Fed's Kaplan: Growth forecast assumes consumers are willing to travel, eat out, re-engage broadly in the economy

Reuters reports that the US economy has likely bottomed, Dallas Federal Reserve Bank President Robert Kaplan said on Thursday. 

Kaplan says his growth forecast assumes consumers are willing to travel, eat out, re-engage broadly in the economy.

The caveat is that a healthy rebound depends on a massive increase in testing so that people feel comfortable resuming travelling, dining out and other pre-crisis activities.

"We need to dramatically increase testing and contact tracing...so that we can grow the economy faster and work down this unemployment rate," Kaplan told Reuters in a phone interview. "Why not spend the tens of billions of dollars ...to make sure ...we get the most benefit from the trillions we have spent," Kaplan said.

"Health experts say the US needs about 3 million to 5 million tests a day, compared with 350,000 today. Small businesses are facing more obstacles on testing than bigger firms", he added.

Assuming ramped up testing, extensions of fiscal support for workers, and new rescue money for cities and states reeling from a drop in tax revenue, the U.S. economy could grow at about a 17% annual pace in both the third and fourth quarters, he said.

Those gains would still leave the U.S. economy about 4.5% smaller by year's end than it was at the beginning, he said, and unemployment would likely still be at 10% or 11%, down from an expected peak of more than 20%.

Continued growth in 2021 should drive it to below 7% by the end of next year, he said, though without the investment in testing that could enable broad reengagement, there is 'more downside.'

Key comments

Downside risks to forecast without ramped up testing.

Under the baseline forecast, unemployment falls to 10%-11% by year’s end, under 7% by end of 2021. 

Sees downside risks to forecast without ramped up testing.

Market implications

We are seeing a positive tone in markets as investors pile in on the fear of missing out and Fed commentary such as this can only go towards helping to boost consumer confidence and aid the US stock market higher

The benchmarks have climbed beyond critical Fibonacci retracements of the 61.8%. Psychologically, this is significant considering these are the levels for which prior market crashes failed to penetrate, such as the Dow in 1929 and Japan in 1989.

However, it is important to understand that although the anticipation of recovery has offset the fears of the next bearish trend, US indexes are not the US economy and nor should they be a reflection of it. Moreover, nor are US equities representative of the wider global stock market. The biggest five stocks now account for a larger portion of the S&Ps 500 market capitalization than ever during the dot–com bubble of 2000. It has never been cheaper to buy the dip thanks to companies such as Robinhood, also helping to fuel the rally fro retain investors. 

What Federal Reserve speakers are not openly talking about, yet, is the pending tidal wave of risk-off themes in anticipation of a protracted trade war between the US and China and the Hong Kong risk which has not been priced into markets as far as the eye can see.

More on this here:

• US Pres. Trump to hold China news conference on Friday, risk-off themes will be in play
•  China's plan of national security law in Hong Kong puts Trump in an unwelcome spot with Xi 
•  The Hong Kong Dollar, the next black swan?
•  Chart of the Week analysis 
• How do experts view financial conflict of top two economies? – The Global Times