On Friday, JPMorgan became the first Wall Street bank to warn that GDP will turn negative by early next year as Americans wait for vaccines to get distributed.
“This winter will be grim,” JPMorgan economists wrote in a client note, “and we believe the economy will contract again” in the first quarter.
‘Dereliction of duty’
“Congress has failed the country,” said David Kotok, chief investment officer of Cumberland Advisors.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, slammed Congress for an “appalling dereliction of duty.”
Treasury Secretary Steven Mnuchin said those funds can be used by Congress to stimulate the economy, but there’s no guarantee a deal can be reached there. And this is a bizarre time to remove ammo the Fed is using to fight the crisis.
“Trump would have signed a bill pre-election. Now he is unpredictable and our national government seems to be in chaos,” Kotok said.
Even the US Chamber of Commerce, a normally Republican-friendly organization, said Mnuchin’s decision “closes the door on important liquidity options for businesses at a time when they need them most,” adding that it “unnecessarily ties the hands of the incoming administration.”
Light at the end of the tunnel
“The early success of some major vaccine trials increases our confidence that such medical intervention can limit the damage that the virus has inflicted on the US economy,” JPMorgan economists wrote.
JPMorgan expects the economy to grow “briskly” during the second and third quarters, with annualized growth of 4.5% and 6.5%, respectively.
Of course, some parts of the US economy are outright booming.
The strength of the housing market helps to blunt the broader economic troubles caused by the pandemic.
Consumer spending slows, layoffs rise
Still, there are growing signs the worsening spread of Covid-19 is hitting the US economy.
“The restaurant recovery ground to a halt in October,” said Pantheon’s Shepherdson.
Meanwhile, the labor market recovery is losing steam — and will be pressured by the new travel restrictions. Initial jobless claims rose in the latest week for the first time in a month. At 746,000, first-time unemployment claims remain well above the worst levels of the Great Recession.
The US economy has shown surprising resilience — until the last few weeks.
But now Aneta Markowska, chief financial economist at Jefferies, fears latest coronavirus spike and health restrictions will cause US consumer spending, the biggest driver of the economy, to drop to zero in the fourth quarter.
“There is a real risk we could contract,” Markowska said.
“If you’re an investor with a long-term horizon, you can look through this near-term weakness,” Markowska said. “If you’re an employee in a COVID-sensitive sector, the vaccines don’t help you yet in any way, shape or form.”
The unprecedented initial response by the Fed, Congress and the White House was aimed at limiting the pandemic’s permanent economic damage. Officials sought to avoid bankruptcies, business closures and permanent job losses.
JPMorgan, however, said the spike in the number of permanent job losses is a “worrisome development” because it can take those newly unemployed longer to find work, plus they run the risk of running out of unemployment benefits.
The hope is that a faster recovery in 2021 limits the scars to the economy. Even so, “some lasting damage still seems inevitable,” JPMorgan said.