Goldman Sachs sees lower US GDP growth in 2022 on worries Omicron could threaten recovery

Crowds of people crossing street on zebra crossing in New York, USA
Crowds of people crossing street on zebra crossing in New York, USA

  • Goldman Sachs cut its 2022 US GDP growth outlook on Sunday due to risks posed by the Omicron variant.
  • The bank now sees annual US GDP growth for 2022 at 3.8%, lower than a prior estimate of 4.2%.
  • This latest variant could further deteriorate the goods supply shortage if other countries tighten restrictions, Goldman said.

Goldman Sachs has cut its outlook for US economic growth in 2022, pointing to risks and uncertainty posed by the Omicron variant of COVID-19.

The bank now expects US gross domestic product growth to expand by 3.8% next year, lower than its prior annual estimate of 4.2%, and Q421/Q422 growth of 2.9%, down from 3.3%.

“While many questions remain unanswered, we now think a moderate downside scenario where the virus spreads more quickly but immunity against severe disease is only slightly weakened is most likely,” Goldman economist Joseph Briggs said in a note published Sunday.

Omicron could interfere with the reopening, but only a “modest drag” on service spending is likely as virus-control policies and economic activity have become less sensitive to the spread of COVID-19, the note said.

The Omicron variant, first detected in South Africa and Botswana in early November, has now spread to one-third of US states. But US medical adviser Anthony Fauci told CNN on Sunday “it does not look like there’s a great degree of severity” to the variant.

But Omicron could worsen the goods supply shortage if its spread in other countries warrants tightening of restrictions, according to Goldman’s note.

“This was a major problem during the Delta wave, but increases in vaccination rates in foreign trade partners since then should limit the scope for severe supply disruptions,” Briggs said.

Worker shortages are likely to persist as the spread of Omicron could push back the timeframe for some people to feel comfortable with returning to work, he added.

In terms of the outlook for inflation, Goldman put forth mixed implications. Lower demand for virus-sensitive services like travel could result in a temporary slowing of the pace of price inflation, but previous virus waves indicate such pressures will reverse, the bank said.

“In contrast, further supply chain disruptions due to Omicron or further delays in the recovery of labor supply could have a somewhat more lasting inflationary impact.”

Other analysts say it’s too early to judge the economic impact of Omicron, but believe most of the risks will likely be limited.

Read More: Fund managers are making 3 costly mistakes heading into 2022, Bank of America says — and investors can outperform by doing the opposite

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Wall Street’s verdict is in: the US economy is booming again

Wall Street New York Stock Exchange
Company earnings have consistently beaten Wall Street estimates in the second quarter.

  • A wave of positive economic data led JPMorgan and Morgan Stanley to boost their growth forecasts Wednesday.
  • The Atlanta Fed’s growth tool also improved, hitting Q4 growth will be the strongest since Q3 2020.
  • The estimates suggest the US economy is booming as hiring rebounds and Americans spend big for the holidays.

The 2021 recovery is going out with a bang.

Economists were flooded with new data on Wednesday, most of it good news for the US. Weekly filings for unemployment benefits slid to the lowest level since 1969. Inflation surged higher, but not as high as economists expected. Americans’ spending throughout October was stronger than forecasted.

Taken together, the reports signal the recovery is charging forward faster than expected. It was enough for Wall Street to lift their forecasts for fourth-quarter growth. Morgan Stanley economists boosted their estimate for current-quarter growth to 8.7% from 3% on Wednesday, citing “the wealth of data” that showed fresh strength throughout the economy. 

Economists at JPMorgan also lifted their hopes for recovery through the end of the year. The bank raised its estimate to 7% from 5% on Wednesday, similarly basing the bullish shift on the Wednesday data dump. The narrowing of the US trade deficit — how much more the country imports than it exports — was a “notable” surprise and suggests trade won’t be a huge drag on GDP, the team led by Michael Feroli said.

Other reports suggest the supply crisis that’s weighed on the recovery and fueled higher inflation is finally starting to fade, the bank added.

“The overall improvement in the data may be the first fruit of the modest easing in supply chain issues evident in some of the survey data,” JPMorgan said.

It’s not just Wall Street calling for a stellar fourth quarter. The Federal Reserve Bank of Atlanta’s GDPNow tool, which uses data releases to adjust its estimate for current-quarter growth, rose to 8.6% on Wednesday from 8.2%.

Everyone, it seems, thinks the recovery is bouncing back.

From third-quarter slump to fourth-quarter surge

The forecasts all sit significantly higher than the 2.1% growth seen through the third quarter. The previous three-month period saw the Delta wave slow hiring and drag on economic activity. The growth rate was the slowest of the pandemic recovery, and the lingering supply-chain crisis raised fears that the economic boom officially ended in the summer.

Wednesday data and bank reactions suggest a new boom started in October. Last month saw the Delta wave fade and retail sales rip to record highs. If the rosiest forecasts come to fruition, fourth-quarter growth will be the strongest since the third quarter of 2020, which itself marked the fastest growth since at least 1947.

The economic boom would also give Democrats a much-needed win in the economics department. President Joe Biden’s approval rating has taken a beating through the fall as Americans blame his administration for soaring prices and weakened economic growth. Consumer sentiment fell to decade lows in November due to “a combination of rapidly escalating inflation combined with the absence of federal policies that would effectively redress the inflationary damage,” Richard Curtin, chief economist at the University of Michigan’s Surveys of Consumers said. Extraordinary fourth-quarter growth would give the party something to celebrate, particularly as midterm elections approach. 

To be sure, the biggest risks to the recovery still loom large. The supply-chain crisis shows signs of easing, but there’s still much to be done to solve the widespread bottlenecks. Inflation will stay at elevated levels until the second half of 2022, Treasury Secretary Janet Yellen said in October. The administration is taking action to lower soaring gas prices, but major producers overseas could counter those efforts.

And even if those issues are resolved quickly, it’s likely still too late to save Democrats election hopes. Incumbent parties tend to lose control of Congress in their first midterm elections. There’s almost no statistical relationship between economic performance and midterm election outcomes.

Still, what might not be good enough for Democrats is still good for the country. A booming fourth quarter would help the US fully leave the Delta wave behind it and place the country much closer to a full recovery.

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Goldman Sachs cuts its China GDP forecast for 2021, warning the economy’s energy crunch is yet another growth shock

A worker works on an assembly line at an automobile manufacturing factory in Qingzhou, East China's Shandong Province, Sept. 28, 2021
  • Goldman Sachs lowered its 2021 GDP growth forecast for China to 7.8% from 8.2%, blaming energy constraints.
  • Pressure to meet environmental targets has affected 44% of China’s industrial activity, its economists said.
  • Evergrande-related risks to the property sector and regulatory clampdowns are other headwinds to the economy.
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Goldman Sachs has lowered its outlook for China’s economic growth in 2021, saying environment-focused curbs on energy consumption could pose “yet another growth shock” on top of the pandemic’s impact.

Economists at the Wall Street bank now forecast growth of 7.8% for the country’s gross domestic product year-on-year, down from the 8.2% expansion they previously expected.

“A relatively new, but tightening, constraint on growth comes from increased regulatory pressure to meet environmental targets for energy consumption and energy intensity,” the economists wrote in a report released Tuesday.

China aims to reach carbon neutrality before 2060, and to have carbon emissions hit their peak and decline before 2030. Increased pressure on Chinese provinces to meet these targets has led to curbs on usage, including scheduled power cuts, that have driven down factory production.

Suppliers to Apple and Tesla are among those affected, according to Reuters. Goldman estimates that 44% of China’s industrial activity has been hit by the cutbacks.

The economy was already grappling with the impact of restrictions brought in to quell outbreaks of the Delta coronavirus variant, the Goldman team noted, as well as regulatory clampdowns across several key industries.

“The peculiar nature of the COVID shock has made the economy more energy-intensive, at least temporarily,” they said, noting that an export boom has boosted demand for power from manufacturing industries.

“Meanwhile, efforts to reduce coal-fired related emissions and a reduction in coal imports have affected supply levels at least on the margin, contributing to a sharp increase in price,” the Goldman team said.

Evergrande’s debt crisis and related risks to the broader Chinese property sector are weighing on property sales and construction, adding to growth constraints, they noted.

Goldman’s team expects China’s economy to grow 4.8% in the third quarter and 3.2% in the fourth quarter compared with a year earlier, down from prior forecasts of 5.1% and 4.1%, respectively. China said its GDP grew 7.9% year-on-year in the April-to-June quarter this year.

Nomura and Fitch have also cut their forecasts for China’s overall GDP growth this year.

Read More: Investing pioneer Rob Arnott says value stocks could give investors returns of 10% a year over the next decade. Here’s why he thinks there may never be a better opportunity to buy them than the one available now.

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Wall Street is bummed the Delta wave has you spending less

Wall Street NY summer
People walk past the New York Stock Exchange (NYSE) on Wall Street on July 15, 2021 in New York City.

  • Goldman Sachs and Bank of America both cut GDP forecasts. The reason: not enough spending.
  • Americans’ spending slid more than expected in July, starving the recovery of its biggest booster.
  • Still, both banks see growth rebounding as the Delta wave weakens and Americans get back to shopping.
  • See more stories on Insider’s business page.

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.”

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Global growth will hit a 5-decade high in 2021 on vaccine-powered rebound, OECD says in upgraded forecast

Japan shopping street coronavirus
  • The OECD lifted its 2021 global GDP estimate to 5.8% from 4.2%, forecasting the fastest growth since 1973.
  • Group of 20 countries will see even stronger growth and emerging countries will lag, the organization said.
  • Central banks need to look through temporary inflation and keep policy support in place, the OECD added.
  • See more stories on Insider’s business page.

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.

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Biden sees a post-pandemic economic boom, but a small and short one

Biden
President Joe Biden.

  • Biden’s budget sees the economy booming for just two years before settling into slower growth.
  • GDP is forecasted to grow 1.8% annually in the mid-2020s, weaker than growth after past recessions.
  • The conservative estimates contrast with the Trump administration’s pattern of underdelivering.
  • See more stories on Insider’s business page.

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.

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US GDP will exceed its pre-pandemic peak by the end of June, Atlanta Fed model says

restaurants
  • The Atlanta Fed’s GDPNow estimate sees economic growth reaching 10.4% in the second quarter.
  • Such an expansion would place US GDP above its pre-pandemic record and mark a full recovery.
  • First-quarter growth reached 6.4% as stimulus and vaccination allowed the economy to reopen.
  • See more stories on Insider’s business page.

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.

To be sure, the last quarter’s expansion came in softer than the Atlanta Fed’s final first-quarter estimate of 7.9%.

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.

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America is getting ready for its post pandemic glow-up

eating restaurant spending reopening
Americans need to spend to help the economy recover.

  • America is reopening, and coming out of its pandemic shell could mean an economic boom. It’s a glow-up.
  • They’re already spending on outdoor activities, transit, restaurants, clothes, and beauty.
  • But America will also look different, and spending in other areas is weak. We don’t know what will emerge.
  • See more stories on Insider’s business page.

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.

And that’s why so many economists are predicting that a lockdown lift will see the biggest boomtime in a generation, potentially ushering in a new era in the US economy. Moody’s Analytics expects the US economy to grow 6.4% in 2021 after shrinking 3.5% in 2020.

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.

haircut
Beauty services are seeing a flood of bookings.

Retailers are gearing up for a “peacocking effect” and dress sales on the rise, while jeans are making a comeback, Insider’s Avery Hartmans reported. Blazers, stylish tops, and brightly colored sandals are all seeing signs of life. Retail CEOs everywhere from Gap to Urban Outfitters have noted signs of an incoming retail boon, with the latter already seeing an uptick in purchases of going-out clothes.

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.

Economists have thus upped their predictions for economic growth every month of the year, according to Bloomberg’s latest monthly survey, forecasting an annualized pace of 8.1% GDP growth in the second quarter.

An unequal recovery and unequal savings

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.

thanksgiving travel 2020
Airline spending has improved, but is still weak.

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.

And while Americans whiled away their quarantine days baking bread and reorganizing their closets, new trends emerged. Clothes are brighter, wide-legged jeans have replaced skinny jeans, side parts are no longer cool, and the “ugly fashion” movement has seen its pre-pandemic popularity accelerate as shoppers increasingly purchase things like grandpa shoes and Crocs

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.

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The IMF lifts its global growth forecast with vaccination and stimulus likely to be a shot in the arm

Kristalina Georgieva
IMF Managing Director Kristalina Georgieva speaks at a press conference in Washington D.C., the United States, on March 4, 2020.

  • The IMF will lift its forecast for global economic growth in a report set for release next week.
  • Vaccination and new US stimulus were grounds for the upgrade, the IMF’s managing director said.
  • Still, developing economies are recovering far slower than advanced countries, she added.
  • See more stories on Insider’s business page.

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.

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US economic growth will hit 7% this year on major stimulus boost, BofA says in latest upgrade

People Shopping covid NYC
People shopping at the Union Square Greenmarket as New York City continues reopening efforts on December 4, 2020.

  • BofA lifted its 2021 US GDP forecast to 7% from 6.5%, the latest in several upgrades by the bank.
  • The firm sees strong spending already and unemployment falling to 4.5% later this year.
  • The White House’s plan for up to $3 trillion in new spending can further lift growth, the bank said.
  • See more stories on Insider’s business page.

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.

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