Consensus Overestimates 2021 US Growth
- By Dominique Dwor-Frecaut
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- 3 min read
With the vaccines used in the US clearly proving effective, the pandemic is no longer the main source of uncertainty to the outlook. The data is in : infections, hospitalizations and deaths are lower in vaccinated groups. In jurisdictions such as Israel or Gibraltar that have high rates of immunizations, life has returned to nearly normal. In the US, the CDC is gradually relaxing restrictions for fully vaccinated adults.
US immunizations slowed in recent weeks (Chart 1), but this is unlikely to delay the recovery for these reasons:
• Policymakers and employers are stepping up incentives, for instance with tax credits for workers taking leave to get immunized or immunization requirements for employees.
• Red states’ immunizations generally lag blue states’, but red states have recently seen slower cases growth, possibly due to higher immunity from infections. Regardless, red states are less likely to respond to higher cases with more restrictions as long as their healthcare capacity remains ample.
• With the mid-term elections only 18 months away and voters’ lockdown patience exhausted, most state governors will likely be reluctant to reverse the reopening trends.
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Summary
- The pandemic is no longer the main source of uncertainty to the US outlook since the vaccines used there are proving effective.
- Labour participation remains well below pre-pandemic levels and has become the greatest source of uncertainty as labour availability constrains the recovery.
- Past participation increases suggest only a gradual recovery with the peak in Q3 or Q4 rather than Q2, as consensus assumes. But a delayed recovery is unlikely to impact trend growth.
Market Implications
- Negative growth surprises could lead to limited equity selloffs and bond rallies in Q2 and Q3.
The Pandemic Is No Longer the Main Source of Outlook Uncertainty
With the vaccines used in the US clearly proving effective, the pandemic is no longer the main source of uncertainty to the outlook. The data is in: infections, hospitalizations and deaths are lower in vaccinated groups. In jurisdictions such as Israel or Gibraltar that have high rates of immunizations, life has returned to nearly normal. In the US, the CDC is gradually relaxing restrictions for fully vaccinated adults.
US immunizations slowed in recent weeks (Chart 1), but this is unlikely to delay the recovery for these reasons:
- Policymakers and employers are stepping up incentives, for instance with tax credits for workers taking leave to get immunized or immunization requirements for employees.
- Red states’ immunizations generally lag blue states’, but red states have recently seen slower cases growth, possibly due to higher immunity from infections. Regardless, red states are less likely to respond to higher cases with more restrictions as long as their healthcare capacity remains ample.
- With the mid-term elections only 18 months away and voters’ lockdown patience exhausted, most state governors will likely be reluctant to reverse the reopening trends.
Also, the epidemic of public panic seems over. The Economic Policy Uncertainty Index (EPUC), a proxy for household COVID fears (shown, for instance, by a strong correlation with the household savings rate) is almost back to its pre-pandemic range. This may reflect that the public has grown numb to the barrage of negative COVID news.
However, labour supply will likely limit how fast the economy returns to normal.
Labour Participation Is Now the Greatest Source of Outlook Uncertainty
With the epidemic winding down, labour supply has become the greatest source of uncertainty to the outlook. Macro data, surveys and media report businesses are struggling to find workers. This reflects the historical Q1 2020 collapse in labour participation, which has recovered less than half its initial decline and has been moving sideways since mid-2020. Women’s participation has been particularly hit and is still trending lower largely due to school and day care closures. Those have recovered partly but remain well below pre-pandemic levels.
The Consensus Forecast Misses the Importance of Participation
The Bloomberg GDP survey assumes a parabolic recovery with a peak in Q2 before a gradual return to trend. Previous episodes of increases in participation, however, suggest a slower start and only a gradual improvement. This suggests the peak in growth could come later, for instance in Q4 rather than Q2.
Furthermore, the BBG survey expectations of 6.5% GDP growth for 2021 GDP seem overly optimistic. I built two labour participation and associated GDP scenarios. In the fast recovery scenario, participation recovers to 60.1% at end-2021, against 57.7% in March 2021 and 61.1% in January 2020. By contrast, under the slow recovery scenario, participation recovers only to 59% by end-2021. Even under the fast participation recovery scenario, I only find 2021 GDP growth in a 5-5.5% range against the Bloomberg survey at 6.5%. The growth the market expects in 2021 is more likely to happen in 2022.
Market Consequences
It is unclear whether negative growth surprises that are more to do with the timing of the recovery rather than trend growth will have lasting market consequences. We are likely back in a TINA regime (There Is No Alternative) anyway. In a TINA regime, the equity risk premium is low due to low headline risk on the back of mediocre inflation and Fed put and due to limited investment opportunities.
Negative surprises could lead to temporary selloffs in Q2-Q3, however, especially if the market mistakenly believes they are the harbinger of a lower growth trend. Positive inflation surprises together with negative growth surprises could generate fears of stagflation, which I expect not to last because I expect inflation shocks to be temporary.
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Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)