fears of catching the coronavirus. Those trends quickly dragged on Americans’ spending. Retail sales slid 1.1% in July, with the largest declines showing up at clothing stores, bookstores, and car dealerships.
Consumer spending counts for roughly 70% of economic activity, making retail sales one of the most relevant measures of the US recovery. Put simply, Americans stopped spending as much in July, and the recovery is likely going to be worse off for it.
The retail sales report shows a “sharp pullback in demand” and starts the quarter off “on a bad note,” BofA economists led by Michelle Meyer said in a note. Even if spending bounces back in August and September, the bleak July print points to “relatively muted” growth in the third quarter, they added.
The data showed a “larger slowdown in spending than we expected,” particularly in service sectors that have yet to stage full recoveries, Goldman economists led by Jan Hatzius said. If case counts continue to rise and restrictions intensify, the recovery could stumble further.
Still, both teams are holding out hope that spending can bounce back before 2022. The slump shouldn’t last long, as the duration of Delta outbreaks in Europe suggest case counts in the US could start to fall in September, the Goldman economists said. The bank raised its fourth-quarter GDP forecast to 6.5% from 5.5% on Wednesday as well, noting the expected drop in cases should power a buying spree similar to that seen through spring.
BofA maintained its fourth-quarter estimate of 6%. The Delta wave will bring “some permanent growth destruction,” but most growth will simply be delayed further into the future, the team said.
“Once the Delta threat is reduced and this COVID wave subsides, we should see the return of pent-up spending for leisure services,” the economists added. “Some categories will have a bigger bounce than others – perhaps travel more than restaurants/bars, for example – but we should see people reengage in these activities.”
Economic recoveries are improving around the world, but the global rebound remains massively uneven, the Organization for Economic Co-operation and Development said in a new report.
The OECD revised its estimate for global gross domestic product higher on Monday, citing unprecedented policy support and the effectiveness of COVID-19 vaccines. Output is now expected to grow 5.8% in 2021, up from the December 2020 forecast of a 4.2% expansion. That rate would mark the strongest year of economic growth since 1973 and follow last year’s 3.5% contraction, the OECD said.
Global GDP will then grow 4.4% in 2022, according to the report. Global income will still sit roughly $3 trillion below its pre-crisis trend by the end of next year as emerging countries struggle to keep up.
“The global economy remains below its pre-pandemic growth path and in too many OECD countries living standards by the end of 2022 will not be back to the level expected before the pandemic,” Laurence Boone, chief economist at OECD, said.
Living conditions aren’t the only disparity expected to widen through the recovery. Real GDP is expected to grow 6.3% and 4.7% among G20 nations in 2021 and 2022, respectively. That outpaces the average growth estimate.
Meanwhile, some emerging-market economies are expected to post substandard growth in the near term. Countries still enduring deadly waves of COVID-19 such as India and Brazil “may continue to have large shortfalls in GDP relative to pre-pandemic expectations” and only bounce back once the virus threat fades, the organization said.
Improving vaccine distribution is key to supporting such countries, especially as virus uncertainties linger. New variants of COVID-19 could necessitate a return to partial lockdowns if populations aren’t vaccinated quickly enough, the organization warned. Such a resurgence could also drag consumer confidence lower and halt any rebound in spending.
Upside risks have emerged as well. Household saving boomed through the pandemic, and that cash could soon be unleashed as people unwind pent-up demand. Spending just a fraction of the bolstered savings “would raise GDP growth significantly,” the OECD said.
But with spending comes inflation. Supply-chain disruptions and bottlenecks around the world have driven material prices higher in recent months. When coupled with a sharp bounce in demand and various stages of reopening, price growth now sits at its highest levels in more than a decade. The OECD expects inflation to average 2.7% in 2021 before cooling to 2.4% next year.
Central banks should allow for a brief inflation overshoot as production normalizes and temporary pressures ease, Boone wrote. Running economies hot can allow for stronger hiring and wage growth, particularly among low-income groups. Central banks must “remain vigilant” and look through temporary inflation, the economist said.
“What is of most concern, in our view, is the risk that financial markets fail to look through temporary price increases and relative price adjustments, pushing market interest rates and volatility higher,” Boone added.
The Biden administration sees a strong economic rebound in the cards. What’s forecasted afterward is less exciting.
President Joe Biden revealed his budget proposal for the 2022 fiscal year on Friday, laying out his plan to spend roughly $6 trillion on child care, clean-energy initiatives, and infrastructure improvements – and laying out a set of forecasts for US gross domestic product over the next several years.
The near-term estimates are promising. Biden sees GDP expanding 5.2% in 2021 and 3.2% in 2022, handily exceeding the annual growth seen just before the COVID-19 crisis.
But if the so-called Biden boom began with his $1.9 trillion stimulus plan in March, then his budget proposal sees it ending just two years later. The administration estimates GDP growth will slow to 2% in 2023 and then settle at 1.8% through 2027.
This is considerably weaker than recoveries from previous recessions. Annual growth averaged 2.3% from 2010 to 2019 as the US placed the Great Financial Crisis behind it. After the dot-com bubble burst in 2001, GDP grew at an average annual rate of 5.4% until 2008. And the output expanded at an annual pace of 4.4% from 1983 to 1989, after back-to-back recessions had kickstarted the decade.
Biden’s forecast, then, is notably conservative. It contrasts with statements he’s made publicly as recently as this week. Citing “independent experts” in a Thursday speech, the president said growth could come in at 6% or greater in 2021.
He added that his follow-up spending proposals would open the door to “faster” growth. Yet the rate of expansion forecasted in his budget sees growth slowing or holding steady through 2027.
It also falls short of forecasts from major Wall Street banks. Morgan Stanley sees growth coming in at 8% this year before cooling to 3.2% in 2022. Bank of America projects growth of 7% in 2021 and 5.5% the following year.
The modest estimates could reflect a desire to buck the trend seen throughout the Trump presidency, which underdelivered on growth, even before considering the economic collapse seen through 2020.
The Trump administration’s final budget expected GDP growth to trend at 2.9% through 2030. While that was published before the pandemic, it still handily exceed the levels forecasted by Biden.
To be sure, other estimates in Biden’s plan are much more optimistic. The White House expects the unemployment rate to fall from 6.1% to 5.5% by the end of 2021 and reach 4.1% by the end of 2022. The rate will then hold steady at 3.8% into 2031, just above the pre-pandemic lows of 3.5%, according to the plan.
Biden’s latest spending proposals – which include trillions of dollars for infrastructure and family support – are also engineered to provide sustained investment instead of an immediate burst like that seen with his stimulus plan. Both packages are meant to be spent over the next eight to 10 years, and administration officials argue such a timeline would minimize their effect on inflation.
The White House has also stepped up its calls to invest in economic growth while interest rates sit at historic lows. While deficits are traditionally measured as debt to GDP, interest-payments to GDP are a better measure for sustainable spending, Treasury Secretary Janet Yellen told lawmakers in a Thursday hearing.
The government should spend on investments that lift output over the long term while debt-financing costs are so low, she added.
“The president’s proposal will have a temporary period of spending and permanent increases that, beyond the budget window, will result in lower deficits and more tax revenue to support those expenditures,” Yellen told a House Appropriations subcommittee.
By at least one popular measure, the US economy will fully recover and exceed its pre-pandemic strength in the second quarter.
US gross domestic product is expected to grow at an annualized rate of 10.4% through the quarter that ends in June, according to the Federal Reserve Bank of Atlanta’s GDPNow model. Growth at that pace would place economic output at a new record high, surpassing the peak seen during the fourth quarter of 2019. It would also be the second-strongest rate of growth since 1978, exceeded only by the record-breaking expansion seen through the third quarter of 2020.
The central bank’s nowcast is a type of projection that is updated as new economic data is published. GDPNow isn’t an official forecast from the Atlanta Fed, and is instead used to narrow down where quarterly growth is likely to land. The model also ignores the pandemic’s impact beyond its influence on source data such as retail sales and global trade, according to the Fed.
The first GDPNow reading for the second quarter was published on Friday, just one day after the Commerce Department published its initial estimate of first-quarter growth. US GDP expanded at an annualized rate of 6.4% in the first three months of the year, missing the median estimate of 6.7% but still showing a sharp acceleration from the prior period. The jump was primarily fueled by widespread vaccination, gradual reopening, and stimulus passed by former President Donald Trump and President Joe Biden.
Though some individual indicators have already surpassed their pre-pandemic levels and signal a strong recovery, GDP remains just below its previous peak. Following the first-quarter reading, GDP has retraced about 96% of its pandemic-era decline. With data tracking consumer spending and hiring trending higher as the economy reopens further, the US is largely expected to complete its GDP recovery in the next two months.
Economists outside the Fed also see growth accelerating through the current quarter. The consensus estimate from a survey of forecasters calls for annualized growth of just under 9% in the second quarter. The most bullish estimates see GDP expanding at a rate of more than 11%, while the least optimistic expect growth to land at about 6%.
The estimates underscore the fact that, should vaccination continue and case counts decline further, the US is on track for its strongest rate of annual growth in decades. The International Monetary Fund estimates GDP will grow 6.4% through all of 2021, exceeding global growth of about 6% and marking the fastest rate of expansion since the early 1980s. Separately, Federal Reserve officials hold a median estimate of 6.5% growth this year.
America is getting ready for its post-pandemic glow-up.
Peak sweatpant has passed and high heels are hot again, in the ultimate symbol of an economy ready to let loose. Americans are booking beauty services, buying going-out clothes again, and readying for a “hot vax summer” as they emerge from lockdown looking and feeling different than they entered, helping the economy roar back to life in the process.
It’s the result of vaccination rates revving up, big cities reopening, and Americans sitting on a ton of cash. Between three stimulus checks and the decline in discretionary spending that accompanied a pandemic shutdown, Americans were holding $2.6 trillion in excess savings as of mid-April, per Moody’s Analytics.
But to power such an economic transformation, Americans need to keep spending.
BofA’s head of North America Economics, Ethan Harris, wrote in March that the US’ economic fate will depend on whether Americans view their excess savings as wealth or deferred income. His team sees the savings being treated as the latter, which should “help support exceptional growth this year in addition to the tailwinds from fiscal stimulus and an improving virus picture.”
Mark Zandi, chief economist at Moody’s Analytics, agrees. “An unleashing of significant pent-up demand and overflowing excess saving will drive a surge in consumer spending across the globe as countries approach herd immunity and open up,” he wrote in a note. He sees 20% of excess savings being spent in 2021, and another 20% next year.
Credit card spending is already up, but it’s just the beginning. Inflation, unequal savings distribution, and an uneven economic recovery may prove to be challenges in spending enough to fuel an economic boom.
Spending on outdoor activities and a ‘hot vax summer’
“The snooze is over,” wrote BofA’s Michelle Meyer, head of US economics, in a note published on Thursday. BofA’s card spending showed a massive uptick in consumer spending for the week, up 45% year-over-year and by 20% over two years previous.
The third stimulus has already impacted Americans’ bank accounts, per Bureau of Economic Analysis data. As incomes climbed by 21.1% last March – a record monthly income leap dating since 1946 – consumer spending rose with it, increasing by 4.2%. Americans haven’t spent that much since June. Total consumer spending, not adjusted for inflation, has now exceeded pre-pandemic levels.
In consumer spending, still leading the way is solitary leisure– solo activities that Americans turned to in the social-distancing era as previous forms of leisure, especially hospitality and entertainment, fell off dramatically. Spending on sporting goods such as golf, campground, and bike equipment, is continuing its momentum with activity above pre-pandemic norms, per BofA.
But we’re also starting to see a resurgence in the activities of pre-pandemic yore. Spending on transit, restaurants and bars, department stores, and clothing have all increased by over 100% on a daily basis over the past 10 days, per BofA.
The post-pandemic beauty boom has also arrived, as The Atlantic’s Amanda Mull reported. From eyebrow threading and hairstyling to mani-pedis and cosmetic injections, she wrote, people are booking up beauty services for their own personal glow-up. Beauty sales increased by 31% for for the week ending April 24, per BofA, compared to 2019.
The start of this spending is already making a difference. GDP grew at a 6.4% annualized rate in the first quarter, the Commerce Department estimated on a preliminary basis.
While Americans have already begun swiping their cards, there are still holes in the economy to fill and challenges to overcome.
Entertainment and airline spending are improving, but still weak, per BofA. More Americans intend to travel as the weeks go by, with some already booking vacation rentals and hotels, and airlines just saw their busiest weekend since pre-pandemic, but travel’s comeback is a gradual one.
That might partly be because the economic recovery across America hasn’t been uniform. BofA spending analysis finds the South and parts of Midwest are faring better economically than the West and the Northeast. That’s likely because the latter regions had longer lockdowns and a slower easing of restrictions in an attempt to curb the spread of the coronavirus.
Also unequal is the share of savings built up during the pandemic. Zandi said in the Moody’s note that this would limit an even bigger boom in spending. “Much of the excess saving has been by high-income, high-net-worth households who are likely to treat the saving more like wealth than income, and will thus spend much of less it, at least quickly,” he wrote.
Nearly two-thirds of the excess savings in the US is by households in the top 10% of the income distribution, per Moody’s data, and three-quarters is by those in the richest 20%.
Consumer spending accounts for 70% of the American economy, and half of that is from the top 10% of American households, per estimates from Goldman Sachs and Deutsche Bank, respectively. That means about one-third of US GDP comes from spending by the top 10%. In other words, the US needs spending from wealthy households the most.
But there’s a side effect that may come with unleashing pent-up demand: inflation. While experts don’t think the economy will overheat like it did in the 1970s, some goods and services have begun to get more expensive amid the supply shortages that have come with reopening. The unpredictability of inflation could cause consumers to curb their spending.
A world with baggy jeans and remote work
In a post-pandemic world, though, America will look a little different. The point of a glow-up, after all, is transformation.
Urban areas too, will look a little different. While experts and the data are pointing to big cities like New York making a comeback, they will likely function in new ways. Urban theorist Richard Florida previously told Insider he thinks major cities will be reshaped and revived by a newfound focus on interpersonal interaction that facilitates creativity and spontaneity. He said the community or neighborhood itself will take on more of the functions of an office.
The work-from-home revolution could bolster new cities’ real-estate markets, as more broadly shared prosperity counteracts decades of increasing regional inequality, but spending within cities themselves could suffer. For instance, economists estimate spending in downtown areas will be 10% depressed – or more in the case of Manhattan – because of the remote-working revolution. So the fashions on the street will look different, and the cities will probably be a bit emptier.
People are also buying more stuff for inside the home. Spending in home categories was up 50.3% over 2019 for the week ending April 24, according to BofA. Americans have learned to spend in a more private way during a year inside. The glow-up is on, but Americans will have to keep spending for a truly impressive makeover.
The International Monetary Fund will lift its projections for global economic growth in the wake of encouraging vaccination trends and major new stimulus in the US, Managing Director Kristalina Georgieva said Tuesday.
The IMF will roll out an upgraded set of forecasts for this year and for 2022 next week when it publishes its World Economic Outlook report, she said. The organization’s January estimates saw global output growing 5.5% in 2021 after a forecasted tumble of 3.5% the previous year. The months since have seen COVID-19 cases fall from their peaks, vaccine rollouts begin, and $1.9 trillion in new fiscal support from the Biden administration.
The developments all stand to boost global economic recoveries through the summer, Georgieva said in prepared remarks.
“This allows for an upward revision to our global forecast for this year and for 2022,” she said.
Without “extraordinary effort” from essential workers and scientists, the global recession seen through most of 2020 would have been “at least three times worse,” the managing director added.
The news isn’t all good. Georgieva highlighted that, despite the broadly improved outlook, the global recovery remains uneven and gaps between countries could widen in the coming months. The US and China are likely to reach pre-pandemic levels of gross domestic product by the end of the year, but “they are the exception, not the rule,” she said.
New virus strains in Europe and Latin America are fueling high uncertainty about the region’s prospects. Emerging and developing countries also endured a 20% drop in per-capita income, roughly twice that seen in advanced economies. The plunge leaves emerging countries with a much harder climb back to pre-crisis health.
“They already have more limited fiscal firepower to fight the crisis. And many are highly exposed to hard-hit sectors, such as tourism,” Georgieva said
One upgrade among many
The IMF joins a handful of other institutions turning more bullish toward the US and global rebounds. Fitch lifted its own forecast for global expansion on March 18 to 6.1% from 5.3%, similarly citing stimulus and progress toward reopening. The estimate implies the strongest year of global growth since at least 1980.
US growth will outperform slightly at 6.2%, Fitch said. That’s up from the previous estimate of 4.5%.
“It still looks reasonable to assume that the health crisis will ease by midyear, allowing social contact to start to recover. But immunization delays or problems remain the key risk,” the firm said.
Wall Street giants have also boosted their estimates in recent weeks. Morgan Stanley is among the most bullish, lifting its US growth estimate to 8.1% in 2021 from 7.6% in an early March note. The forecast also calls for US GDP to reach pre-pandemic levels by the end of the first quarter.
Bank of America raised its 2021 US growth estimate to 7% from 6.5% on Thursday, marking its fourth upgrade this year alone. The revision was entirely linked to Democrats’ new stimulus measure and the “exceptional consumer spending” seen among those receiving relief checks, the team led by Michelle Meyer wrote.
The American reopening is already leading to stronger growth than banks expected. Just ask Bank of America.
On Thursday, BofA economists lifted their 2021 US growth forecast once again on hopes for past and future stimulus accelerating the economic recovery. The upgrade is at least the fourth the bank has made this year.
The team led by Michelle Meyer now expects gross domestic product to grow 7% this year, up from the previous estimate of 6.5%. Output will then reach 5.5% the following year, also an upgrade.
Growth on a fourth-quarter-by-fourth-quarter basis will total 7.7% in 2021 and 4.4% in 2022, the team added. That exceeds the Federal Reserve’s median estimates of 6.2% and 3.4% growth in 2021 and 2022, respectively.
The upward revision is entirely linked to stimulus. The $1.9 trillion measure passed by Democrats earlier this month is already fueling “exceptional consumer spending” according to credit- and debit-card spending data tracked by the bank. Distribution of $1,400 direct payments contributed to a 40% month-over-month spending leap among recipients. The boost might only just be getting started, the economists said in a note to clients.
Total card spending was up a whopping 45% from a year ago and 23% from two years ago for the seven days ending March 20, per BofA data.
“We think consumer spending is about to take off given the one-two punch of stimulus and reopening,” they added.
Hopes for a follow-up spending package added to the bank’s rosier forecast. The White House is organizing a proposal for up to $3 trillion in spending on infrastructure, climate, and education projects to further aid the country’s rebound. Such a plan would drive a more moderate boost to growth over a longer period of time, the bank said.
Tax hikes used to pay for a follow-up spending package could offset some gains, the team added.
Stronger 2021 growth should open the door for a swifter labor market recovery, according to the bank. The team expects a series of encouraging jobs reports starting with the March release scheduled for April 2. Payroll growth is projected to average 950,000 per month in the second quarter and pull the unemployment rate to 4.7% from 6.1%.
The rate will fall more modestly through the rest of the year to 4.5%, the team said. That matches the Fed’s own year-end estimate.
Bank of America’s bullish update follows similarly optimistic forecasts from Wall Street peers. Recent weeks have seen Morgan Stanley, UBS, and Goldman Sachs all lift their own estimates for 2021 GDP growth.
Morgan Stanley remains the most bullish of the bunch, estimating the economy will expand 8.1% this year and return to pre-pandemic output levels by the end of the first quarter. All three banks, along with Bank of America, hold decidedly more hopeful outlooks than the Fed due to expectations for another large-scale spending measure.
Goldman Sachs joined its Wall Street peers in revising its US economic outlook on Saturday, pegging an increasingly bullish forecast to Democrats’ latest stimulus package.
The team led by Jan Hatzius now expects US gross domestic product to grow 8% in 2021 on a fourth-quarter-to-fourth-quarter basis, according to a note published Saturday. That’s up from the previous estimate of 7.7%. The bank’s full-year growth estimate climbed to 7% from 6.9%.
The current-year projection largely hinges on President Joe Biden’s stimulus plan, as Goldman had initially expected a $1.5 trillion deal to reach Biden’s desk. The $1.9 trillion plan signed by the president on Thursday will accelerate the nation’s economic recovery through the middle of 2021 before tapering off into 2022, the bank’s economists said. Stimulus checks’ rollout over the coming months will concentrate the plan’s positive impact in the second quarter, they added.
Democrats’ stimulus package is probably the last major pandemic-era relief deal, but key tenets of the plan are set to be renewed as the economy climbs out of its virus-induced hole. The bill’s expansion of the child tax credit will probably be extended or made permanent by Democrats, according to Goldman.
The $300 supplement to federal unemployment benefits will expire as planned in September, but expanded eligibility and benefit duration policies included in Biden’s package could be prolonged, the team said.
Next stop: Infrastructure
Biden has said he aims to pass a massive infrastructure measure to further juice the US recovery. Such a plan will come with a price tag of at least $2 trillion, though details are scarce for now, Goldman said.Inclusion of funding for child care, health care, or education could push the sum to $4 trillion, though tax hikes would probably be needed to fund such a package, the bank added.
Biden campaigned on a $2 trillion package, though some Democratic senators indicate they favor even larger spending. Sen. Joe Manchin of West Virginia, an influential moderate member of the caucus, has said he could support up to $4 trillion, while Sen. Dick Durbin of Illinois, a member of party leadership, has said he could support $3 trillion.
Infrastructure spending would have a less pronounced impact on growth, but Goldman still sees the package driving a stronger expansion through 2022. The economy will expand 2.9% next year on a Q4-Q4 basis, up from the bank’s prior forecast of 2.4%.
Goldman’s update follows similarly optimistic changes elsewhere on Wall Street. Morgan Stanley lifted its forecast on Tuesday to 8.1% on a Q4-Q4 basis. US GDP will fully rebound to pre-pandemic highs by the end of the first quarter and trend higher in the coming months as the economy fully reopens, the team led by Ellen Zentner said.
Separately, UBS projected growth would reach 7.9% from Q4 2002 to Q4 2021 as stimulus, falling COVID-19 case counts, and continued vaccination opened the door for a strong recovery. The bank, like Goldman, had expected Republicans to water down the size of the latest relief package. Passage of the full bill can help consumer spending lift the ailing services industry into 2022, economists led by Seth Carpenter said in a note to clients.
Another massive tranche of fiscal stimulus is on the brink of passage, and UBS sees the measure fueling strong growth well into next year.
Economists led by Seth Carpenter expect US gross domestic product to grow 7.9% from the fourth quarter of 2020 to the fourth quarter of 2021. Growth on a calendar-year basis will total 6.6%, a larger-than-usual difference due to depressed first-quarter gains.
The economy will continue to expand at a robust pace in 2022 as a new fiscal support measure further boosts the recovery, the team projected.
The bank’s previous baseline scenario assumed Republican opposition would force President Joe Biden to shrink his $1.9 trillion stimulus plan, but that hasn’t taken place. With House Democrats poised to approve the measure in a final vote on Wednesday, the bill is set to lift the last pockets of the economy still struggling through lockdowns.
“The manufacturing sector is robust. The housing sector is surging. The part of the economy that is lagging is consumer spending on services,” the team said in a Tuesday note. Their updated forecast sees spending more evenly spread between goods and services.
Nearly all signs point to a healthy recovery in the coming months. The average rate of vaccination has stabilized above 2 million shots per day, according to Bloomberg data. At the same time, daily case counts are down significantly from their January peak and hospitalizations have similarly plummeted.
The pace of the rebound has raised questions as to whether Biden’s massive relief plan is necessary. Where Democrats claim the hole in the economy is large enough to warrant nearly $2 trillion in fresh aid, critics argue the proposal will overheat the economy and send inflation soaring.
UBS sees little risk of a lengthy inflation overshoot. April and May will likely see price growth sharply accelerate, but that rally will quickly give way to moderately higher inflation in line with the Federal Reserve’s target. The roughly 10 million jobs still lost to the pandemic are proof that there’s room for stronger-than-usual inflation, the bank said.
“We see sustained growth, well in excess of the long-run sustainable pace, but we also see a substantial amount of labor market slack,” the team added.
The outlook matches that outlined in recent weeks by Fed Chair Jerome Powell. The central bank expects reopening to lift prices at a fairly quick rate, but the decades-long trend of relatively weak inflation won’t “change on a dime,” Powell said in a late-February House hearing.
The Fed’s preferred inflation gauge will only trend at its 2% target by the end of 2023, UBS said. Rate hikes likely won’t arrive until 2024, though tapering of the central bank’s asset purchases could arrive as soon as October if the recovery surprises to the upside, the economists added.
Morgan Stanley has lifted its forecasts for 2021 economic growth in the US, citing a collection of encouraging trends for its brighter outlook.
Gross domestic product is now expected to grow by 8.1% on a fourth-quarter by fourth-quarter basis, up from 7.6%, the team led by Ellen Zentner said in a Tuesday note. Growth for 2022 was revised 0.1 points lower to 2.8%.
The bank also expects US GDP to fully rebound to its pre-pandemic level by the end of the current quarter. The output gap – a measure of how actual growth compares to maximum potential growth estimates – is expected to turn positive and reach 2.7% by the end of the year as the economy roars out of its virus-induced downturn. That would be the highest reading since the 1970s, according to the Bureau of Economic Analysis.
Economic reopening, a faster rate of vaccination, and stronger job growth all contributed to the adjustments, the economists said. New stimulus likely to win final approval in the House on Wednesday is in line with what the bank expected, but its earlier timing and the pace of first-quarter growth also added to optimism, the team added.
Morgan Stanley sees the unemployment rate tumbling further, though taking longer to reach lows seen before the pandemic. The gauge is projected to average 4.9% by the fourth quarter of 2021, down from the previous 5.1% estimate. Unemployment will sink further to 3.9% over the following year, the team said.
“A more robust return to work will be somewhat offset by rising labor force participation, but economic activity is strong enough to still generate a sharp decline in the unemployment rate,” the bank added.
The faster recovery will come at a cost, and Morgan Stanley’s latest inflation projections signal price growth will firm up later this year. Higher prices for rent, healthcare, and staples will lift inflation to 2.6% in April and May before it eases to 2.3% at the end of the year, according to the economists. Inflation will hold at the elevated level well into 2022, meeting the Federal Reserve’s above-2% target.
Still, significant tightening of monetary conditions isn’t likely to take place until 2023, the bank said. Policymakers will likely reiterate their dovish guidance when they meet next week and project near-zero rates staying at least through 2022. Yet the recovery and related effects on inflation and hiring will lead the Fed to begin shrinking its asset purchases in January 2022, Morgan Stanley said.
“By the middle of the year we expect the cloud of COVID will have thinned and the recovery will have picked up meaningfully enough that the Fed will see it as appropriate to begin taking its foot off the gas pedal,” they added.