Latest figures confirmed that the economic impact of the coronavirus was weaker than I expected in 2H20. After rebounding sharply in 3Q20, the US economy avoided a contraction in 4Q20. More recently, health data have pointed to a significant improvement since mid-January, which has pushed several states such as California to ease restrictions. Coupled with the $900 billion fiscal stimulus voted in December, US growth should remain resilient in 1Q21. In addition, the acceleration of vaccine rollout and a third fiscal stimulus would guarantee another strong quarter in both 2Q21 and 3Q21. In this context, US growth should exceed expectations in 2021 (Bloomberg consensus: +4.1%e).
Strong 3Q and 4Q GDP in 2020 resulted in a positive base effect for 2021
Despite the coronavirus pandemic gained traction in late 2020 and forced majority of states to implement restrictions, the US economy avoided another contraction in the fourth quarter. On a QoQ annualized basis, after rebounding by 33.4% in 3Q20, real GDP grew by 4.0% in 4Q20. GDP regained 76% of its pandemic-induced slump, ending the year 2.5% below the level of 4Q19. Over the past year, US GDP shrank 3.5%, the first negative reading since 2009 and the largest decline since 1946. Focusing on 4Q20, real personal consumption expenditures (PCE) growth slowed to 2.5% (down from 41.0% prior), reflecting falling government support and lockdown measures. Nevertheless, non-residential and residential investment kept supporting activity. As a matter of fact, investment in structures rose for the first time since 3Q19 because of a rebound in mining (after oil-related weakness in prior quarters). In this context, the significant GDP rebound in 2H20 resulted in a large positive base effect for 2021, namely +1.9%.
Health situation has improved substantially since mid-January
The recent improvement of health situation is a key factor behind my optimism for 2021. On a 7-day moving average basis, new confirmed cases of Covid-19 (adjusted for testing) have declined since the second week of January with a sharp drop of the positivity rate. This plunge was accompanied by a significant fall in hospitalizations as shown by the chart below.
In my opinion, vaccination can largely explain why hospitalizations started dropping with a large proportion of at-risk groups, health workers and over-65s combined, now being already infected or protected. As a reminder, according to the latest CDC update, more than 30 million doses were administered with the number of people receiving two doses now exceeding 5 million. As a result, on a 7-day moving average basis, the number of deaths should also normalize downward in the short term.
Meanwhile, on January 28th, President Joe Biden announced several changes to the country’s Covid-19 vaccine supply and distribution plans in an effort to streamline and increase vaccinations in states, tribal areas and territories. This statement came after Biden said earlier last week that he might be able to raise to 150 million his 100-day goal of administering 100 million vaccination shots for the coronavirus. Accordingly, the US should be able to vaccinate all its over-65s and health workers by the end of May (at the latest).
Several large states started easing restrictions
With a two-month spike in hospitalizations subsiding, California and other large states loosened Covid-19 restrictions despite the potential spread of more contagious strains. On January 26th, California Governor Gavin Newsom lifted the stay-at-home order.
In the meantime, Illinois, Michigan and Massachusetts also eased curbs. More recently, New York Gov. Andrew M. Cuomo announced indoor dining will resume with limited capacity in New York City restaurants. Starting on February 14th, the city’s restaurants can seat customers indoors at 25 percent maximum capacity, officials said.
Lastly, Bloomberg reported that New Jersey Governor Phil Murphy said he will consider easing Covid-19 restrictions if data continue to improve.
All in all, the drag from curbs is likely to fade during 1Q21. Therefore, GDP should avoid a contraction especially in a context where fiscal policy will be more supportive than in 4Q20, with the $900 billion stimulus voted in December.
Fiscal policy will be very supportive
Fiscal policy has been the other game changer in upgrading my US growth forecast for 2021. The $900bn bipartisan relief bill that passed in December will boost the high level of excess savings accumulated since March 2020. According to my estimates, total excess savings over the period [Mar. 2020 – Jan. 2021] should exceed $1.6 trillion.
Although the current price tag of Biden’s new $1.9 trillion economic rescue package looks elevated, another fiscal stimulus (something closer to $1 trillion) is likely to be passed this quarter and will probably include another batch of checks ($1000 seems to be a minimum) for households. As a result, total excess savings could exceed $2 trillion by 2Q21. In a context where health situation is supposed to improve substantially and visibility has also increased amid vaccines’ efficiency, excess savings could flood the economy sooner than expected, translating into a large GDP increase in both 2Q21 and 3Q21.
All in all, if an extreme risk (such as a new variant that is 100% resistant to vaccines) does not materialize, US growth should exceed expectations this year (Bloomberg consensus: +4.1%e) and even top the 5% mark.