Global investors are expected to remain glued to the performance of the US economy and look out for any signals and economic indicators closely. How will the world’s largest economy bring itself back to its earlier strength — remains to be seen. Even as the impact of Covid-19 is still underway, the role of the US Federal Reserve will become even more important in the days to come.
The effectiveness of the vaccination programme, including its distribution, may perhaps remain one of the biggest factors. In this backdrop, JP Morgan on its website carried a report to find out whether the US economy will continue its rebound in the coming year or not.
The report looks at 5 major indicators that any investor investing in US stocks should also keep an eye on. According to Jim Glassman, Managing Director and Head Economist for Commercial Banking, these five indicators of US economy are:
- Normalcy in growth
- Fiscal relief
- Job market
- Equity market
Here are some excerpts from the report:
Return to normal on the horizon
GDP is rapidly closing in on its pre-pandemic high as COVID-19 vaccines begin to roll out. After growing at a 5%-7% annualized pace in the fourth quarter, economic output has almost recovered its pandemic losses. However, due to lost growth, the economy may be operating at only 98.7% of its true potential, leaving plenty of room for above-trend growth in 2021. The household saving rate almost doubled last year to 12.9%. This could translate into a potential $1.5 trillion supporting pent-up consumer demand as the pandemic subsides.
Fiscal relief in the first quarter
Congress has passed a $920 billion relief bill aimed at rescuing struggling households and businesses. The relief package amounts to about 4.5% of nominal GDP. Many economists believe this latest stimulus could boost real GDP in 2021 by at least 3 percentage points.
It provides a $300 weekly supplement for unemployment insurance, as well as $600 direct payments to many individuals. The Fed is continuing to provide monetary support. The target for short-term interest rates remains pegged at zero, and long-term interest rates are resting 2 percentage points below their theoretical equilibrium.
Job market lag
The headline unemployment rate has fallen to 6.7%. However, it doesn’t count the 4 million workers who left the job market in 2020 or independent contractors still working but not earning what they were before the pandemic.
Broader measures of joblessness suggest that the economy is approximately 10 million jobs short of full employment. The Federal Reserve anticipates steady job creation throughout 2021, with the median forecast calling for unemployment to fall to 5% by year’s end.
Inflation worries are premature
Despite a $3.3 trillion federal deficit, inflationary pressure is unlikely to appear anytime soon. COVID relief bills are more akin to a rescue package than traditional stimulus—the legislation largely replaces lost income, rather than creating new demand. The targeted nature of the spending makes it unlikely to fuel inflation.
Eventually, the Fed will need to unwind its excess holdings. But as quantitative easing demonstrated, the Fed’s growing balance sheet will not necessarily create inflationary pressure. With central banks abroad also providing extraordinary monetary support, the U.S. dollar should hold its value against major global currencies.
Equities are looking ahead
Investors are confident that COVID’s disruptions will prove transitory. Equities markets have long assumed the health crisis would be short-lived. Pandemic shutdowns have hardly threatened the long-term forces of globalization and digitization, which are transforming the economy and lifting corporate profits. If anything, the pandemic has demonstrated the adaptability of the U.S. economy and accelerated adoption of labor-enhancing technologies. Investors are also optimistic about the economy’s true potential.
Glassman’s view is that 2021 seems likely to validate optimism about the U.S. Economy and even as COVID’s dislocations will not disappear overnight, the pieces are in place for a rapid rebound. For an Indian investor taking exposure in other economies especially the US economy can provide adequate diversification to one’s portfolio.