Wednesday, December 2, 2020

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Vaccines unlock the final leg of a full economic recovery.

Since nationwide stay at home measures began easing back in April and May, the U.S. economy has consistently beat expectations.

Data from the housing market, retail sales, and measures of manufacturing and service sector output have come in better than feared for months now.

Stimulus from the CARES Act shored up consumer balance sheets.

And while the unemployment rate is still at a disappointing 6.8%, tens of millions of folks have returned to work after furloughs or temporary layoffs in the spring.

So as investors look towards 2021, this resilient economic backdrop coupled with positive vaccine news has brought another pillar of next year’s economic forecasts into focus — pent-up demand.

“The good news about the economy is that if we get past this very difficult period, there is a lot of pent-up demand,” Steven Rattner, chairman and CEO at Willett Advisors, told Yahoo Finance on Tuesday. “People have saved at an enormous rate. They also got stimulus checks and other forms of payments, and so the consumer is in very good shape at the moment.”

This thesis basically says delayed spending on activities that were either deemed unsafe by consumers or restricted by local governments will rush back as the pandemic eases, giving a jolt to consumption and in turn GDP growth.

And while this recession has been unique in many ways, Nick Colas, co-founder at DataTrek Research, said in a note to clients Tuesday, “consumers absolutely delay purchases of just about everything they can in a recession, even when it is dangerous to do so (e.g. tires), and then ‘make up’ for this lost consumption in the next economic recovery.”

Against the backdrop of an economy performing better than expected, this surge in spending would be gravy. And it adds to Neil Dutta’s idea highlighted in Tuesday’s Morning Brief that there are simply more reasons for economic optimism over the next 12-18 months than there are reasons for pessimism about the next two months.

As for how large that consumer cushion really is, economists at Morgan Stanley pegged consumers’ excess savings through September at $15 trillion. And this balance is part of what the firm expects consumers to draw down as confidence grows regarding a potential end to the pandemic.

“Heightened uncertainty throughout 2020 has kept the savings rate elevated through September (14.3%), but as expectations improve, we expect spending to follow and the savings rate to fall further,” said Morgan Stanley economists led by the Ellen Zentner. “Moreover, we expect the widespread availability of a vaccine by mid-year to permeate expectations and spending intentions as a broader array of services become safe to resume.”