Economic Outlook – September 2020

September 8, 2020 Economic Outlook


  1. Third-quarter U.S. GDP growth rate estimates have trended higher despite weaker consumer spending. Most third-quarter annualized growth estimates range from 25% to 30% reflecting a snap-back from the second-quarter’s steep decline of 33%. A V-shaped economic recovery appears underway consistent with phased reopenings following the exogenous shock of virus-related widespread stay-at-home orders from March to April. Business manufacturing has emerged as a second-half tailwind for economic growth following a record depletion of $315 billion from U.S. inventories due to supply chain disruptions. Current evidence indicates momentum is building in the particularly hard-hit auto sector where sales declined 40% from December to April. Company surveys also report improving sentiment in industries such as airlines, homebuilders and capital goods companies. Annualized GDP is still on-track to decline by more than 5% in 2020. The pace of recovery thereafter will depend on available treatments for the virus. 

  2. Inflation continues to elude the Federal Reserve, for now. Federal Reserve Chairman Jerome Powell recently noted the economic downturn is putting downward pressure on inflation, which has been running below the 2% target rate for several years. At the Federal Reserve Bank’s annual symposium, Chairman Powell announced the central bank would abandon its decades-old policy of pre-emptively raising rates to head-off inflation. The new framework utilizes an average-inflation target and outcome-based forward guidance; inflation would overshoot the Fed’s target during recoveries to avoid negative rate policy in declines. The hope is to spark inflation in the U.S. thereby avoiding a prolonged period of deflation as experienced in Japan. Central bank policy will shift focus from inflation to employment. Policy will henceforth minimize shortfalls in unemployment, which may provide “life-changing gains” for more people according to Mr. Powell. If these policies are successful, a period of higher inflation may take root, bolstering hard assets and result in a steepening of the yield curve.

  3. Unemployment remains near 10% indicating a prolonged economic slowdown with recovery dependent on containing the coronavirus. Still, the labor market shows improvement and continues to claw back losses from late-March when weekly unemployment claims peaked at nearly 7 million. Most recently, weekly claims declined to approximately 1 million. Hours worked are on track to increase 20% quarter-over-quarter. Due to unprecedented monetary and fiscal policy stimulus, U.S. household disposable income has remained mostly unchanged despite record post-war jobless claims. We expect the labor market will rebound quickly with broad distribution of a vaccine, perhaps in early 2021. However, a resurgence of virus cases as schools reopen, and the weather turns colder, might first cause permanent layoffs to increase in the near-term.

  4. Small businesses are facing an unparalleled test of their resilience. Crucial fiscal stimulus programs have expired, leaving many small businesses without necessary liquidity. A recent survey found that only one in six small business owners was “very confident” they would be able to maintain payroll without further assistance. The American Bankruptcy Institute expects significant small business bankruptcies this year. According to the Small Business Bureau, U.S. firms with fewer than 500 employees account for 44% of economic activity and employ nearly half of all workers. We expect additional fiscal stimulus support will be forthcoming when Congress reconvenes in September- or there is significant risk that the pace of economic recovery will be downgraded.

Sources: Bloomberg LLC, FactSet, U.S. Department of Labor

Disclosure: This commentary reflects the opinions of Welch & Forbes based on information that we believe to be reliable. It is intended for informational purposes only, and not to suggest any specific performance or results, nor should it be considered investment, financial, tax or other professional advice. It is not an offer or solicitation.

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