Thoughts

December 04, 2020 | 15:53

U.S. Economy: The Race is On

Economist

Director and Senior Economist
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Director and Senior Economist
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

The first batch of November economic numbers suggests the recovery is losing steam due to a mix of ebbing pent-up demand and rising COVID-19 related restrictions and anxieties. Nonfarm payrolls rose the least (245,000) during the recovery and half as much as expected. The Institute for Supply Management says both manufacturing and services activity slowed from the earlier rapid pace. New auto sales reversed for a second straight month. The latest October figures tell a similar tale of fading momentum. A second retreat in pending home sales, albeit from lofty levels, suggests even the hot housing market is simmering down. Commercial construction spending
slid further, which is no surprise, given structural shifts playing out in the office and retail segments, flagging another quarterly contraction in the sector. Despite a further solid gain in exports, the U.S. trade deficit widened further. Also, note that, apart from ecommerce, Black Friday underwhelmed retailers, as early seasonal discounts pulled forward some sales. There’s little doubt that the second wave of the coronavirus is throwing a wet towel on traditional retail outlets and malls. The Fed’s Beige Book cited rising anxiety among businesses, with four districts noting that “activity began to slow in early November as COVID-19 cases surged”.

Since then, virus caseloads have surged further, topping 200,000 new daily positive counts or double that of early November, with record hospitalizations and daily deaths exceeding 3,000 mid-week. So far, the resurgence has led to just a smattering of new restrictions, largely involving the closure of indoor dining, bars, theatres and museums in several states, though New Mexico has shut down non-essential businesses. While this is a pale imitation of the spring shutdowns, the situation could change for the worse if the second wave becomes a deluge during the holiday season when more people gather indoors. It’s a race between this potential serious headwind for the economy (especially if Congress fails to extend some support programs beyond yearend) and the rolling out of an effective, safe vaccine that marks the beginning of the end of the pandemic.

For now, we are sticking with our call for a solid 5.0% advance in Q4 real GDP,
with even some upside risk. Not all data disappointed this week. Initial and
continuing jobless claims fell sharply, signalling a further decline in the unemployment rate. Aggregate work hours are towering at an annualized 8% above Q3 levels. As well, the New York Fed’s Weekly Economic Tracker suggests real GDP is down just 2.3% in late November from a year ago, which precisely lines up with our Q4 call. For now, we see slower 1% growth in Q1, which is a placeholder until we get some clarity on the course of the second wave, the timeline for a vaccine rollout (the FDA could make an announcement late next week on Pfizer’s vaccine), and the potential for more fiscal stimulus (with some progress this week as Democrat leaders ratcheted back demands for an outsized package). Investors clearly see the glass as half full, and we wouldn’t disagree, but the next few weeks could still be dicey.