Goldman Sachs Predicts Faster US Economic Recovery

JP Morgan strategist: Biden's priority is covid 1:28

(CNN Business) -

The Democrats' surprise victory in Georgia should pave the way for a faster economic recovery from the pandemic, says Goldman Sachs.

The bank updated its 2021 unemployment and GDP forecasts on Wednesday night after CNN and other media outlets projected that Democrats will take control of the Senate.

The institution said this result means they will have enough votes to grant hundreds of billions of additional relief to an economy wounded by the worsening pandemic.

"Democrats are likely to approve more fiscal stimulus in the first quarter," Goldman Sachs economists wrote in a note to clients.

The optimism of economists helps explain why investors have not been mostly concerned about the chaos in Washington.

The Dow closed at all-time highs Wednesday even after the mob of Trump supporters stormed the Capitol.

Goldman Sachs now projects GDP growth of 6.4% in 2021, up from the previous projection of 5.9%.

That's well above the consensus estimates of around 3.9%.

That faster growth should also translate into more hires and fewer layoffs.

The Wall Street bank now expects unemployment to fall to 4.8% by the end of 2021 and to 3.9% by the end of 2023.

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Morgan Stanley is also becoming more optimistic about the economy: the bank anticipates US GDP growth of 5.9% in 2021.

"With the likelihood of further fiscal expansion, this gives us greater confidence that the recovery of the US economy will be on a solid footing," Morgan Stanley economists wrote in a note to clients Wednesday.

Is another $ 750 billion of aid on the way?

President-elect Joe Biden has called the $ 900 billion stimulus package enacted by Congress last month a "down payment."

• LEE: When will you receive the second stimulus check?

Goldman Sachs now expects Congress to pass another $ 750 billion of fiscal stimulus in February or March.

This would include $ 300 billion in stimulus checks, $ 200 billion in aid to state and local governments, and $ 150 billion in additional unemployment benefits.

The bad news is that it seems increasingly that the economy will need more help to get through the pandemic.

Private sector employers unexpectedly cut jobs in December, according to ADP.

Not only have COVID-19 deaths and hospitalizations risen to record levels, but the deployment of the vaccine has also been slow.

Less than half of the vaccines distributed by the federal government have been administered.

There is also concern about how fast new strains of the virus are spreading around the world.

Senior Democrat bullish on infrastructure and stimulus

"Discouraging news on the virus front, including the slow pace of vaccination and the emergence of more infectious virus strains, suggests that increased stimulus spending will be delayed longer than usual," said Goldman Sachs economists. .

In other words, the next stimulus package may not accelerate growth in the economy as much as expected, at least in the first place.

Economists and political analysts do not expect Democrats to enact drastic tax increases that threaten the recovery.

Narrow majorities in the Senate and House of Representatives will make it difficult to pass broad legislation in Congress.

Still, some longtime Democrats are optimistic about the ability to pass important laws.

Democratic Senator Sherrod Brown said the fact that Senate Majority Leader Mitch McConnell no longer controls the agenda changes the situation.

"McConnell put a brake on our ability to address the issues that people support," Brown told CNN Business on Thursday.

Brown, who is on his way to becoming chairman of the Senate Banking Committee, predicts there will be enough votes to enact $ 2,000 stimulus checks, a higher minimum wage, additional rental assistance and an increase in home insurance. unemployment.

He also added that several Republicans will support these initiatives now that they have the opportunity to vote on them.

The Ohio senator is also optimistic at the prospect of bipartisan support for an elusive infrastructure package that includes funding not just for roads and bridges, but also greater access to broadband.

"We've talked about it forever," Brown said.

Will the Fed raise rates during Biden's first term?

The big debate on Wall Street now is whether the Democrats' victory in Georgia alters the favorable environment driving financial markets.

Very low inflation has prompted the Federal Reserve to promise to keep interest rates at zero for the foreseeable future.

At a time when bonds are yielding next to nothing, that emergency stance has forced investors to put money in stocks.

But the Fed's plans could change if inflation begins to show signs of life.

Goldman Sachs said it now projects that inflation will nearly reach the Fed's 2% target by the end of 2023. The bank also now expects the Fed to "lift off" from zero during the second half of 2024, compared to its previous forecast of he was referring to early 2025.

However, Morgan Stanley warns that inflationary conditions are already brewing.

The bank expects core inflation in the United States to reach 2% much earlier, by the end of this year.

And that it "exceeds" that target by 2022. That's because the company expects US officials to take stronger action to address worsening inequality.

"The COVID-19 shock has exacerbated the impact on lower-income households," Morgan Stanley economists wrote, "creating even greater urgency for policymakers to act to bring relief to affected households." .

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