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Today, SIFMA unveiled the results of its biannual survey of the chief U.S. economists of 27 global and regional financial institutions. Earlier this year the world changed almost overnight, with the U.S. economy taking the sharpest drop into recession on record. Yet, as we head into the end of the year of COVID only forecasts, there are clear, statistical signs of economic recovery.
The U.S. recovery since the lockdowns has been strong, boosted by fiscal stimulus, and outperformance in some sectors of the economy, such as online retail sales and home sales. The economic recovery, as depicted by growth in real GDP, has clearly been in a V-/swoosh-shaped pattern.
“We are in for a difficult winter, but more fiscal support and positive developments on the vaccine front should help households and businesses look for that light at the end of the tunnel,” said Ellen Zentner, Chief US Economist at Morgan Stanley and chair of SIFMA’s Economic Advisory Roundtable. “The promising news is that we are asking ourselves how good next year will be, whereas in 2020 the question was how bad would it be.”
The Economy:
Economists expect GDP growth to finish 2020 at -2.5% (median forecast, 4Q/4Q). For 2021, the median forecast sees GDP increasing by 3.5% (4Q/4Q). On a quarterly basis, they forecast 2.6% GDP growth in 1Q21, improving to 4.2% in 2Q21.
In terms of the shape of GDP growth recovery, 53% responded Swoosh-shaped recovery, followed by 20% W-shaped. When looking at the business outlook, this changes to 57% Swoosh-shaped and 29% K-shaped.
Respondents expect the unemployment rate to end 2020 at 6.8%, falling in 2021 to 5.4% (4Q average). Employment growth (average monthly change in non-farm payroll employment) is expected to end 2020 at -729,000 but rebound to +393,000 in 2021.
Life After COVID:
57% of respondents expect the labor force participation rate not to return to the ~63% pre-COVID-19 average until beyond 2022, followed by 29% expecting it in 2H22.
Once a vaccine is distributed en masse, 38% of economists expect consumers to approach high-density activities at increased but nowhere near pre-COVID-19 levels, while another 38% expect it to return to pre-COVID-19 norms.
56% of respondents expect employees never to return to the office at pre-COVID-19 levels, followed by 19% each that expect it in 2H21 and 2H22.
Monetary Policy:
Economists indicated that should the Fed need to provide more policy accommodation, the top tool will be asset purchases/balance sheet (75%), followed by 63% responding yield curve control and 63% selecting increased use of the emergency lending 13(3) facilities.
100% said the U.S. won’t take its target rate into negative territory, and 56% expect the Fed will begin to lift its target range for the federal funds rate beyond 2023, followed by 31% in 2023.
In terms of inflation, respondents expect it to end 2020 at 1.2% for the PCE deflator and 1.5% for the core PCE deflator (year-over-year). Top factors in the outlook for core inflation were economic slack/unemployment and COVID-19 recovery time.
As for interest rates and credit markets, economists identified inflation/inflation expectations and U.S. economic conditions as the factors that have the greatest impact on expectations for long-term Treasury yields in 2020. For key rates movements, 100% expected the yield curve to steepen, and 67% expected the TED to remain the same.
Macro Policy:
When considering fiscal stimulus, 56% of respondents expect the next round to occur after inauguration, followed by 38% by end of this year. Economists are split when it comes to the format the stimulus will come in: 44% expect it to come in multiple targeted deals and 44% expect one large package.
If more stimulus does not occur, 43% of respondents indicate this could lower 2021 GDP forecasts by over 40 bps, followed by 36% by 20-40 bps.
As for trade policy and whether the U.S. will proceed with trade negotiations with China, 67% responded start up where they left off, while 33% responded with relax trade pressures. 57% of respondents expect the U.S. and China to eventually agree on light trade deal (around only eliminating tariffs, reducing the U.S. trade deficit with China), followed by 36% no progress after Phase 1 and 7% still holding out hope for a full deal (includes IP protection).
The press release can be found be here: https://www.sifma.org/resources/news/sifma-economic-roundtable-expects-gdp-growth-to-recover-fully-by-end-of-2021-at-3-5
The survey can be found here: https://www.sifma.org/resources/research/us-economic-survey-end-year-2020/
Note: The survey was populated before President-elect Biden indicated the tariffs imposed on China under the phase one trade deal will remain in place at the start of the new administration.
