COVID-19 vaccine will ‘unleash’ the U.S. economic potential
Yahoo Finance Video
Yahoo Finance’s Myles Udland, Julie Hyman, and Brian Sozzi discuss the market action and economic outlook with Jefferies Chief Financial Economist, Aneta Markowska.
Video Transcript
MYLES UDLAND: All right, let's continue our discussion about the state of the economy right now, and what 2021 may have in store for investors. Joining us now for that conversation is Aneta Markowska. She is the chief financial economist over at Jeffries. So Aneta, let's begin with what we just heard from lawmakers on trying to get something done by the end of this year. You're expecting there to be passage of stimulus in the beginning of the next Congress at the end of January. How do you see that timing gap, that one month, impacting the outlook, if at all, really, for I guess the first half of next year, let's say.
ANETA MARKOWSKA: So that was our assumption when we published our 2021 outlook about two to three weeks ago, but you know, I'm optimistic that we might actually get it earlier. So in our base case, both fourth end of fourth quarter GDP are pretty weak, about 2%, And that's because, again, we assumed that the stimulus wouldn't be passed until January. In that case the money wouldn't really hit until February. And so a lot of the negative momentum that we're seeing in the data currently would actually spill over into the first quarter.
Again, you know, given how things are going I'm optimistic that that will actually get that inflection point a little bit sooner, probably in January, in which case, you know, Q1 will look a little bit better. But Q4, you know, clearly things have slowed. We've essentially plateaued when it comes to consumption, employment, manufacturing sector is kind of the only part of the economy that's still doing very well, as well as housing. But there's been a clear negative impact. And so we're desperately needing this fiscal support.
JULIE HYMAN: Aneta, it's Julie here. So if this particular package does not have the state and local aid, that seems to be one of the areas of dispute, what does that mean? You know, because we've been hearing that all along that the aid is urgent on all fronts, but one would think it's particularly acute for some of these state and local municipalities, right, especially taxed as they are by the rising case count for coronavirus and public health systems, for example. So what are the implications of that?
ANETA MARKOWSKA: Well, I mean, the transmission mechanism to the broader economy is through the labor market. And we have already seen some pretty significant losses from the state and local governments, first in the early months of the pandemic, then there was a short period of stabilization, but in the last, I would say three months, state and local governments have been sort of bleeding in terms of jobs. So that has been a drag on employment, and without this aid I think there's a real risk that these job losses at the state and local level accelerate early next year.
So you know, I think it's doubtful that state and local will make it into this bill, but hopefully, you know, in January with the new president and the new Congress they can tackle that again and provide at least something, you know, for states that have had significant revenue draw downs as a result of COVID and that really need this money to prevent these layoffs.
BRIAN SOZZI: Aneta, you mentioned a February or potential February inflection point. What's the exit velocity for the US economy at that inflection point?
ANETA MARKOWSKA: So I think we'll be sort of starting at roughly 2% growth coming out of the fourth quarter. I actually, you know, think consumption at some point will spill out completely. December I'm really concerned about because of potential payback effect, you know, we had a pretty strong Black Friday online, so I think November sales might be OK. But I'm really concerned about December. So we'll be sort of starting next year with very little momentum.
And so you know, again, we do need this fiscal package to reverse that negative momentum to get the economy growing. And if that's the case, which you know, again, I'm optimistic, then by the time we get the vaccine distributed to the masses, which is probably a Q2 event, we're going to be looking at a pretty sharp reversal, and I think the second quarter looks pretty good right now.
MYLES UDLAND: I want to pick up on that, Aneta, because our conversation has been a little bit downbeat. But I read your note, and I thought it was a great way to frame the investing conversation, great rotation. Everyone talks, I guess, you know, bonds into stocks, or whatever you want it to be. And really you're talking about the handoff from, I guess what you could call like trend economic growth versus sort of this recessionary fiscal stimulus aided period. And I think you're quite positive on that transition as we get to the second half of next year.
ANETA MARKOWSKA: I am. I think really once we get the vaccine, we'll really see that unleash, the economic potential that's there. And you see it in the savings rate in particular. I think a lot of those savings are concentrated in higher income cohorts, and it's really a direct sort of flip side of the shortfall in sort of the spending that we're seeing today as a result of COVID.
So the money is there. I think the pent up demand is clearly there. You know, you look some of the travel surveys, et cetera, people are really dying to go back to living their lives. So the potential is there. We really just need the vaccine to be distributed to the masses to unlock that potential.
And then you can very easily start a virtual circle, right, with again, initially high income households spending on services, whether it's travel, eating out, et cetera, that will then create a lot of those jobs that were lost, these low wage jobs that were lost as a result of COVID, and those are the households are relying on fiscal support. So once you get that positive kind of virtual cycle going, you know, the reliance on fiscal policy will also fade, and the economy will sort of be able to maintain that momentum on its own.
BRIAN SOZZI: Aneta, you wrote in one of your recent notes you're not expecting the Fed to make any changes to its bond buying program this week. But just based on where you see the economy right now, it is slowing down, would that be a mistake? Should the Fed be out there buying more bonds and buying them aggressively?
ANETA MARKOWSKA: No. So we're in this very unique position where, you know, we are clearly in a growth slowdown, but at the same time, we know almost with certainty that by 3 months this growth slowdown will be over, right, once we have the vaccine. And the problem for the Fed is that policy lags are quite long.
You know, they are at least six to 12 months. So even if the Fed responded today whether it's by a twist or increasing the size of asset purchases, that action will not actually even kick in until the spring. And by then it'll be too late. By then you really won't need that support, as I mentioned earlier. So I think that's one of the reasons the Fed has been very reluctant to do the twist, and that's been a very consistent messaging from Fed officials in recent months kind of leading up to this meeting.
I think their strategy and rightly so, is instead of trying to address the slowdown, which we can't really do anything about, let's focus on supporting the recovery in 2021. And the first thing that they need to do is actually provide guidance on QE to prevent a taper tantrum. That is one of the top questions I'm getting from clients these days, is how much are rates going to back up next year, and to what extent could that derail both the economic recovery and the risk rally. So I think the Fed's number one job going into 2021 is going to be to prevent a taper tantrum scenario, and forward guidance is a very critical component there.
JULIE HYMAN: Aneta, on a related front, when you talk about the risk rally, we've been watching the risk rally in particular when it comes to SPACs and IPOs and cryptocurrencies and anything that is sort of gone crazy this year, and we tend to talk to market participants about that. But from an economic perspective, are you concerned about a blow up then trickling through and coming back into the economy?
ANETA MARKOWSKA: Well, you know, again, one of the problems and the reason that investors are really concerned about a potential back up in yields is because that's typically how you kind of uncover these situations, right? That kind of happened at the end of extended risk rallies, is it's, you know, you kind of get the tide going out and then it exposes all the weak links in the system.
And I think that's one of the reasons, actually, the Fed needs to manage this exit and policy normalization very carefully. With respect to you know, some of the assets that you mentioned, you know, for me I'm concerned about broader financial conditions and about the credit flows to the real economy and whether it's the Bitcoin or SPACs, I really don't see strong linkages there unless that morphs into a broader tightening of financial conditions, you know, both in the equity credit markets, mortgage markets, et cetera. And so that's what I'm kind of paying more attention to and more concerned about.
MYLES UDLAND: All right. Aneta Markowska is the chief economist at Jefferies. Aneta, always great to get your thoughts. Have a great holiday, great new year. And I know we'll talk in 2021.