There is a light at the end of the tunnel – and it’s not a train heading our way. Unfortunately, the last leg of this trip before we exit the tunnel may be the most painful. The virus remains the lead story, and we are again seeing its impact with the recent economic data.
Two-thirds of the way through the fourth quarter, estimates for this quarter’s growth have started to be revised downward. The recent surge in the virus likely translates to slower-than-forecast growth in the current quarter as well as the first quarter of 2021. The light that we see is the fact that starting sometime in the second quarter of 2021, GDP growth is expected to be stronger than initially forecast due to the reported high efficacy rates of the vaccines from Pfizer and Moderna. It is still expected that we will be into the second half of 2021, however, before the COVID decline in GDP is recovered.
The disappointing November employment report released on December 4 clearly reflects the current impact of the resurgence of the virus and the accompanying restrictions being announced by various localities. Payrolls gained 245,000 in November, well below expectations of 460,000. The unemployment rate declined to 6.7% from 6.9%, but that was largely due to a 400,000 decline in the work force that far exceeded the 74,000 decline in the household measure of employment. Payrolls remain 9.8 million below the February peak, and the size of the work force is 4 million below its level before the pandemic, suggesting that the unemployed are no longer looking for jobs.
Data for the November employment report was retrieved in the middle of November. The virus has accelerated since then, causing many to forecast an actual decline in employment when the December report is published on January 8. As might be expected, weekly data points closely tied to the virus such as airline passenger traffic, restaurant bookings, and public transportation usage have all weakened or slowed in the past few weeks after showing signs of improvement in the late summer.
Without another support package from Washington, expect year-over-year personal income growth to continue to decline as unemployment benefits expire. The weak November employment report may have forced some fiscal action before the end of the year, however, as there now appears to be a growing consensus for a $908 billion package that would extend unemployment benefits, lengthen the moratorium on evictions, and provide for more PPP loans.
Interest rates have moved higher on expectations of improved economic activity and resulting higher inflation in the second half of 2021. Nevertheless, interest rates remain near historic lows and are expected to remain so. The Fed and other central banks have communicated a desire to keep rates low for the foreseeable future as their tolerance for slightly higher inflation has increased. Additionally, with public debt at record levels, central banks have a strong incentive to keep interest rates low.
Good news on the reported efficacy of the vaccines contributed to the strongest month for global equities on record. Investors also indicated an increase in risk tolerance by favoring small-cap equities over large-cap equities for the first time in nearly three years. The outperformance of growth stocks relative to value stocks took a pause as a recovering economy may be more beneficial to sectors of the market that have long been out of favor.
As stated many times, full economic recovery will not be possible until the threat of the virus is resolved. We may have taken the first big step in that direction during November, recognizing that economic data is likely to look worse near-term, before the tide fully turns.