America was just seeing record GDP growth. Now be prepared for the slowdown

There is much to celebrate on Thursday’s GDP report showing the US economy grew at a record annual rate of 33.1% in the third quarter. It is evidence of the powerful double punch of fiscal stimulus and easy money from the Federal Reserve. And it reflects the reopening of much of the US economy.
Unfortunately there is real obstacles that will go forward slow down recovery, maybe strict. Some economists even fear that the economy will contract again and trigger a double-dip recession.

Surging coronavirus infections will slow growth this fall and winter. Hotels, restaurants, movie theaters, airlines, and other hard-hit businesses cannot fully recover if the pandemic worsens.

The failure of Congress and the Trump administration to reach a business cycle deal means more small businesses are sure to fail, state and local layoffs may accelerate, and stimulus controls are not coming to ease the pain for consumers anytime soon.

“Without further tax assistance through 2021, poorly managed health conditions and election uncertainty could mean a long winter,” wrote Gregory Daco, chief US economist at Oxford Economics, in a report on Monday.

“Very shaky” prospects

Economists are preparing for the inevitable slowdown. For the past six weeks, the New York Federal Reserve GDP nowcast model halved its estimate for fourth quarter annualized growth to just 3.5%. That would mean a major slowdown in the Blockbuster Summer GDP report.

Jefferies is straight more pessimistic and forecasts annualized growth of just 2% in the last three months of the year. This is because the early withdrawal of fiscal stimulus is likely to mean a blow to consumer spending – the biggest engine of the economy and the brightest spot of recent times.

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“The prospects for the fourth quarter are from our point of view very shaky,” wrote Aneta Markowska, finance economist at Jefferies, in a report to the customers on Thursday. “The economy lost a lot of its dynamism in the summer.”

The Back-to-normal index, created by CNN Business and Moody’s Analytics and fell below 60% in early April. It quickly recovered to around 80% by August. But it hasn’t moved since then.
Likewise the CNN Business Economic Recovery Tracker shows, that Hotel occupancy is still 31% below the pre-crisis level. U.S. airports process less than half of the travelers who took them at this point in 2019.

The risk of double-dip recession is real

And these trends could retreat as states and cities try to fight the spread of the pandemic. Chicago and Newark have already announced new restrictions. Germany and France are implement partial locks. Disneyland Paris is shut down again.

“The way forward will inevitably be an uphill battle,” wrote Seemah Shah, chief strategist at Principal Global Investors, in a report on Thursday. “With virus cases rising and a new tax package not yet seen, economic concerns are resurfacing.”

This is why some economists believe the recovery will stall.

“We’re slipping back into recession,” Danielle DiMartino Booth, CEO and chief strategist of Quill Intelligence, told CNN Business this week.

Jeoff Hall, Managing Economist at Refinitiv IFR, warns that there is “a strong possibility of negative growth” in the fourth quarter, possibly even a double-digit decline in GDP, as COVID cases rise and new restrictions are imposed.

Even the real estate market, arguably the hottest part of the economy, is showing signs of cooling.

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Upcoming home sales fell unexpectedly in September, according to new figures released on Thursday. This is the first drop since April and despite the record low mortgage rates.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, is more nervous in early 2021 than he was late this year.

“We are concerned that the first quarter may not see any growth,” Shepherdson wrote in a report, “unless new momentum is passed almost immediately after the January 20th inauguration.”

When does the stimulus come?

Therefore, the election result will play a crucial role in the recovery.

If the Democrats win the election, Jefferies expects a massive $ 3.5 trillion stimulus plan. That would lead to a stronger recovery, Jefferies said, with GDP growing 5.5% in 2021.

But the size of a stimulus package would be smaller, perhaps much smaller, if Democrats and Republicans shared control of Congress and the White House. Such a scenario would cause GDP to grow more slowly, Jefferies said.

Wall Street is scared, but there should have been the fall coronavirus surge

Whoever is responsible is facing a huge challenge: the U.S. economy still shed nearly 11 million jobs before the pandemic. JPMorgan doesn’t see a full recovery of jobs until 2022.

“The easy part of the economic recovery is over,” said Lauren Goodwin, an economist with New York Life Investments.

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