By Rex Nutting
The U.S. economy could use a shot in the arm — literally and figuratively —says award-winning economic forecaster Avery Shenfeld of CIBC World Markets, who is the chief economist of the team that won the Forecaster of the Month contest for October.
He’s speaking not only of the prospect of an effective and safe vaccine against COVID-19, but also additional fiscal support to the economy to help businesses, families, and state and local governments thrive until the pandemic eases.
The economy is not yet out of the woods, despite a great number on growth a few weeks ago and a very preliminary report from Pfizer /zigman2/quotes/202877789/composite PFE +1.28% and BioNTech /zigman2/quotes/214419716/composite BNTX +3.60% on Monday that their vaccine could soon be ready to be administered to a limited number of people.
CIBC’s forecast has been assuming that “mass vaccination would be well under way by midyear, and that the disease will be fading out” over the subsequent few quarters.
After growth averaging less than 2% between now and the middle of 2021, his team is forecasting growth of around 6% in the second half of 2021.
“The unleashed demand will be quite dramatic once the virus levels are low enough,” Shenfeld predicts. “The shot in the arm coming to protect us against COVID could be an even bigger economic shot in the arm than many now expect.”
“If there is a surprise in today’s [announcement from Pfizer], it’s not in that timing, but that the high effectiveness rate would imply a quicker phase out of COVID-19 case counts once mass vaccination is achieved,” he says. “It won’t do much to alter our fate in the next few months, in which a huge second wave will take the wind out of growth.”
“The economy faces three major headwinds,” Shenfeld says. There is the virus itself, of course.
Then there is the evidence that the economic recovery is slowing now that the low-hanging fruit has been picked. Some sectors of the economy won’t be able to recover completely until more people feel safe enough to gather in large crowds again. “We’ll struggle to get other sectors to play their role,” Shenfeld says.
Then there is the need for further fiscal stimulus and relief to insure that families and businesses will be able to survive financially until that day. The risk is that there’ll be “a failure of political will to provide support to prevent a wave of bankruptcies and foreclosures.”
In the medium term, he’s quite optimistic that the “rebound in the post-vaccine economy will be sharper.”
“There’ll be a rush of pent up demand,” he says.
He’s confident that the pandemic won’t leave large permanent scars to the structure of the economy. Unlike most recessions in which manufacturing takes the bulk of the hit, this recession clobbered services.
“We haven’t closed down factories; we’re closing restaurants and bars,” he says. It is much faster to get service businesses up and running again than it is to retool factories that have been shuttered. The capital investments needed will be minimal.
Shenfeld’s forecast is much more optimistic than the Federal Reserve’s, but he understands that the Fed needs to push out the public’s expectations of higher interest rates in order to keep interest rates down now.
He expects the Fed will begin to normalize its policy in 2023, but it could be sooner if the post-vaccine economy is even stronger than he’s forecasting.
Shenfeld and his colleague Katherine Judge turned in one of the best monthly performances in the 17-year history of our forecasting contest. Of the 11 economic indicators we tracked, their forecasts on six —nonfarm payrolls, GDP, consumer price index, consumer confidence index, housing starts and the trade deficit — were the most accurate among the 44 teams competing. And their forecast for new-home sales was the third-most accurate.
The crowning achievement was their forecast for 33.0% growth in gross domestic product, just shy of the 33.1% that was reported by the Bureau of Economic Analysis. “Even I had to laugh when our GDP forecast was within 0.1% of the first BEA estimate,” Shenfeld says. “The note I sent to my team was ‘how did we miss that extra 0.1%?’”
It was the ninth time Shenfeld and his team have won our contest.
The runners up in the October contest were David Kelly of J.P. Morgan Asset Management, Peter Morici of the University of Maryland, Spencer Staples of EconAlpha, and Ian Shepherdson of Pantheon Macroeconomics.
The MarketWatch median consensus published in our Economic Calendar includes the predictions of the 15 forecasters who have earned the most points in our contest over the past 12 months, plus the forecast of the most recent winner of the monthly contest.
The economists included in our consensus forecast are: Jim O’Sullivan of TD Securities, Christophe Barraud of Market Securities, Andrew Hollenhorst’s team at Citigroup, Seth Carpenter’s team at UBS, Ryan Sweet of Moody’s Analytics, Spencer Staples of EconAlpha, Avery Shenfeld’s team at CIBC, Stephen Gallagher at Société Générale, Brian Wesbury and Bob Stein at First Trust Advisors, Jay Bryson’s team at Wells Fargo, Michelle Meyer’s team at Bank of America, Richard Moody at Regions Financial, Ellen Zentner’s team at Morgan Stanley, Lou Crandall of Wrightson ICAP, and Michael Feroli of JPMorgan Chase.