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WASHINGTON—The U.S. economy has bounced back strongly from the pandemic-induced plunge, supported by unprecedented monetary and fiscal responses. The faster-than-expected rebound has helped markets recover in a remarkably short period of time.
U.S. indices posted their best August performance in decades. Investors, however, have turned nervous this month, with Europe starting to see a sharp increase in CCP virus cases. Uncertainty surrounding the next stimulus package and the political battle to replace the late Supreme Court Justice Ruth Bader Ginsburg have also brought additional worries.
COVID-19 cases and possible shutdowns pose the biggest risk to markets, according to Sameer Samana, a senior global market strategist at Wells Fargo Investment Institute.
“But it seems like the threshold for broad shutdowns like last spring remains fairly low,” he told The Epoch Times in an email.
In Europe, the number of new cases has started to rise again, especially in the UK, France, and Spain. The UK government has started to impose new restrictions, such as forcing pubs, bars, and restaurants to close at 10 p.m. Germany’s top virologist last week warned that the country could also implement restrictions.
Analysts are confident that the virus is growing less deadly, in part due to advances in COVID-19 treatments that reduce its severity. They, therefore, believe that another round of broad shutdowns in the United States remains unlikely.
“The recent sell-off was largely sentiment-driven, and the reversing of the exuberance we saw in late August,” Samana said. “The fundamentals—economic growth, earnings, etc.—remain solid, and we see additional gains for equities through next year.”
Stimulus checks and enhanced unemployment benefits that lifted household incomes were instrumental to the sharp recovery in economic activity.
Consumer spending, which accounts for more than two-thirds of the U.S. economy, recouped nearly 75 percent of its peak-to-trough decline as of July. Durable goods orders and housing activity are almost back at their pre-pandemic levels.
“We cannot understate the impressive initial V in U.S. economic activity,” Peter Hooper, chief economist at Deutsche Bank said in a report, referring to the sharp economic rebound.
To reflect the faster-than-expected recovery, the bank raised its third-quarter gross domestic product (GDP) growth projection by roughly 12 percentage points to 31.8 percent annualized.
Economists also observe faster improvement in the labor market after the U.S. economy added 1.37 million jobs in August. The unemployment rate fell to 8.4 percent in the August report, exceeding earlier projections. Many had predicted the jobless rate to remain above 10 percent at the end of 2020.
According to the new projections released last week, the Federal Reserve now predicts unemployment to hit 7.6 percent by the end of the year and 5.5 percent by the end of next year. The central bank also forecasts the change in GDP at the end of 2020 to be 2.8 percentage points higher than in its June report.
Fiscal Uncertainty
While the economic recovery has gotten off to an “impressive start,” fiscal uncertainty remains a major issue in the United States, according to Deutsche Bank economists.
“We now assume that significant further support will not be forthcoming until after the election,” Hooper said.
Following months of talks, policymakers have failed to reach a deal on the next stimulus package. And the battle to fill Ginsburg’s Supreme Court seat may complicate the deal further as Democrats push for a delay until after inauguration in January next year.
Economists worry that the initial strong consumer activity may begin to fade in the fourth quarter with a lack of further fiscal action.
“The resulting drop in income support for households is already beginning to depress activity,” Hooper said, adding that the economic growth could slow to near zero in the fourth quarter if consumer spending slides.
He said the growth could pick up again in the first quarter next year with some post-election fiscal support.
Following the central bank’s policy meeting last week, Fed Chairman Jerome Powell also reiterated the need for further fiscal stimulus to support the recovery and avert potential downside risks from withdrawing the aid.
“I don’t think the V-shaped recovery depends on the package, but I do think a targeted package could be a great help,” White House economic adviser Larry Kudlow told CNBC on Sept. 22.
He said the administration is looking to get additional funds for schools, for example, to help them open safely. The White House also wants to extend the Paycheck Protection Program (PPP) to support small businesses.
Lance Roberts, chief investment strategist at RIA Advisors, believes that fiscal stimulus will help the economy in the short term, as nearly 30 million Americans who are unemployed still depend on government support. He notes, however, that the stimulus won’t make economic growth better in the long run.
“We’ve been bailing out companies, households, and governments ever since 2008, and it hasn’t made economic growth better. It’s made the wealth gap even wider,” he told NTD Business.
He said that while the government is trying to ease the effects of the crisis, “all we’re doing is making the economic inequality that much worse.”
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