Will U.S. economic recovery slow down in the coming months?
The U.S. economy suffered a strong hit due to the Covid-19 pandemic. Pessimistic forecasters have often doubted the pace of the U.S. economy’s recovery over the last year. However, the consensus has currently largely caught on to the U.S. economic boom, but some analysts still worry about “peak-data.”
Experts discussing “peak data” claim that the pace of economic growth cannot possibly get any stronger. Thus, they argue that instead of accelerating, the growth will continue at the current pace. If economic growth levels off, equity markets will follow, potentially coming under some pressure.
Do these analysts’ opinions have merit?
We should discuss economic data by its momentum and the level of activity. In this case, momentum refers to how economic conditions are changing compared to the recent months. Are things slowing down or picking up? Where are things going? On the other hand, the level of activity measures how far conditions stand from their historical averages – is the economic data currently better or worse than average?
Some measures measure momentum, while others look at the level. For instance, the ISM manufacturing PMI measures momentum.
The market is typically concerned with future profits. As a result, the strongest period for market returns is early in the business cycle, immediately following the decrease in the economy. In this period, the momentum in the economic data is strong, while the activity level is still low.
During the pandemic, the consensus overestimated the size of the GDP plunge while continued underestimating the speed of the ensuing recovery. Even though 2021 will likely be a strong year of growth, the consensus still forecasts meaningful slowing as growth slows from 6.6% in 2021 to just 3% in 2022 (Q4/Q4).
Still, such a forecast may not prove right with the economic reopening. More and more businesses shrug off lockdowns, and rising demand means that they will recover from the pandemic collapse faster-then-expected.