Despite Covid-19 headwinds adding a touch of gloom to the global economic outlook, Fitch Solutions remains bullish about the fate of the US economy going into the coming year. Primarily driven by an uptick in private consumption, the market intelligence firm has revised its growth predictions for the US from 4.1% to 5%. 

“US real GDP expanded by 4.0% q-o-q annualised in 4Q2020, according to the government's advance estimate, slightly below the Bloomberg median forecast of 4.2% annualised and bringing the full year figure to a 3.5% contraction, above our previous forecast of a 3.7% contraction,” the firm observes in a 29 January report. 

Fiscal policy will be the main thrust of US economic recovery. Fitch sees government spending growing 1% y-o-y and adding 0.2 percentage points (ppt) to growth in 2021. 

Biden has proposed a US$1.9 trillion ($2.53 trillion) - including an additional US$1,400 in direct payments. Not all of this is likely to be passed by the senate. The actual figure is seen to be around US$600 billion- US$1.2 trillion, or about 2.8-5.6% of GDP - higher than the initial US$500 billion proposed by Republicans. 

The onset of fiscal stimulus by Joe Biden’s Democratic administration, coupled with the Covid-19 vaccine rollout, is seen to drive private consumption. Ultimately, however, the actual size of the final growth figure could vary based on the size of base effects from 2020, the weak start to 2021, the size of Biden’s stimulus package and rate of vaccination. GDP growth in the US could thus fall within a wide range of around 4.5-5.5%.

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Private consumption this year is seen to grow 6% y-o-y - reversing a 3.9% contraction in 2020 - which will add 4.1 ppts to US growth. Aside from the likely larger fiscal stimulus in the wake of a unified Democratic government, household balance sheets remain in a strong position. With savings rates (12.9%) remaining high and household debt as a share of GDP low (around 80% vis-a-vis just under 100% in 2009), consumer spending could recover rather quickly. 

Unemployment figures are also headed in the right direction, with Fitch expecting a decline from 6.7% at end-2020 to 5.7% by end-2021. While heavy losses of 140,000 jobs were incurred in December 2020 and are expected to remain weak in January, economic stimulus and vaccine rollouts - alongside expected easing of health restrictions - could see renewed hiring over 2021. More money in the pockets of American workers will help drive private consumption. 

And there is reason for hope on the Covid-19 front. “While another short-term rise in infections is possible, the number appears to have peaked at around 248,000 cases and is trending lower at 148,000 daily new cases (seven-day moving average) as of Jan 29, 2021,” reports Fitch. 

The US is currently on track to hit Biden’s target of 100 million Americans vaccinated by his 100th day in office, with 1 million people vaccinated daily. The pace of inoculation could potentially reach 1.5 million per day by summer, with the Biden administration hinting that enough vaccines for 300 million people will be made available by the end of summer. 

Monetary expansion

Further cause for optimism is the Fed’s continuation of an accommodative monetary policy, with Fed Fund rates held at 0.00-0.25% and quantitative easing at US$120 billion per month. While inflation is expected to return to its targeted 2% in 2021, this is likely to be a transient rise from last year’s low inflation rate. 

“In terms of tapering, it’s just premature. We just created the guidance [on how long the central bank would keep printing money and buying bonds]. We said we wanted to see substantial further progress toward our goals,” insists exasperated Fed chairman Jerome Powell. 

The Fed wants to see “inflation moderately above 2% for some time” to achieve inflation averaging 2% over the business cycle before thinking about raising rates. Bank of Singapore (BOS) chief economist Mansoor Mohi-uddin does not therefore see fed rates raised until 2024. 

Corporate profitability remains weak, but is seen to improve substantially over 2021, driving a 7% y-o-y increase in fixed investment and adding 1.3 ppt to GDP growth. Aggregate earnings per share growth for the S&P 500 remains negative, but IT, healthcare, utilities and consumer staples saw positive y-o-y growth in 4Q2020. Profit margins seem to be bottoming out. 

“Despite the sharp collapse in earnings, 12-month trailing profit margins for the S&P 500 only fell to about 7.5%, which is higher than the 2.0% during the Global Financial Crisis. Additionally, a key component for profit margins is pricing power, which seems to be returning to businesses,” notes Fitch. Greater profitability and growing cyclical demand, they add, could benefit corporate America and support output and capital expenditures.