Saving and fiscal stimulus are providing income replacement, so we see no cascading financial crisis. Also, productivity gains and inventory rebuilding argue for a boost to growth in 2021. The Blue Chip consensus U.S. real GDP forecast is 4.2% for 2021; we believe up to 6% is likely.
Growth in China has also been a key support for global economic activity in 2021. Manufacturing has performed well (goods > services) in the global economy. For this reason, rising COVID-19 case counts in China in 2021 are important. We’ll watch commodity prices closely in coming weeks around the Lunar New Year.
To be sure, there remains a rough patch for numerous countries to get through Q1 2021. U.S. initial jobless claims remained elevated at 900,000 last week. Mobility data & restaurant reservations have been choppy for another week. The economic goal of fiscal stimulus remains providing a bridge until the medical solution (vaccines) to the medical problem (virus) can take effect in 2021. Bloomberg’s measure of consumer comfort ticked up last week, after declining the week before.
A fiscal boost plus easy monetary policy remain the offset to the negative economic data. Despite the concerning labor backdrop & volatile data, U.S. bond yields have not moved much week over week (10yr currently 1.09%). A (still) massive economic shock and massive fiscal + monetary stimulus are fighting to a draw.
There remain some sources of strength. U.S. housing starts rose 5.8% m/m in Dec, with building permits up 4.5%. Single-unit starts surged +12.0% m/m and single-unit permits were up +7.8%. Strong demand for single-family homes continues to be the driver. The NAHB homebuilders index remained elevated, mortgage rates remain low, mortgage applications for purchase remain in an uptrend, and existing home sales increased +0.7% m/m in Dec. We also think it's worth mentioning that "single-family" homes will be more significant economic drivers than "multi-family" homes.
If there’s no financial crisis (thank you Fed, as we’ve noted previously) markets can continue to look thru near-term concerns. Large companies can access capital markets and tap into global growth (especially manufacturing). By the second half of 2021, economic re-openings should take over (providing a smoother glide path). Growth should not be scarce in 2021 overall.
That leaves the question of inflation. The Philly Fed index showed surges in unfilled orders and its price measures. Markit PMIs also were consistent with pricing pressure building in January. An inflation scare in 2021 is becoming more consensus. Fed Chair Powell was asked in his December press conference what he would do if confronted with a surge in inflation this year. He responded: “that has all the markings of a transient increase in the price level. So you can imagine that as people really want to travel again—let’s say, you know, that airfare, airfares—I’m just imagining this, right?—that they go up. But what inflation is, is a process whereby they go up year upon year upon year upon year. And if—given the inflation dynamics that we’ve had over the last several decades, just a single, single sort of price-level increase has not resulted in ongoing price-level increases.” (FOMC press conference, 12/16/2020)
The question is: will the market allow the Fed to take this stance without some discomfort?
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by FactSet.
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