The U.S. government’s non-farm payroll report came out and was worse than expected. Markets were looking for an additional 105,000 jobs but only got 49,000 new jobs. Additionally, last month’s figure was revised down from a 140,000 contraction to a 227,000 contraction, adding to the overall miss. Canada also published its jobs report, which also missed consensus as the economy lost 212,800 jobs against consensus for a 40,000-job contraction. While no job loss is good, the Canadian dollar has shown some resilience due to losses being almost entirely part-time positions, with full-time employment fairly stable.
While very easy monetary and fiscal policy measures should keep demand supported, the path of the virus and the race between infections and vaccinations still play a key role in the labor market, as illustrated by today’s jobs report. To this point, news flow on the virus and vaccines has improved significantly over the past couple of weeks. The daily pace of vaccinations has risen from around 200,000 at the end of the year to more than 1 million. Meanwhile COVID-19 cases have dropped ~41% from their peak after the widely anticipated post-holiday surge.
Unfortunately, the more contagious strains out of the U.K., South Africa and Brazil likely mean that we aren’t out of the woods yet. According to estimates, even a very optimistic pace of vaccinations will not be able to offset the increase in rate of spread of the new strains. This means that the number of cases and hospitalizations could return to their post-holiday peak in early spring.
By summer, the hope is that enough people will have been vaccinated to slow even the more contagious virus strains. This should allow for significant economic reopening, although there remain risks for another uptick in cases in the fall due to colder weather pushing activities indoors and super-spreader events. The magnitude of this potential infection wave will be dependent on the speed of vaccinations and the hesitancy or willingness among the younger population to be inoculated. Should a sufficiently rapid rate of inoculation be maintained through year-end, then the chances of sustaining a full economic reopening should increase.
The economic outlook, however, is more optimistic than the virus outlook due to the mighty “fiscal put.” Even if only half of President Biden’s $1.9 trillion fiscal proposal is enacted, the fiscal response to the pandemic will total up to nearly 25% of GDP. Further aiding the recovery is the accumulated $1.4 trillion in excess savings, or savings over and above the pre-pandemic trend, as a result of $2.8 trillion in stimulus measures and shutdowns in the service sector. That amount of dry powder doesn’t include the impact of the $900 billion Consolidated Appropriations Act signed in December or President Biden’s recent $1.9 trillion proposal.
So while the path of the virus still plays a role in determining the direction of the economy, fiscal stimulus should support growth, with the GDP receiving another boost when economic reopening progresses sufficiently to release pent-up demand for services. | |
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