US Macro: Recovery gains momentum in early 2021 –

In notable contrast to trends we are seeing in Europe, the US recovery pace picked up a notch in the early part of 2021. Following a significant rebound in retail sales and solid industrial production growth in January, the ISM and Markit PMIs suggest both services and manufacturing continued to recover rapidly in February, with the Markit Composite PMI rising to 59.5 from 58.7 in January – the highest reading since August 2014.

All of this is consistent with the ongoing easing of restrictions throughout the US. The hospitality sector has now largely reopened, following moves by New York and California in January to reopen restaurants, and some states have even started easing capacity restrictions on hospitality – for instance in Texas and Massachusetts.

This has led to a continued recovery in indoor dining, with the latest 7-day average of OpenTable data showing dining 39% below normal levels, a big improvement from the 57% shortfall in January.

As a result of this, we expect Friday’s February payrolls data to show a big rebound in jobs growth – we project a 300k rise in payrolls, much higher than the 195k expected by the Bloomberg consensus.

With that said, we also expect the reopening to drive a pickup in the participation rate, which remains around 2 percentage points below pre-pandemic levels. While there is significant uncertainty over how quickly discouraged workers will return to the labour force, we expect this to keep the unemployment rate relatively elevated over the coming year, even with strong payrolls growth.

PMIs and hospitality sector stage a further recovery in February

Source: Refinitiv Datastream, Bloomberg, ABN AMRO Group Economics

Vaccine rollout and stimulus to drive further recovery, but Fed will stay accommodative – The relatively rapid roll-out of vaccines is also enabling the economy to reopen more quickly. The US is now inoculating 0.6% of the population per day – a similar pace to the UK, and much faster than the EU pace of 0.2% per day. As a result, 7.8% of the population has now received two doses of the vaccine, and a further 9% of the population has received a single dose, bringing the total fully/partially vaccinated to 16.8%.

The economy will also see support from a further massive fiscal package that is making its way through Congress, and we expect the $1.9trn (10% GDP) package to be passed broadly in tact by the middle of the month (although it could be subject to some modest slimming down in the Senate).

While these factors will drive a rapid closure of the output gap, we expect significant slack to remain in the labour market, and we do not expect the Fed’s new average inflation target to be met until late 2023 at the earliest. As such, and even with a continued rapid recovery in the economy over the coming months, we continue to think bond markets may be getting ahead of themselves in repricing Fed hikes. We expect the new FOMC projections, released on 17 March, to better anchor market expectations of future Fed policy and in turn restrain the rise in bond yields.