U.S. economy loses momentum

January 20, 2021 – As we start the new year, several key data points and events are influencing our forecast revisions this month. First, as a result of the Georgia Senate election run-off on January 5, Democrats will control both chambers of Congress and the White House; we had assumed Congress would be divided. For this reason, we have upwardly revised our estimate of gross domestic product (GDP) growth this year to reflect another round of fiscal stimulus (in addition to the package passed last month) and tax policy changes beginning in 2022. Outside of fiscal policy, the virus case surge and the adverse affects on growth and consumer spending have been far worse than we assumed. Consumer spending growth in Q4 of 2020 and Q1 of this year were revised downward as a result. Incoming economic data, including the December jobs report, reflected the quick loss of momentum in the economic recovery.

Now that the books are closed on 2020, we estimate fourth quarter GDP growth to be 3.4 percent (annualized). The loss of momentum in Q4 will translate into a softer 0.9 percent annualized rate of GDP growth for Q1, with real consumer spending contracting outright. Full-year GDP growth for this year is expected to rise 3.3 percent following an estimated 3.5 percent contraction in GDP growth in 2020. We continue to forecast stronger growth in the second half of this year as a vaccine becomes more widely available and consumer confidence begins to more meaningfully recover.

Highlights:

• Economy losing momentum
• Fiscal policy should support growth
• Consumer spending now likely to contract in Q1
• Long-term interest rates rising

^*Seasonally adjusted (SA), compound annualized growth rate (CAGR), year-over-year (YoY).

Sources: Visa Business and Economic Insights and U.S. Department of Commerce.

Georgia changes our fiscal policy outlook

Following the Georgia Senate run-off, we now know the new Congress will be controlled by Democrats with a very slim 51-vote majority in the Senate (with Vice President-elect Harris serving as the tie-breaking vote). The narrow majority will likely limit, but not prevent, major policy changes. As a result, we now expect another round of fiscal stimulus with as much as $2,000 stimulus checks, further enhanced unemployment insurance benefits, and aid to state and local governments getting passed before the end of Q1. We have upwardly revised our forecast for government spending at the federal, state and local levels. We have also increased our forecast for personal income growth as the stimulus effects of both December’s stimulus package and the likely new package boost Q1 income from government transfer payments. Even with the stimulus effects, real consumer spending is still expected to contract in Q1. In the absence of stimulus, we would likely see an even greater contraction in spending for the quarter. Beyond the near-term stimulus effects, we have built in corporate tax increases beginning in 2022, which will weigh on business investment and after-tax corporate profits.

Consumer spending recovery to slow in Q1

Economic data on the consumer sector for the final month of the year was disappointing, to say the least. Consumer confidence slid as state and local governments imposed further restrictions to contain surging COVID cases, and the economy experienced the first month of job loss since last April. All signs are pointing towards a significant loss of consumer spending momentum. Another headwind that will likely unfold later this year is inflation. Prices are expected to rise for consumers, thus opening up a gap between nominal and real consumer spending. The slower pace of consumer spending to start 2021 suggests that a full recovery in nominal consumer spending is not likely to occur until the second quarter of this year.

Long-term interest rates moving higher

One byproduct of the change in party control following the Georgia elections was a sharply higher 10-year Treasury rate. The upward move reflects the increased likelihood of another stimulus package along with higher federal government outlays over the next few years. Such programs are expected to result in greater federal debt issuance (greater supply). This led investors to price in higher longer-term interest rates.

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