When the COVID-19 pandemic struck and non-essential businesses were shut, millions of workers lost their jobs, leading economists to project an unemployment of 9%, 10% or more by yearend.
The economic pain was immense, but not quite as bad as projected, and now with several vaccines near approval and the year ending, strategists and experts from Federated Hermes and Insight Investment in virtual webinar gave insight into where they believe the U.S. stands and what they foresee for the year ahead.
Addressing the projections for unemployment, and the November reading of 6.7%, Phil Orlando, chief equity market strategist at Federated Hermes, noted, “we are 3% or 4% ahead of where we thought we would be at best in terms of unemployment, so I am really happy about the labor market.”
Despite that positive, recently data have indicated a slowing of economic growth, which he attributed to “lack of more stimulus.”
While the vaccine rollout will boost the labor market by allowing people to return to work in service industries, which have been restricted, R.J. Gallo, senior portfolio manager, head of duration committee and muni bond group, Federated Hermes, suggested: "The biggest changes will be structural: will as many people be in the big office buildings? What about work travel? But our base case is that the unemployment number will continue to move south.”
And it will be labor market improvement that determines the shape of the recovery, according to Silvia Dall'Angelo. “I am an inflation skeptic, with so much slack in the labor market, I don't see a risk of overheating inflation anytime soon.”
Gallo also addressed inflation. “Inflation is the first thing to watch. We have seen a shortfall in inflation recently, but the Fed recently made a change, to a high level to commitment to increasing inflation,” he said. “Some rollback on international trade could help. We don't think inflation will spike, but it will rise.”
By late spring, he suggested an annual rise in the consumer price index greater than 2%, but when measured by the personal consumption expenditures, the Federal Reserve's preferred method, inflation will fall slightly short of 2%. "Will it be sustained there?" he asked, "Probably not. It will continue to increase.”
And while not offering a numerical prediction, Gallo said that he sees a "buoyant recovery."
Orlando noted many economists expect a double-dip recession, but Federated Hermes does not see it that way. “We don't see a double-dip recession, we have called for second quarter 2021 GDP growth 5.6%, second half to be around 4%, as growth will be stronger than consensus in our opinion.”
Gallo said Federal Reserve will be worth watching "to see whether or not an increase in market yields makes the Fed change its asset purchasing options."
A "disorderly" jump in yields, he said, or one that "will mess with their inflation goals" could lead to yield curve control, the Fed extending maturities or increases purchases of securities.
While Federated Hermes sees GDP for 2020 showing a 4.5% contraction, the largest since World War II, Dall'Angelo points to a positive: policymakers' rapid response. "The fiscal stimulus has been massive. Very different from 2008 and 2009, when policy was a stigma."
Insight Investment is still finalizing their predictions, but Francesca Fornasari, head of currency solutions, said in general they see below-consensus numbers for GDP, inflation and employment.
“The vaccine is good news no doubt, but our general sense is that rollout will be slower than people and the markets expect,” she said. “Then there is also the psychology factor," with some people ready to take vacations, fly, eat out, etc., sooner than others. "So Q1 2021 could easily be a small, negative number, which would dampen prospects of growth for the rest of the year.”
The rising number of cases and additional restrictions being imposed in some cities and states, she said, creates another economic hurdle. “It will come down to how quickly people change their behavior and that will be to a varying degree, from person-to-person,” said Fornasari. “We are less convinced that the recovery path won’t be as good or as fast as what people think right now.”
Wholesale trade
Wholesale inventories grew 1.1% in October after a revised 0.9% rise in September, first reported as a 0.4% gain, while wholesale sales climbed 1.8%, following a 0.4% jump a month earlier.
Economists polled by IFR Markets expected inventories to rise 0.9% in the month.
