Monday Morning Quarterback (02/1/2021)

February 1, 2021

4Q20 GDP

On Thursday, the Bureau of Economic Analysis reported that U.S. GDP increased at a seasonally adjusted annual rate of +4% during the fourth quarter. Despite a strong rebound in the back-half of 2020 (GDP rose a record +33% y/y during the third quarter), the United States’ economy contracted by -3.5% from 2019, the largest decrease in economic activity since the late 1940s. A contraction in consumer spending on services was responsible for most of the -3.5% contraction in 2020, while spending on goods rose. Accounting for roughly 70% of U.S. economic output, consumer spending dropped by a seasonally adjusted -2.5% during 4Q20, falling from a +41% 3Q20 rebound.

Chart of Yearly Change in Gross Domestic Product

Personal Savings Rate Nearly Doubles

Once the pandemic is under control, Americans should resume activities, such as traveling, attending sporting events, and dining out. With the personal savings rate almost doubling to +13.4% y/y in 4Q20, economists expect the extra financial buffer to support more consumer spending once COVID business restrictions ease. Growth in consumer spending would result in more hiring, especially in the hardest-hit industries, like personal services, hotels, stores, and restaurants.

GDP estimates

Despite weakness in the economy over the past several months, economists increased their growth forecasts for 2021. In December, JPMorgan Chase (JPM) economists projected a 4Q21 GDP growth of +3.4% y/y. Since then, JPM upwardly revised its estimate to +5.4%. This month, the Fed, IMF, and Wall Street Journal released their new GDP projections, as well. For the full year of 2021, the Fed was most conservative with its estimate of +4.2% GDP growth, versus the Wall Street Journal’s survey of economists (+4.3%) and International Monetary Fund (+5.1% y/y).

Durable Goods Orders

Though restaurant and retail activity continued to be weak in December, manufacturing remained strong. For the eighth consecutive month, U.S. factory orders for business equipment increased. Durable goods, products meant to last a minimum of three years, rose +20 bps last month, falling short of economists’ expectations. Nonetheless, nondefense capital goods orders, which exclude aircraft, beat Bloomberg’s survey of economist’s median estimate of +50 bps, rising to +60 bps. Additionally, November’s gain in core capital goods orders was revised from +50 bps to +100 bps. Due in part to ultra-low borrowing costs, the growth in capital goods corroborated other data that showed investment in equipment remains robust. Despite the pandemic’s constraints on the supply chain and workforce, still-lean inventories should continue driving output this year. Compared to 2019, 2020’s core capital goods orders increased by 1.8%, while total durable goods bookings declined by 7%.

Orders Rise Chart

Weekly Jobless Claims

On Thursday, the U.S. Labor Department reported that initial jobless claims dropped to 847,000 for the week ended January 23rd. However, the DoL revised the new jobless claims from 900,000 to 914,000 for the week ending January 16th. Over the past several months, weekly unemployment claims have remained well above the pre-covid peak of 695,000. The Fed estimates that the jobless rate will drop from 6.7% to 5% in December 2021 and 4.2% by the end of 2022.

Initial Claims for Unemployment Benefits

FOMC Press Conference

Following the FOMC meetings last week, the Fed announced that it had kept its dovish monetary policies in place, stating that business activity has weakened with the pandemic’s resurgence. According to the Federal Reserve Chairman Jerome Powell, the slow-rollout of vaccines left Fed officials cautious about the months ahead. “We think it’s going to be a struggle,” he said during the post-FOMC press conference. “The pandemic still provides considerable downside risks to the economy.”

COVID Update

Last week, coronavirus cases dropped for the 3rd consecutive time, as COVID casualties stayed relatively flat, week-over-week. As of February 1st, there have been over 26.1M cases and 440K deaths.

Chart of New Coronavirus Cases Reported per Day

Chart of New Reported Coronavirus Deaths per Day

Coming This Week

This week, the ISM will report Manufacturing PMI on Monday and Services PMI on Wednesday. Industry experts expect January’s ISM surveys to show moderate strength. Similarly, January unemployment could also be inflated due to a seasonal adjustment. Nonetheless, experts expect the jobless rate to remain at 6.7%. However, that number will not include the unemployed Americans that have stopped searching for a job.