What If...

When questions are not being asked, they tend to be the most interesting to explore. The most intriguing at the moment? What if a vaccine does not alter the overall trajectory of the economy?
There is little doubt it will alter the composition of spending and be a tailwind to job creation in certain sectors of the economy. But it is entirely unclear whether it will be a jolt to the overall growth rate.
Why? Americans have been spending at a rate similar to a fully employed economy because of the spring and summer stimulus.
Certainly, a vaccine will bring with it changes to the economy. But the question is whether or not it will act as an accelerant or simply alter the composition of the recovery.

“The future ain't what it used to be.”
― Yogi Berra

Yes, a vaccine is on the horizon. That is - and should be - a relief. But the question of how it changes the outlook for the economy and the trajectory of the economy is an entirely different matter. It is always a bit intriguing when a question is not being asked, particularly when it is one of such importance.

And there are reasons to be skeptical about the overall impact of a vaccine on the trajectory of the overall recovery. Namely, the consumer is spending like its a 1.999% unemployment rate. But the unemployment rate is 6.9%, and wages and salaries have not kept pace with the spending surge.

So what exactly is a vaccine going to do for the trajectory of the economic recovery?

“I wish I had an answer to that because I'm tired of answering that question.”
― Yogi Berra

That is a tough question to answer. After all, the consumer was able to spend through the Covid shock due to the massive stimulus in the spring and summer. For its part, the consumer figured out how to spend the money. Cannot go out to eat? Buy more groceries. Do not want to ride public transit? Buy a car. While the economic pain was real, there were also numerous booms. Housing is another example of where the money flowed.

In the midst of an economy still emerging (and that never fully emerged) from lockdown, the economy - and specifically the consumer - bounced back with vigor and vengeance. Which makes it a bit difficult to see how a vaccine is going to significantly alter the trajectory of the economy. Certainly, spending is likely to pivot away from elevated grocery to restaurants. But will it really act as an accelerant to the overall economic picture?

“It ain't the heat, it's the humility.”
― Yogi Berra

The most obvious pushback is likely to be "there will be a cyclical upturn from a vaccine that will be a powerful jolt to growth dynamics." Given the V recovery that has already taken place in manufacturing, it is a bit of an uphill battle to get to a better place in manufacturing in the near-term. Further, the new orders index is wildly high. Expecting a vaccine to materially accelerate the cyclical side of the economy might be a touch aggressive.

"But it will certainly be supportive to small businesses and hiring will pick up." Again, this is a bit of a stretch when it comes to the data. NFIB small business sentiment and hiring plans are already elevated relative to levels seen over the past 15 years. Will it begin to materially increase small business from these levels as inoculation approaches? Possibly. But the bounce will be from an already elevated level, and it is likely to be far less exciting than anticipated.

This is not meant to be a pessimistic note. It is meant to explore a question that does not seem to be getting much attention, but has dramatic implications. With the consumer is already spending like unemployment has fallen back toward the ambiguous " full employment" level and stimulus running off, the vaccine will find a consumer needing to rely on wages and salaries to continue spending. That requires employment to normalize, and that is not something that happens instantly. Not to mention, a vaccine on the horizon greatly reduces the chances of incremental stimulus to maintain the current pace of spending until the labor market has fully healed.

A vaccine will alter the mix of consumer spending and therefore how the economic recovery unfolds. That in an uncontroversial statement. It is less clear exactly how much a vaccine is going to jolt the overall economy in the end. Readjust the recovery, certainly.

But add accelerant to it? That is unclear.

As always, please do not hesitate to reach out with comments, questions, or suggestions.

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Samuel E. Rines
Chief Economist
Avalon Investment and Advisory
Direct: 713-358-6077
2929 Allen Parkway, Suite 3000
Houston, Texas 77019
srines@avalonadvisors.com

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