Despite a pandemic winter, economists see green shoots
Initial signs of economic recovery are tenuous, but there are a growing number of them now giving hope to investors, business owners and ordinary Americans alike.
In addition to a continuing fall in weekly jobless claims, a cross-section of economic indicators offers a glimmer of hope for recovery, while corporate bottom lines and household finances both suggest the emergence of an economy that is inching closer to normalcy.
“The most important thing is to keep this economy going while we’re still in this area of uncertainty with regard to the virus,” said Tom Martin, senior portfolio manager at Globalt Investments. “What’s most important is that people can keep their jobs, or be able to pay their bills and not end up on the street if they don’t have a job,” he said.
To that end, lawmakers have been pushing new plans for stimulus that include unemployment support and direct payments for many Americans. A new report from the nonpartisan Congressional Budget Office, though, finds improvement even if 2021 is another year characterized in Washington, D.C., by partisan gridlock.
The CBO found that real GDP is expected to bounce back to its pre-pandemic level by the middle of this year, growing by 3.7 percent in 2021, even absent additional stimulus — although a lack of fiscal support would put a drag on the jobs recovery: The CBO predicts that the number of people in the labor force will not reach its pre-pandemic level until 2024.
Some policymakers have recently expressed a brightening outlook: Raphael Bostic, president of the Atlanta Federal Reserve, said this week that the American economy could rebound more quickly than anticipated. Highlighting what he called positive recent developments, Bostic said, “We should be open to the possibility that things might happen more strongly than they would otherwise.”
Market observers say this is already taking place on Wall Street as earnings season has given investors reason for optimism. Traders’ expectations of a rebound have, by and large, been met with positive quarterly reports. “Earnings are bouncing back,” said David Wagner, portfolio manager and analyst at Aptus Capital Advisors. “About 80 percent of these companies are beating estimates by now. It shows the resiliency of corporate America and how they’ve been boosted by fiscal and monetary stimulus,” he said.
In the early days of the pandemic, companies slashed their forward guidance or stopped offering it entirely. Wagner said companies now are beating these pessimistic expectations, but he added that the bar has been raised relatively quickly. “Forward guidance is really strong, and management commentary about future guidance is also very strong,” he said.
There are even signs that Main Street is slowly recovering. The Paychex | IHS Markit Business Employment Watch, a snapshot of small business health, found that economic conditions have more or less stabilized on a month-to-month basis. “The headline is that there’s actually some underlying strength that we’re pretty hopeful about,” said Frank Fiorille, vice president of risk, compliance and data analytics at Paychex.
Fiorille noted that business conditions actually improved in five of the eight sectors the index tracks, with leisure and hospitality trailing, and credited fiscal support with keeping small businesses on life support in the sectors that are now showing improvement. “The stimulus that the government has put in, and specifically things around the Paycheck Protection Program, there’s a lot of stuff in there that’s really helping small to midsize businesses get to the other side,” he said.
Household finances have been supported by stimulus to individuals, and analysts say this leaves consumers in a position to hit the ground running. Unlike most recessions, from which families and businesses tend to emerge saddled with debt, “We don’t have that problem,” said Megan Horneman, director of portfolio strategy at Verdence Capital Advisors. “We came into the pandemic with very strong corporate balance sheets, very strong household balance sheets,” she added.
The single biggest factor on which the strength and speed of the rebound will depend is ramping up the rollout of the Covid-19 vaccine, experts say.
The unequal nature of the pandemic’s impact, the lockdowns that distorted consumers’ behavior and limited their ability to spend, has resulted in substantial personal savings just sitting on the sidelines. Jamie Cox, managing partner for Harris Financial Group, said the release of pent-up demand will be an economic boon. “Consumers are in a better financial position overall than they’ve been in a long time. Spending has dropped and incomes for a lot of Americans have stayed the same or gone up… which means they have the capacity to keep the consumption engine of the economy alive,” he said.
Cox added that fiscal stimulus along with accommodative monetary policy have made an economic base case for expansion. “There’s a lot of money overall in the system, and that’s supportive of economic growth,” he said.
The single biggest factor on which the strength and speed of the rebound will depend is ramping up the rollout of the Covid-19 vaccine, experts say — and the expectation that President Joe Biden’s administration will be able to coordinate production and delivery, particularly in areas where access still lags. “There’s this very positive potential out there, but we’re by no means out of the woods yet as far as getting the virus under control,” Martin said.
“We think the biggest fix to all this is speeding up vaccine distribution. Right now, that’s what is holding back job creation and holding back consumer spending,” Horneman said.
Policymakers say a massive vaccination campaign also will pay labor market dividends. In a CNBC interview Tuesday, Dallas Fed president Robert Kaplan said more stimulus is needed so vaccines can be deployed and schools reopened safely so that many working mothers — whose labor force participation has suffered in the pandemic — can go back to their jobs.
Cox echoed that point, saying: “It’s my view that the vaccination situation is probably going a lot better and I think that’s one of the reasons you start to see the information come out from the CBO and Wall Street firms updating their GDP forecasts. The next wave of this is going to happen when pharmacies come online in a big way,” he predicted. “Critical mass happens a lot faster that way.”