Market Perspectives: 4th Quarter 2020

Economic Outlook: Through The Pandemic And Beyond November

3 min read
Economic Outlook: Through The Pandemic And Beyond November

Many factors feed into the relative strength or weakness of the US economy, but the president traditionally receives the credit or blame. Fiscal policy taxes and government spending – have an important role in economic activity, and confidence can drive consumer spending and business investment decisions. However, Congress controls the purse strings. The president does not have the ability to fine tune the economy, but whoever wins the White House will face a number of challenges in dealing with an ongoing pandemic and record levels of government borrowing and spending.

In any downturn, fiscal policy can play an important role in reducing the damage. Without it, temporary impacts can lead to more permanent damage. Businesses fail. Workers lose job skills. Ideally, the degree and timing of support should depend on measures of job distress, such as the unemployment rate. However, lawmakers have not been able to agree on that.

While the increase in government borrowing is worrisome to many, the real danger is not doing enough to support the economy in the near term and ending support too soon. To get back on a sustainable trajectory, with debt rising no faster than GDP, we’ll need more tax revenue or less spending.

What happens in 2021 depends on more than who wins the White House. During the Clinton years, a divided government led to a budget surplus. Republicans didn’t get big tax cuts. Democrats didn’t get big spending increases. In contrast, in the current situation, a divided government makes it harder to get things done. One party rule (the same party controlling the White House and both chambers of Congress) will most likely lead to higher taxes or cuts to entitlement programs, depending on the outcome.

The Federal Reserve will continue to do its part beyond November, keeping short-term interest rates low, through 2023. The Fed’s recent changes to its stated policy objectives had already been underway in practice over the last couple of years. Specifically, the adoption of a flexible average inflation targeting framework means that policymakers will allow inflation to exceed the 2% goal following a period of inflation below 2%, but this will not be done in a mechanical way. Judgement will drive policy decisions.

The Fed’s employment goal has been made broad-based and inclusive. In a break from the past, the Fed will no longer raise short-term interest rates preemptively to fight inflation when the unemployment rate is low. There is no specific target for the unemployment rate, as officials recognize that low unemployment substantially benefits low- and medium-income communities.

The pandemic now appears likely to be a more long-lasting economic event, requiring a restructuring of significant parts of the economy over the quarters ahead – and elevated job losses remain a key risk. While the Fed has been critical in providing liquidity, it can’t offset the economic impact of an ongoing pandemic. Further fiscal support will be needed, regardless of the November outcome.

Economic Snapshot

The pace of economic growth will depend on the virus, the efforts to contain it, and the degree of fiscal support. However, a full recovery is not expected until the pandemic is well behind us. In the meantime, economic activity is likely to be mixed, with some sectors doing better than others. Insufficient fiscal support, elevated job losses, and a squeeze in state and local budgets remain key concerns.
MP-Q42020-E.S.-768x794 (1)Raymond James. “Economic Snapshot.” Investment Strategy Quarterly. Pg. 17, Web.

Raymond James, “Investment Strategy Quarterly Recap.” Investment Strategy Quarterly. Pg. 8-9 Web.

Investing involves risk, and investors may incur a profit or a loss. Past performance is not an indication of future results. There is no assurance
that any forecast mentioned will occur. Expressions of opinion are as of this date, subject to change without notice and are not guaranteed to occur.  Some material in this newsletter prepared by Raymond James for use its financial advisors. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. All opinions are those of the author and not necessarily Raymond James.

Posted November 6, 2020 in Articles Business Investments Market Updates News Articles




 

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