Several areas of the U.S. economy experienced a swift rebound after the lockdowns began being lifted last May. The housing market, for instance, by various measures eclipsed its pre-pandemic high just a few months into the initial reopening, and shortly after the stock market also returned to record levels. Even gross domestic product, by far the broadest measure of economic activity, is on track to realize a full recovery as early as the second quarter of 2021. A clear laggard, though, has been consumer confidence, which roughly a year into the crisis remains closer to the cycle lows than the highs. This was not surprising in 2020 as Americans were dealing with stricter activity restrictions and a relentless influx of dour news headlines. This year, however, the improvement in sentiment should start gaining momentum as the vaccine rollout expands and the both the economic and quality of life impact from the pandemic fades. In fact, COVID-19 deaths in the U.S. have recently fallen to a 3-month low, and hospitalizations have declined for 57 consecutive days (down over 70 percent from the January peak). Consumers are starting to notice such trends because a new Gallup poll found that 60 percent of Americans now report that they perceive the coronavirus situation in the U.S. as getting better, compared to 26 percent who say it is staying the same and 14 percent who believe it is getting worse.
Another thing that may help boost consumer confidence in the near-term is the recent progress made in D.C. towards finally passing the next pandemic relief bill. Although the actual need and effectiveness of the various components of the latest fiscal package can be debated, what is undeniable is that such a large sum of money is going to have a big impact wherever it winds up being put to work. With the $1400 direct payments, for instance, if this is used by consumers for discretionary spending it could go a long way to support local brick-and-mortar businesses hurt by the lockdowns and other activity restrictions. However, according to the Census Bureau nearly three in every four households that recently received the $600 stimulus check used the funds to pay down debt or boost their savings. Similarly, a new Bank of America survey asked consumers how they would spend the incoming $1400 government transfer payment, and even in the lowest-income category a 53 percent majority reported that they plan to use the windfall to save, pay off debts, or invest. This supports our argument that the existing fiscal measures by themselves are unlikely to cause anything but a transitory uptick in inflation in 2021, at least when measured by the CPI and other popular price indices, and this is therefore another reason why any claims that Federal Reserve officials are worried about the U.S. economy overheating this year are largely overblown. 2022 and beyond is of course another story, especially if the new Congress decides to pursue additional, larger spending initiatives.
Sources: Econoday, Compound, Gallup, U.S. DoC, BAML, FRBSL