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The U.S. economy is recovering from the COVID-19 recession quicker and stronger than most forecasters expected, but the economy will still need continuing support from the Fed and the Congress, says Andrew Hollenhorst, chief U.S. economist for Citi Research and the winner — along with his colleague Veronica Clark — of the Forecaster of the Month contest for May.
The 2.5 million gain in payrolls in May signals “the beginning of an historically rapid expansion,” he wrote to clients. Hollenhorst has long been predicting that the economy would bounce back quickly, but the pace of the job gains in May surprised even him.
“We had expected millions of jobs to be added over the summer, but that this would not be picked up until the release of the June jobs report,” he wrote. That’s not to say that everything is fine, not with nearly 21 million people out of work.
Also read:Revisiting that funky drop in unemployment to 13.3% in May: Nobody really believes it
He expects the official unemployment rate to fall from around 12.5% at the end of June to about 7.2% at the end of the year. Payrolls should increase by about 12 million in the second half of the year.
Hollenhorst says the pandemic has scrambled all the usual business-cycle relationships. But economists are adapting quickly to gleaning information from relatively new real-time data sources — such as mobility data from smartphones and data that tell us how many diners are being seated at restaurants.
The key to this recovery is not the typical question of how long it will take for the economy to work out the underlying imbalances in credit, investment, inventories or money supply that sparked the recession, but in “how quickly people can go back to their prior behaviors.”
“A variety of higher frequency data and anecdotal reports are pointing to a rapid return to a level of activity much closer to (if still below) normal. It is not that we are overly optimistic on the prospects for the U.S. economy, just that we are much more optimistic than the extreme pessimism that until recently had become the accepted wisdom,” he says.
Hollenhorst says the quick actions by the Federal Reserve and Congress have made a big difference. Small businesses were able to put a sizable number of workers back on the payrolls, just as intended by the Paycheck Protection Program. The Fed’s fire hose has restored credit and confidence to a big segment of the business community. The Fed concludes a two-day meeting later Wednesday.
He expects further action by Congress this summer to extend some of the lifelines that are set to expire, such as enhanced unemployment insurance and the PPP. That support should prevent a second wave of recession that could happen if small businesses were to fail or if unemployed workers were to cut back on spending because their incomes have fallen so sharply.
| Hollenhorst and Clark’s forecasts | Number as reported* | |
| ISM manufacturing index | 39.8% | 41.5% |
| Nonfarm payrolls | -21.6 million | -20.5 million |
| Trade deficit | -$43.5 billion | -$44.4 billion |
| Retail sales | -8.7% | -16.4% |
| Industrial production | -11.4% | -11.2% |
| Consumer price index | -0.7% | -0.8% |
| Housing starts | 890,000 | 891,000 |
| Durable goods orders | -17.2% | -17.2% |
| Consumer confidence index | 86.0 | 86.6 |
| New home sales | 465,000 | 623,000 |
| *Subject to revision | ||
Hollenhorst and Clark won MarketWatch’s forecasting contest over 44 rival teams in part by having the most accurate forecasts on two of the 10 indicators we track in the contest — housing starts and durable goods orders. In addition, their forecasts for three others — the ISM manufacturing index, industrial production, and the consumer confidence index — were among the 10 most accurate.
The runners up in the May contest were Rubeela Farooqi of High Frequency Economics, Jay Bryson’s team at Wells Fargo, and Avery Shenfeld at CIBC, Christophe Barraud of Market Securities and Ryan Sweet of Moody’s Analytics in a three-way tie.
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 forecasters in our survey are: Christophe Barraud of Market Securities, Jim O’Sullivan of TD Securities, Ryan Sweet of Moody’s Analytics, Andrew Hollenhorst’s team at Citi Research, Seth Carpenter’s team at UBS, Jay Bryson’s team at Wells Fargo, Brian Wesbury and Bob Stein at First Trust Advisors, Peter Morici of the University of Maryland, Jan Hatzius’s team at Goldman Sachs, Lou Crandall of Wrightson ICAP, Stephen Gallagher at Societe Generale, Ian Shepherdson of Pantheon Macro, Robert Brusca of Fact & Opinion Economics, Michelle Meyer’s team at Bank of America, and Stephen Stanley at Amherst Pierpont.
