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Economic Research: Staying Home For The Holidays

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Economic Research: Staying Home For The Holidays

President-elect Joe Biden won the U.S. presidential election, with what appears to be a divided Congress (the Georgia Senate Jan. 5 run-offs will be the deciding factor). With the coronavirus strengthening during flu season and economic momentum weakening, President-elect Biden will have his work cut out for him during his first year as president.

The U.S. economy post-election won't be very different than where it was before Nov. 3, which is a slow recovery with a 25%-30% risk of recession, closer to the top of the range. We expect U.S. economic growth to decline by 2.3% (quarter over quarter annualized) in the fourth quarter, closing 2020 at -3.9% for the year. On its own, a one quarter decline does not signal recession. But it increases chances that the U.S. will see another downturn in the near future.

As this recovery unfolds, the big risks have increased: no coronavirus vaccine yet available as the country heads into flu season and a lack of new fiscal stimulus, with more pandemic-related stimulus expiring at year-end. Increasing trade tensions with China only makes matters worse.

S&P Global Economics expects real GDP to contract 3.9% this year and grow a modest 4.2% in 2021. All of this assumes passage of a $1 trillion stimulus package before year-end. Even with that boost, by the fourth quarter of 2023, real GDP would still be $96 billion (or 1.9%) smaller than what we expected in our December 2019 forecast. Adding to the pain is that the U.S. unemployment rate is unlikely to fall to its precrisis low until after 2023.

Table 1

S&P Global U.S. Economic Forecast Overview
November 2020
2019 2020f 2021f 2022f 2023f
Key indicator
Real GDP (year % ch.) 2.2 (3.9) 4.2 3.0 2.1
(September forecast) (4.0) 3.9 2.4 2.6
Real consumer spending (year % ch.) 2.4 (4.3) 5.0 3.6 2.7
Real equipment investment (year % ch.) 2.1 (6.2) 8.5 2.9 1.1
Real nonresidential structures investment (year % ch.) (0.6) (10.3) 0.2 4.6 2.2
Real residential investment (year % ch.) (1.7) 3.9 5.5 2.9 2.4
Core CPI (year % ch.) 2.2 1.7 1.9 1.8 1.9
Unemployment rate (%) 3.7 8.3 6.4 5.6 4.6
Housing starts (annual total in mil.) 1.3 1.3 1.4 1.4 1.4
Light vehicle sales (annual total in mil.) 17.1 14.4 16.4 16.7 16.8
Federal Reserve's Fed funds policy target rate range (year-end %) 1.5-1.75 0-0.25 0-0.25 0-0.25 0-0.25
Note: All percentages are annual averages, unless otherwise noted. Core CPI is consumer price index excluding energy and food components. f--forecast. Sources: BEA, BLS, The Federal Reserve, Oxford Economics, and S&P Global Economics Forecasts.

Since June, S&P Global Economics has said that it is not a far-fetched possibility that we could get a scenario of no more fiscal stimulus and a COVID-19 resurgence that cripples growth in the fourth quarter (compared with our baseline). Unfortunately, this downside scenario seems more likely. In our downside scenario, GDP will decline for two consecutive quarters. In such a scenario, the economy is only likely to get back to its pre-pandemic level in the second half of 2022, with higher risk of leaving the economy with longer-term scarring.

Chart 1

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The March CARES Act helped support struggling families through large fiscal transfers to households, such as stimulus payments and enhanced unemployment insurance, and moratoriums on mortgages. But the doors are closing. Household stimulus payments and enhanced unemployment insurance for displaced workers have already expired with additional support to households highly uncertain. Moreover, renters' relief has already expired (though a public health government mandate will help keep tenants in their homes). Other moratoriums and emergency unemployment benefits are scheduled to expire at the end of December. Combined, consumer spending and household balance sheets (especially for lower income households) are at risk heading into the New Year.

With currently no agreement on new stimulus in the making, the worry now is that there will be no stimulus until next year, if at all. Moreover, indecision among policymakers will influence private-sector expectations and spending plans. Households, for example, may delay spending activity on worries that the modest recovery may collapse. Even if Congress agrees on further stimulus ahead of a Continuing Resolution on Dec. 11, the money from any agreement won't make it in time to support fourth-quarter economic activity.

A Ho-Hum Holiday And Sluggish New Year

The economy, which has recouped two-thirds of the economic losses from the COVID-19 recession, is now showing signs of weakness this holiday season in the midst of climbing COVID-19 infection rates. While promising vaccine news fills the airwaves as the weather chills, the viral spread as people head indoors leaves the near-term economic outlook at risk.

The slowdown came after solid economic gains this summer (not enough to regain the $1.95 trillion lost by COVID-19-related closures). Initial jobless claims have climbed closer to the 800,000 claims of August, portending signs that the healthier payroll data since May has come to a close. While initial jobless claims are nowhere near the over 6 million weekly claims at the height of the crisis, it is more than three and a half times higher than precrisis monthly average of 220,000. Moreover, with all the low hanging fruit picked on the jobs front, as the virus spreads, further quarantines--either mandated or self-imposed--will weaken the jobs market into winter. We don't expect to see the jobs market regain all the 22.2 million jobs lost until first-quarter 2023. The unemployment rate will not reach precrisis levels until second-quarter 2024.

The housing-related bounce in consumer spending has slowed. While housing-related spending will continue to provide support next year, less so than in 2020 and much of the pent-up demand has been spent. Unfortunately, the pandemic will continue to weigh on people-facing services, making an even more challenging environment for those businesses that survived the first round of shutdowns. Car sales strength supports the desire to avoid public transport with low interest rates providing another incentive.

Despite the decline in the personal saving rate to 13.6% in October from its historic peak of 33.6% in April, it remains much higher than its precrisis 1975 historic average of 7.3% and its precrisis high. The precrisis level in savings equilibrium likely points to a post-pandemic boost in consumer spending for the U.S. economy once the vaccine is available. Still, that delayed spending bounce may be for a select few. With the unemployment rate still high and possibly climbing in the near term, particularly in low-wage jobs, and extended unemployment benefits coming to an end, many households will be unable to spend into the New Year.

People-facing businesses and industries continue to struggle and will likely remain challenged into next year. They have seen only a modest lift from recession lows in April amid continued government restrictions on capacity, expiring government stimulus, and fear-capped customer demand.

The challenging economic environment comes as the U.S. government remains far apart in reaching an agreement on providing additional stimulus to those households and businesses displaced by the COVID-19 recession.

Please Sir, I Want Some More

Recognizing the heightened uncertainty around negotiations, we expect an agreement of around $1 trillion will be reached next year as economic conditions worsen. That is just enough to keep first-quarter in positive territory--but barely, at just 0.8%. But the agreement comes too late for the holidays, with fourth-quarter GDP in negative territory as consumer spending falls sharply in December. The slow recovery path in the near term is followed by quicker growth in the second and third quarters of next year with increasing availability of the vaccine. In our base case, the U.S. real GDP finally gets back to precrisis levels in the third quarter of 2021.

We assume households, businesses, and, to a lesser extent, state and local governments receive help, with about three-fifths of the $1 trillion coming in 2021 and two-fifths over 2022 and 2023. Assuming a multiplier effect in line with Brookings/Hamilton/CBO estimates, you would get a weighted average impact of $500 billion over our forecast horizon of 2021, 2022, and 2023, adding about 2.5 percentage points to growth over the three-year period. With no stimulus, all else equal, the economy would be 1.5 percentage points smaller in 2021, with another 1 percentage point drag spread out in 2022 and 2023.

Even if a 2.5 percentage point boost to economic activity through deficit-financed government transfers were to occur, it would still not be enough to fill the estimated current 3.6% negative output gap (as of third-quarter 2020). Perhaps that is why the Fed is not likely to raise rates until 2024. Based on our analysis, the output gap will finally get to its historic average of negative 0.2% sometime in 2024. We expect the Fed to raise rates sometime in 2024 once its average inflation target holds above 2%.

Stimulus negotiations during a lame-duck presidential period are tricky, for sure. We assume Congress will reach an 11th-hour compromise on a Continuing Resolution to keep the government open before Dec. 11. But risks are high. Already-extended jobless benefits have expired, and with the majority of out-of-work Americans unemployed for at least 27 weeks, their traditional benefits will also expire soon. Moreover, further job cuts from state and local governments, whose budgets have been crushed by COVID-19, will add pressure if federal stimulus isn't available. They would need to tighten their belts further, increasing chances of more jobs lost in December.

Unemployed Elves

The jobs market continued to slow in October, with job gains at 638,000. That was less than September's 672,000 gains, though close to our expectation. Gains were driven completely by the private sector, which came with broad-based increases across both goods- and service-providing industries. Under normal times, job gains of that size would signal a hot economy--but these aren't normal times.

Despite historic record job gains since May, the U.S. economy still needs to regain at least 10 million jobs to regain the 22.2 million jobs lost from the COVID-19 recession. Worryingly, this was also likely the easier half of the jobs recovery. That next half is going to take some time as we go through the "sticky" part of the unemployment pool. Moreover, the four-week moving average of initial jobless claims, currently at 749,000, which is three and a half times precrisis levels, is now climbing higher, suggesting that job market gains may have stalled.

The unemployment rate fell a full percentage point to 6.9% in October, for good reasons. People entered the labor force and even more got employed. While we're happy to see more people rejoining the workforce, the labor force has lost 3.68 million workers since February. Assuming the labor force was at February levels and accounting for the Bureau of Labor Statistics (BLS) unemployment mismeasurement estimate, the unemployment rate would be 9.3%, a full 2.4 percentage points higher than the headline.

Chart 2

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Chart 3

image

Still, encouragingly, the number of unemployed designated as "permanent job losers" edged down together with "temporary job losers." Still, the share of permanent job losers to total unemployed remains around 33.3%. Moreover, the share of long-term unemployed is now at a disturbing 32.5%.

Indeed, while continuing jobless claims have trended lower, it's for the wrong reasons. It is not because many long-term unemployed workers found a job, but instead because their unemployment benefits have expired. Indeed, the longer a worker stays unemployed, the harder it is to rejoin the workforce. Rightly or wrongly, business managers assume that their skills have atrophied and don't offer them a job.

Extended unemployment benefits have already expired, and for the long-term unemployed, traditional unemployment benefits are also nearing the maximum number of weeks allowed while those who received pandemic unemployment assistance benefit checks will also lose benefits at the end of the year.

Less Cushion For Some

The 0.7% month-over-month increase in wages and salaries was no match for the 6.2% drop in individual government transfer payments in October. That largely explains the 0.8% overall drop in disposable personal income this October.

Despite the overall drop in income, the personal saving rate remained high, at 13.6%, much larger than its precrisis historical average back to 1980 of 7.3% and higher than its precrisis high of 13.2%. It's also 5.9 percentage points larger than the six-month moving average of the February saving rate (7.5%). Extending it back to 1959, its 13.6% rate is above its precrisis rate of 8.8% though below its 1975 peak of 17.3%. Now holding well above its historic average for eight months, the average household will likely have the accumulated savings to boost spending once the crisis is over.

Chart 4

image

But averages are deceiving. People working for industries less affected by social distancing, or for industries benefiting from current restrictions, have fared relatively better than those workers caught in the crossfire--people working in people-facing industries such as leisure and hospitality. While displaced workers in these industries benefited from generous unemployment benefits, the unemployment rate in people-facing industries remains extremely high and the expiry of benefits leaves a solemn New Year.

The still-high saving rate is in part driven by the extraordinary government stimulus to households during the crisis (extended federal unemployment benefits and the $1,200 checks to households) and also that discretionary spending has been handicapped, particularly for high-income households. Vacations and leisure activities, for example, have been canceled for the foreseeable future, leaving households with more cash on hand. While some of that extra cash from canceled leisure activities went into home furnishings, it wasn't enough to offset the extra savings.

The savings rate was supplemented by large government unemployment transfers. With the end of the federal extended unemployment benefits, we could expect to see the saving rate decline in 2021. How sharp a decline depends on if the government agrees to additional stimulus for the unemployed and, if so, how much unemployed workers receive.

Furthermore, amid an extremely weak jobs market and concerns that government support is no longer available, economic worries may keep households cautious when opening up their checkbooks, suggesting that the saving rate will only slowly decline. That suggests that the consumer spending boost right after the recovery won't be the trend. From here on out, we suspect spending activity will settle down to a sustainable pace that reflects a jobs sector far from healed.

Spending Is Homeward Bound

Retail sales slowed to a surprising 0.3% gain in October, the smallest gain in this recovery, though it follows a 1.6% increase in September and has been above pre-pandemic levels since June.

Sales at housing-related retailers remained impressive in October, with sales at building material, garden equipment, and supply stores at an all-time high. This is consistent with the gains in the housing sector.

Chart 5

image

Internet sales remain ahead of the pack, as COVID-19-related fears led to more online shopping instead of visiting the mall. Sales excluding autos, gas, and building materials moderated to only a 0.1% gain for the month, following a gain of 1.2% in September. The weakening occurred despite overall sales getting a boost from Amazon's Prime Day sales (moved to October from July this year), as nonstore sales surged 3.1% in October.

Unfortunately, spending at people-facing businesses remains weak. Restaurants and bars sales declined in October, and we expect such sales, which remain well under normal levels, to continue to decline in the coming months as state and local governments increase restrictions on indoor dining to slow the spread of COVID-19 and as colder weather makes outdoor dining less appealing.

Biden Term

President-elect Biden won the popular vote and surpassed the 270 votes needed for an Electoral College victory. However, the results were tighter than what most polls expected, with President Donald Trump seeing sizable gains in support. Additionally, while Democrats kept a majority in the House of Representatives (but lost a few seats in the process), control of the Senate has yet to be decided. Georgia will host two runoffs for Senate seats on Jan. 5. Moreover, the Senate will be up for grabs again in two years, with 22 Republican seats at stake in the 2022 midterm elections, relative to the 13 Democrats hold. However, Republican control of state houses could affect redistricting, making it challenging for Democrats to hold the majority in the House in 2022.

If President-elect Biden starts his first term with a gridlocked Congress, many of his long-term structural policy promises will likely remain unfulfilled for at least a while (for more see "Next Steps For President-Elect Biden: Containing Coronavirus And Stabilizing The U.S. Economy," Nov. 19, 2020). If the Republicans keep the Senate in 2022, the new president's big structural policy promises could languish in the last two years of his first term. Still, we never thought President-elect Biden would focus on long-term structural policy issues right out of the gate. We believe his first year (and certainly his first 100 days, given the rapid spread of COVID-19) will be dominated by stabilizing the health of both the American people and the U.S. economy.

As we've seen in the current fight to extend emergency stimulus, a gridlocked Congress may not only limit President-elect Biden's plans to fight the health and economic effects of the virus, but it may also impede his policy options later on, particularly leading up to the 2022 midterm elections. As has been the case with presidencies of late, executive order and other nonlegislative powers will be significant tools.

Interestingly, there is some overlap in the Democratic and Republican agendas in areas such as trade and national security despite gridlock on Capitol Hill. There may also be bipartisan support for increased infrastructure spending (though "who pays" may kill any attempt at compromise). Still, with another surge in COVID-19, making it the third-leading cause of death in 2020, there may even be public support to invest in public health infrastructure during President-elect Biden's term.

Table 2

S&P Global U.S. Economic Outlook (Baseline)
November 2020
--2020-- --2021f-- 2017 2018 2019 2020f 2021f 2022f 2023f
(percent change) Q1 Q2 Q3 Q4f Q1f Q2f Q3f
Key indicator
Real GDP (5.0) (31.4) 33.1 (2.3) 0.8 12.4 7.2 2.3 3.0 2.2 (3.9) 4.2 3.0 2.1
(in real terms)
Domestic demand (5.9) (30.3) 36.8 (1.8) (0.8) 12.5 7.3 2.5 3.2 2.3 (3.8) 4.4 2.9 1.9
Consumer spending (6.9) (33.2) 40.7 (3.8) 1.0 17.0 5.1 2.6 2.7 2.4 (4.3) 5.0 3.6 2.7
Equipment investment (15.2) (35.9) 70.1 1.4 1.5 11.4 12.1 3.2 8.0 2.1 (6.2) 8.5 2.9 1.1
Intellectual property investment 2.4 (11.4) (1.0) 0.4 0.1 11.9 13.5 4.2 7.8 6.4 (0.0) 3.3 3.0 0.7
Nonresidential construction (3.7) (33.6) (14.6) (0.1) 1.1 13.8 14.8 4.2 3.7 (0.6) (10.3) 0.2 4.6 2.2
Residential construction 19.0 (35.5) 59.3 4.0 (2.3) 6.8 7.0 4.0 (0.6) (1.7) 3.9 5.5 2.9 2.4
Federal govt. purchases 1.5 16.5 (6.2) (3.7) (1.3) (2.0) (1.8) 0.3 2.8 4.0 4.1 (1.6) (2.0) (1.2)
State and local govt. purchases 1.1 (5.4) (3.3) (2.8) (4.5) (3.4) 0.4 1.2 1.2 1.3 (0.9) (2.9) 0.6 0.6
Exports of goods and services (9.5) (64.4) 59.7 (6.3) 1.2 10.1 14.2 3.9 3.0 (0.1) (14.4) 2.1 8.8 5.4
Imports of goods and services (15.0) (54.1) 91.1 (0.9) (10.8) 12.0 13.9 4.7 4.1 1.1 (11.0) 4.3 7.3 3.4
CPI 2.1 0.4 1.3 1.2 1.5 2.7 1.8 2.1 2.4 1.8 1.2 1.9 1.8 2.0
Core CPI 2.2 1.3 1.7 1.7 1.7 2.4 1.7 1.8 2.1 2.2 1.7 1.9 1.8 1.9
Nonfarm unit labor costs 11.3 6.7 (7.8) 10.0 3.7 (6.0) (1.7) 2.7 2.1 2.4 3.9 0.9 1.5 2.0
Productivity trend ($ per employee, 2009$) (2.8) 18.5 4.7 (7.7) (4.0) 7.2 3.7 1.1 1.4 1.0 2.7 0.8 0.4 0.4
Unemployment rate (%) 3.8 13.0 8.8 7.3 6.8 6.5 6.2 4.3 3.9 3.7 8.3 6.4 5.6 4.6
Payroll employment (mil.) 151.9 133.7 140.8 142.3 144.1 145.8 147.1 146.6 148.9 150.9 142.2 146.3 150.0 152.6
Federal Funds rate (%) 1.3 0.1 0.1 0.1 0.1 0.1 0.1 1.0 1.8 2.2 0.4 0.1 0.1 0.1
10-yr. T-note yield (%) 1.4 0.7 0.7 0.8 1.1 1.3 1.5 2.3 2.9 2.1 0.9 1.4 1.7 2.0
Mortgage rate (30-year conventional, %) 3.5 3.2 3.0 2.8 2.9 3.0 3.1 4.0 4.5 3.9 3.1 3.0 3.2 3.3
3-month T-bill rate (%) 1.1 0.1 0.1 0.1 0.2 0.2 0.2 0.9 2.0 2.1 0.4 0.2 0.2 0.2
S&P 500 Index 3,069.3 2,928.8 3,321.6 3,403.4 3,557.5 3,600.1 3,546.0 2,448.2 2,744.7 2,912.5 3,180.8 3,570.2 3,708.1 3,939.5
S&P 500 operating earnings (bil. $) 1,970.5 1,661.3 1,487.2 1,362.1 1,466.9 1,801.6 2,064.7 1,588.4 1,770.5 1,880.9 1,620.3 1,958.0 2,271.3 2,192.1
Current account (bil. $) (446.1) (682.2) (767.2) (744.5) (652.4) (677.1) (693.6) (365.3) (449.7) (480.2) (660.0) (681.7) (672.3) (624.0)
Exchange rate (Index March 1973=100) 111.2 112.4 107.2 105.8 105.6 105.3 104.9 108.9 106.4 110.1 109.1 105.2 105.1 105.4
Crude oil ($/bbl, WTI) 45.8 27.8 40.9 35.0 40.0 44.2 46.0 50.9 64.8 57.0 37.4 44.2 47.5 51.1
Saving rate (%) 9.6 25.7 15.8 13.3 12.3 9.6 9.1 7.2 7.8 7.5 16.1 10.1 8.8 8.0
Housing starts (mil.) 1.48 1.08 1.43 1.38 1.36 1.35 1.37 1.21 1.25 1.30 1.34 1.36 1.36 1.36
Unit sales of light vehicles (mil.) 15.2 11.4 15.4 15.6 16.1 16.3 16.5 17.2 17.3 17.1 14.4 16.4 16.7 16.8
Federal budget balance (fiscal year unified, bil. $) (356.6) (386.9) (2,000.9) (387.6) (632.9) (607.9) (210.6) (665.8) (779.0) (984.4) (3,131.9) (1,748.4) (1,309.5) (1,248.1)
Sources: Oxford Economics, S&P Global Economics forecasts. f--Forecast. Notes: (1) Quarterly percent change represents annualized growth rate; annual percent change represents average annual growth rate from a year ago. (2) Quarterly levels represent average during the quarter; annual levels represent average levels during the year. (3) Quartery levels of housing starts and unit sales of light vehicles are in annualized millions. (4) Quartery levels of CPI and core CPI represent year-over-year growth rate during the quarter. (5) Exchange rate represents the nominal trade-weighted exchange value of US$ versus major currencies.

Upside And Downside Scenarios

Each quarter, S&P Global economists project two scenarios in addition to their base case, one with faster growth than the baseline and one with slower. In this report, scenarios are based on risks to baseline growth coming from the timing of vaccine availability to the wider public, strength and duration of capacity restrictions, and amount of further fiscal support.

Upside: It's a wonderful life

In the upside scenario, we anticipate weaker nationwide lockdowns in December compared with our baseline case but still meaningful enough to stall economic growth in the fourth quarter. Phasewise reopening is assumed to take place at a quicker pace starting January on the back of accelerated vaccine dispersion. Consumer sentiment bumps up sharply in anticipation of a wonderful life approaching sooner than expected. Government stimulus in the tune of $1.5 trillion ($1 trillion in baseline) also helps sustain a higher growth path for a longer time compared to our baseline.

In this scenario, the U.S. economy contracts by 3.8% in 2020 and rebounds 4.5% in 2021. It continues to grow at a higher pace in 2022 and 2023 versus our baseline, with 3.5% and 2.4% annual average real GDP growth, respectively. Consumer spending on an inflation-adjusted basis would track above 3% for three consecutive years (2021-2023), the first of such instances since the mid-2000s (during the housing market bubble).

Higher growth rates also mean the unemployment rate falls under 4% by mid-2023 and core CPI inflation (actual and expectations) start to average 2% consistently on a 12-month-rolling average basis starting in the second half of 2022. The Fed raises its policy rate for the first time in this recovery in mid-2023 (versus mid-2024 in baseline).

Just as the world bounces back from the global COVID-19 recession, trade tensions would ease. Together, the global recovery would help business sentiment rebound across both the industrial and service sectors, but the S&P 500 would be not outstrip the baseline forecasts by much given expectations for the Fed to raise rates sooner than later.

Table 3

S&P Global U.S. Economic Outlook (Upside)
November 2020
(Percent change) 2017 2018 2019 2020f 2021f 2022f 2023f
Key indicator
Real GDP 2.3 3.0 2.2 (3.8) 4.5 3.5 2.2
(in real terms)
Domestic demand 2.5 3.2 2.3 (3.7) 4.8 3.6 2.2
Consumer spending 2.6 2.7 2.4 (4.1) 5.6 4.4 3.0
Equipment investment 3.2 8.0 2.1 (6.2) 7.7 4.3 1.4
Intellectual property investment 4.2 7.8 6.4 (0.0) 2.7 4.2 1.0
Nonresidential construction 4.2 3.7 (0.6) (10.3) (0.6) 6.1 2.5
Residential construction 4.0 (0.6) (1.7) 3.7 7.4 0.9 2.4
Federal govt. purchases 0.3 2.8 4.0 4.1 (1.6) (2.0) (1.2)
State and local govt. purchases 1.2 1.2 1.3 (0.9) (2.9) 0.6 0.6
Exports of goods and services 3.9 3.0 (0.1) (14.0) 3.1 8.9 6.1
Imports of goods and services 4.7 4.1 1.1 (10.9) 6.0 8.9 5.1
CPI 2.1 2.4 1.8 1.2 1.9 1.9 2.2
Core CPI 1.8 2.1 2.2 1.7 1.8 1.9 2.1
Nonfarm unit labor costs 2.7 2.1 2.4 3.8 0.7 1.7 2.1
Productivity trend ($ per employee, 2009$) 1.1 1.4 1.0 2.8 1.0 0.5 0.4
(Level)
Unemployment rate (%) 4.3 3.9 3.7 8.2 6.2 5.1 4.0
Payroll employment (mil.) 146.6 148.9 150.9 142.3 146.5 150.8 153.5
Federal Funds rate (%) 1.0 1.8 2.2 0.4 0.1 0.1 0.3
10-yr. T-note yield (%) 2.3 2.9 2.1 0.9 1.3 1.8 2.2
Mortgage rate (30-year conventional, %) 4.0 4.5 3.9 3.1 2.9 3.2 3.5
3-month T-bill rate (%) 0.9 2.0 2.1 0.4 0.2 0.2 0.3
S&P 500 Index 2,448.2 2,744.7 2,912.5 3,192.9 3,720.8 4,007.5 4,190.2
S&P 500 operating earnings (bil. $) 1,588.4 1,770.5 1,880.9 1,644.3 1,992.8 2,278.7 2,253.6
Current account (bil. $) (365.3) (449.7) (480.2) (652.5) (690.5) (729.9) (727.2)
Exchange rate (Index March 1973=100) 108.9 106.4 110.1 109.3 106.8 106.3 105.6
Crude oil ($/bbl, WTI) 50.9 64.8 57.0 37.4 44.2 47.5 51.1
Saving rate (%) 7.2 7.8 7.5 16.0 10.8 7.9 6.8
Housing starts (mil.) 1.2 1.2 1.3 1.3 1.4 1.4 1.4
Unit sales of light vehicles (mil.) 17.2 17.3 17.1 14.5 17.0 17.3 17.1
Sources: Oxford Economics and S&P Global Economics Forecasts. F--Forecast. Notes: (1) Exchange rate represents the nominal trade-weighted exchange value of US$ versus major currencies.
Downside: The Grinch that stole stimulus

In our downside scenario, a fall wave of COVID-19, together with a failure to provide fiscal support, leads to another economic downturn, with a much steeper contraction in consumer spending than in the baseline forecast and a much longer timeline to bring COVID-19 under control. This would slow phased reopenings--delaying the recovery in spending, reducing its vigor, and delaying laid-off workers getting back to work.

Consumer spending would plunge in December and much of first half of the first quarter on consumer fears and "circuit breaker" shut ins. The contraction in consumer demand and output in the pessimistic forecast is made worse with households losing income benefits from the government (versus our baseline), delaying the recovery further.

Owing to the sharper contraction and slower recovery in consumer spending and related investment spending by businesses, GDP growth would rise only 0.8% in 2021 in the pessimistic forecast, barely a nod to recovery following a contraction of 4.4% in 2020.

In this scenario, the economy doesn't get back to the previous cycle peak before sometime in the second quarter of 2022 (compared with third-quarter 2021 in the current baseline). The larger hit to economic growth in our downside scenario translates into a corresponding higher unemployment rate. The initial degree of dislocation and uncertainty over reemergence of the virus would keep the unemployment rate elevated at close to an 8.3% average in 2021 before it would finally start to move back down in 2022 to 6.2% and in 2023 to 5.2% (compared with 6.4%, 5.6%, and 4.6% in 2021, 2022, and 2023, respectively, in the baseline).

With the world reeling from the global recession, trade tensions would flare, at least over the near term, between the U.S. and China, giving the private sector more reach to hoard savings rather than invest. Both business and residential investments would be hit hard, with business fixed investment declining both this year and next. In such a scenario, stock markets would struggle to move up. With inflation stubbornly low, the Fed would be on an effective zero bound for several years to come.

Table 4

S&P Global U.S. Economic Outlook (Downside)
November 2020
(Percent change) 2017 2018 2019 2020f 2021f 2022f 2023f
Key indicator
Real GDP 2.3 3.0 2.2 (4.4) 0.8 6.4 2.8
(in real terms)
Domestic demand 2.5 3.2 2.3 (4.3) 1.1 6.4 2.6
Consumer spending 2.6 2.7 2.4 (5.1) 1.7 7.0 3.6
Equipment investment 3.2 8.0 2.1 (6.5) 3.4 7.3 2.1
Intellectual property investment 4.2 7.8 6.4 (0.3) (0.8) 6.8 1.5
Nonresidential construction 4.2 3.7 (0.6) (10.7) (4.9) 9.5 3.2
Residential construction 4.0 (0.6) (1.7) 3.5 2.2 5.9 3.0
Federal govt. purchases 0.3 2.8 4.0 4.1 (1.6) (2.0) (1.2)
State and local govt. purchases 1.2 1.2 1.3 (0.9) (2.9) 0.6 0.6
Exports of goods and services 3.9 3.0 (0.1) (14.5) 0.4 10.1 6.2
Imports of goods and services 4.7 4.1 1.1 (11.7) 2.8 9.9 3.7
CPI 2.1 2.4 1.8 1.2 1.3 1.6 2.3
Core CPI 1.8 2.1 2.2 1.7 1.3 1.5 1.9
Nonfarm unit labor costs 2.7 2.1 2.4 4.0 0.9 0.1 1.0
Productivity trend ($ per employee, 2009$) 1.1 1.4 1.0 2.5 (0.7) 2.3 1.0
(Level)
Unemployment rate (%) 4.3 3.9 3.7 8.5 8.3 6.2 5.2
Payroll employment (mil.) 146.6 148.9 150.9 141.8 143.3 149.0 151.6
Federal Funds rate (%) 1.0 1.8 2.2 0.4 0.1 0.1 0.1
10-yr. T-note yield (%) 2.3 2.9 2.1 0.9 1.2 1.6 1.8
Mortgage rate (30-year conventional, %) 4.0 4.5 3.9 3.1 3.1 3.0 3.1
3-month T-bill rate (%) 0.9 2.0 2.1 0.4 0.2 0.2 0.2
S&P 500 Index 2,448.2 2,744.7 2,912.5 3,148.2 3,110.2 3,665.3 4,025.2
S&P 500 operating earnings (bil. $) 1,588.4 1,770.5 1,880.9 1,584.8 1,692.1 2,324.4 2,220.2
Current account (bil. $) (365.3) (449.7) (480.2) (640.0) (638.0) (689.2) (633.9)
Exchange rate (Index March 1973=100) 108.9 106.4 110.1 109.2 105.5 105.1 105.2
Crude oil ($/bbl, WTI) 50.9 64.8 57.0 38.3 40.1 47.3 54.7
Saving rate (%) 7.2 7.8 7.5 16.6 12.0 9.3 7.6
Housing starts (mil.) 1.2 1.2 1.3 1.3 1.3 1.3 1.4
Unit sales of light vehicles (mil.) 17.2 17.3 17.1 13.9 14.1 16.2 16.3
Sources: Oxford Economics and S&P Global Economics Forecasts. F--Forecast. Notes: (1) Exchange rate represents the nominal trade-weighted exchange value of US$ versus major currencies.

The views expressed here are the independent opinions of S&P Global's economics group, which is separate from, but provides forecasts and other input to, S&P Global Ratings' analysts. The economic views herein may be incorporated into S&P Global Ratings' credit ratings; however, credit ratings are determined and assigned by ratings committees, exercising analytical judgment in accordance with S&P Global Ratings' publicly available methodologies.

U.S. Chief Economist:Beth Ann Bovino, New York + 1 (212) 438 1652;
bethann.bovino@spglobal.com
U.S. Senior Economist:Satyam Panday, New York + 1 (212) 438 6009;
satyam.panday@spglobal.com

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