U.S. Economic Growth Will Easily Top 6 Percent In 2021

Latest figures confirmed that the economic impact of the coronavirus was weaker than expected in the fourth quarter of 2020, resulting in a strong base effect for 2021. More recently, health data have pointed to a significant improvement (drop in new confirmed cases, hospitalizations and deaths) since mid-January while vaccines rollout has been faster than forecasted. As a result, the majority of states decided to ease restrictions. In the meantime, fiscal policy has been very accommodating with the $900 billion fiscal stimulus voted in December, the $7.6 billion Californian package in February and the $1.9 trillion fiscal boost signed in March. Given that more than $1.0 trillion of the $1.9 trillion package will hit the economy in the fiscal year that ends this September, U.S. GDP growth should remain elevated until at least 3Q21. Therefore, over the year, economic growth should easily top current expectations of +5.5% (Bloomberg consensus) and even the +6.0% threshold. Lastly, the huge total excess savings already accumulated since March 2020 and a potential infrastructure bill imply that risks associated to this optimistic scenario look skewed to the upside.

The economic impact of the coronavirus was weaker than expected in the fourth quarter of 2020

Despite the fact that the coronavirus pandemic gained traction in late 2020 and forced majority of states to implement new restrictions, the U.S. economy avoided another contraction in the fourth quarter. On a QoQ annualized basis, after rebounding by 33.4% in 3Q20, real GDP grew by 4.1% in 4Q20 (revised upward from 4.0%). The revision didn’t change the nation’s annual GDP which shrank 3.5%, the largest fall since 1946, when the U.S. demobilized after World War II. However, the slight upward adjustment resulted in a higher base effect for 2021, namely +2.0% (v +1.9% prior).

Health situation has improved substantially since mid-January

As I already noted, the improvement of the health situation is a key factor behind my optimism for 2021. On a 7-day moving average basis, CDC data showed that new confirmed cases of Covid-19 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 both hospitalizations and deaths.

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. According to latest estimates, these groups could be fully covered by April. In the meantime, President Joe Biden said that the U.S. will have enough vaccines for every adult by the end of May (two months earlier than the administration had previously estimated). As a reminder, according to the latest CDC update, more than 90 million doses were administered with the number of people receiving two doses now exceeding 30 million. Lastly, the U.S. is now administering more than 2 million doses a day on average, up from 900 thousands a day in the early days of the vaccination campaign.

Most of states started easing restrictions

With the number of hospitalizations subsiding, California and other states started loosening Covid-19 restrictions despite the potential spread of more contagious strains. The drag from curbs is therefore likely to fade during 1Q21.

As an example, latest BLS report shows February payroll gains were dominated by reopenings in the leisure and hospitality sectors, which accounted for 94% of the headline gain (355k out of 379k total). The bounce came despite particularly unfavourable weather conditions. Absences from work due to bad weather were three times larger than the February average in the 10 years prior, which suggests that the trend will keep improving in March. Meanwhile, consumer confidence in most exposed areas started rebounding in February. As a matter of fact, an easing of Covid-19 restrictions in California coincided with a sharp rise of the “present situation” component in the state.

Fiscal policy has been very supportive

Fiscal policy has been the other game changer in upgrading my U.S. economic growth forecast for 2021. The $900bn bipartisan relief bill passed in December already boosted the high level of excess savings accumulated since March 2020. According to my estimates, total excess savings over the period [Mar. 2020 – Jan. 2021] almost reached $1.7 trillion.

As I mentioned before, this huge amount will grow again in the coming months and could even top the $2 trillion mark (9.3% of nominal GDP) as early as March. In late February, California legislators approved a $7.6 billion COVID-19 package, including $600 stimulus checks. An estimated 5.7 million checks will go to low-income Californians, including families with children enrolled in CalWORKS, as well as elderly, blind and disabled recipients of Supplemental Security Income or the state’s Cash Assistance Program for Immigrants. The package also included more than $2 billion in grants for struggling small businesses.

Lastly, President Joe Biden’s $1.9 trillion Covid-19 relief bill cleared its final congressional hurdle on March 10, with the House passing the bill on a 220-to-211 vote. According to Bloomberg, “Most Americans will be receiving direct payments of $1,400, with the money starting to go out within days. The bill provides new health-insurance subsidies and child-tax credits, while extending $300 per week supplemental unemployment benefits into September. There’s also $360 billion for state and local governments, a bailout for troubled union pensions and funds to ramp up vaccinations and school re-openings.“

In my opinion, even if most of total excess savings will be concentrated in the top quintile of the income distribution, a part will probably flood the economy from 2Q21 as economic confidence returns and most affected sectors reopen. Another part could be directly spent later with the improvement of both regional and international mobility. In the meantime, top earners could affect a part of excess savings to financial assets and housing supporting activity indirectly.

A big infrastructure bill can’t be excluded

The focus has already shifted towards a big infrastructure package. The “build back better” program, that the White House says will be announced after Biden signs the $1.9 trillion aid bill, should be more expansive than the previous one and will probably reach $2.5 trillion.

SCOOP Emerging details @JoeBiden infrastructure plan via @LJMoynihan: Could be as high as $2.5 trillion over 4 years; some public-private partnerships that could leverage government spending. Details will start to leak in coming days as Biden finishes w the passage of stimulus

— Charles Gasparino (@CGasparino) March 10, 2021

However, the initiative looks far more complex to be implemented especially with Republican opposition to raise hikes in order to fund it. In addition, Sen. Joe Manchin (D-W.Va.) recently told Axios he will block a climate and infrastructure plan if Republicans are not included.

To put it in a nutshell, if an extreme risk (such as a new variant that is 100% resistant to vaccines) does not materialize soon, 2021 U.S. growth should easily exceed current expectations (Bloomberg consensus: +5.5%e) and top the 6% mark.