Shifting into Higher Gear—the Case for a Brighter Economic Outlook – February 22, 2021

After languishing near the end of last year, the economy is showing tentative signs that growth is beginning to pick up. Economic forecasting is sometimes considered educated guesswork, especially in today’s environment, but there are cautious reasons to be optimistic.

The economy is benefiting from the $900 billion relief package passed in December and seems likely to get another boost from a costlier bill that could pass in a few weeks.

There is plenty of pent-up demand that’s been curtailed during the pandemic. An unusually high savings rate (per U.S. BEA data) suggests there is ample firepower to fuel growth later in the year. Covid vaccinations are ramping up, and the 7-day moving average for new daily U.S. cases is down 70% since early January (CDC Covid tracker through February 17).

Dr. Marty Makary, a professor at the Johns Hopkins School of Medicine and Bloomberg School of Public Health, wrote in the Wall Street Journal last week that he believes we could reach herd immunity by spring. If so, that would be good news.

Let’s look at one important piece of data that is signaling a firmer economic foundation. Retail sales surged by 5.3% in January, far exceeding the consensus estimate of a 1.1% rise, according to Investor’s Business Daily.

Most analysts point to the $900 billion stimulus package and an easing of Covid restrictions for January’s showing. Notably, the huge miss by analysts highlights the difficulty in forecasting in today’s environment. In this case, the botched forecast was a pleasant surprise.

In addition, industrial production data compiled by the Federal Reserve reflects continued strong performance in the industrial sector, with manufacturing production having recovered 95% of the loss experienced since January 2020 (through January 2021).

Of course, there are always risks, and the path of the pandemic will play a major role. It is also important to consider the unintended consequences of Fed policy and fiscal policy decisions being made today.

But given the fallout from the pandemic, policy makers are willing to take the risk that doing too little could have greater consequences than doing too much.

Created 2021-02-22 15:31:02