Stimulus to boost economic growth in the US

US Overview

Stimulus to boost economic growth in the U.S.

The U.S. economy appears to be losing some momentum as the calendar turns to 2021. The cause of the recent slowdown is clear. The public health situation continues to deteriorate, which has led to a patchwork of new business restrictions, diminished consumer confidence and weaker-than-anticipated consumer spending. As a result, we have altered our estimate for real GDP growth in Q4-2020 and Q1-2021, which we now expect to rise 4.0% and 1.3%, respectively, on a quarterly annualized basis.

Despite some near-term moderation, we are a bit more constructive on 2021 as a whole thanks to several new developments. For one, the economy stands to benefit from the recent injection of fiscal support. The U.S. Congress passed a fiscal relief bill in late December, which was subsequently signed into law by President Trump. In addition to an appropriations bill that funds normal government operations, the package provides roughly $900 billion in financial relief for households, businesses and state & local governments.

What’s more, after a slow start, the pace of vaccine deployment is gaining momentum. According to health experts, achieving herd immunity to COVID is still possible by the end of the summer. This would unlock many of the activities rendered unfeasible by a highly transmissible virus. Taking all of this into consideration, we now anticipate a slightly more robust pace of real GDP growth in the years ahead. We look for real GDP to expand by 4.6% in 2021 and 4.8% in 2022.

International Overview

Outside U.S. Economic Growth Outlook Weakens

Outside of the United States, the global growth outlook has generally weakened since our previous monthly update. COVIDcontinues to run rampant, particularly in the northern hemisphere where cold weather has forced many people and activities indoors. Subsequently, our global growth forecast has fallen by a couple tenths of a percentage point for 2021, with only about half of that offset with a higher 2022 forecast.

A new variant of COVID has emerged in the United Kingdom that appears to be significantly more transmissible, and the nation is currently experiencing a crushing wave of COVIDspread that led the British government to institute a nationwide lockdown shortly after the start of the year. In continental Europe, tighter holiday restrictions have been extended in many countries to keep new COVID cases from rising exponentially. There even have been some cracks in the armor in fortress Asia. New cases in Japan have skyrocketed, and in China, a few hundred positive tests have led to a lockdown of more than 11 million people in the Hebei province near Beijing.

Nevertheless, financial markets appear to be more focused on the medium- to long-run outlook, which looks much brighter. Although vaccine dissemination has been slow in most countries, it should accelerate in the months ahead. Combined with warmer weather, naturally acquired COVID immunity and elevated household savings, the second half of 2021 and 2022 should be much better days for the global economy.

Economics Group

Securities2 Stimulus to Boost Economic Growth in the U.S.

While we expect the recently enacted fiscal relief bill to bolster consumer spending in 2021, personal consumption appears likely to weaken in Q1-2021. So far, the relatively quick rebound in consumer spending has been propelled by an upshift in spending on durable goods, which, by definition, last a long time and don’t need to be purchased very often. Meanwhile, spending on services, especially close-contact services, remains depressed by COVID-re lated safety precautions. If most of the recent retail sales reports are any indication (sales declined in October and November), consumer spending has already started to lose momentum.

Although we expect a slight contraction in Q1-2021, personal consumption expenditures are poised for substantial growth over the remainder of the year. Direct checks, expanded unemployment benefits and a revamped Paycheck Protection Program will boost personal income and savings, which should support stronger consumption. An immediate increase to consumer spending seems unlikely, given many close-contact activities are currently limited by COVID. The eventual widespread distribution of vaccines, however, should unleash pent-up demand for these services and help drive consumer spending higher over the course of the year.

Since our last forecast update, the new political landscape has come into better focus. With the results of the Senate election in Georgia now settled, the Democrats have unified control of the House, Senate and White House. Although winning control of the Senate lifts the odds of more spending down the line, additional spending is not a forgone conclusion. Democrats have razor-thin majorities in both chambers of Congress that will make it difficult to pass large pieces of legislation. The timing and magnitude of another fiscal relief package is not foreseeable at the moment, so we are moving forward with the assumption that no additional fiscal relief occurs. That noted, another round of stimulus spending would bring some additional upside to our

Wells Fargo Securities

forecast for consumer spending and economic growth more broadly. Although we have upgraded our forecast for consumer spending, we have not materially changed our expectation for a modest upturn in business fixed investment this year. The rise of remote work initially led to a boom in spending on laptops and communication equipment, and some payback now appears in order. Strengthening in industrial and transportation equipment should help offset some of this weakness, however. The Boeing 737-MAX has been cleared by the FAA and shipments have started to resume, which should help support overall business investment. By contrast, nonresidential investment spending looks set to weaken further this year alongside a collapse in new commercial construction starts and still-low levels of oil and gas drilling activity.

Meanwhile, we remain of the belief that the recent strength in the housing market will extend throughout 2021. Mortgage rates continue to test new lows and the race for more space to accommodate virtual activities continues to spur ro bust home sales, single-family home building and home improvement spending. Even if mortgage rates move meaningfully higher or the work-from-home era comes to an abrupt end—neither of which are likely, in our view–demographics will remain supportive of housing activity in the years ahead.

In short, the latest round of fiscal relief should lead to a slightly stronger pace of overall economic growth in 2021. We have revised our inflation forecast slightly higher to reflect a stronger pace of consumption as well as higher oil prices. That said, we anticipate the core PCE deflator to average 1.7% for the year in 2021 and 1.8% in 2022, below the 2% average inflation target which would likely prompt the Fed to tighten monetary policy. Along similar lines, we look for the unemployment rate, which currently stands at 6.7%, to end the year at 6.2% and 5.0% in 2022. Bearing all of this in mind, we continue to expect the Fed to maintain its current target range of 0.00%-0.25% through at least the end of 2022.

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