Vaccine news gives a much-needed boost to the economic outlook

The coronavirus and the economy have always been linked tightly, but the relationship took a decidedly positive turn Monday.

With the news that Pfizer had seen a more than 90% success rate in its vaccine trials came the first tangible feelings that the eight-month Covid-19 nightmare was, if not nearing an end, at least loosening its death grip sometime in the foreseeable future.

That’s unequivocally good news for the U.S. economy, which has been in a technical recession in February.

“This is very good news in both the near term and also over the longer run. In the near term, we’ve seen the stock market boosted so that’s going to boost household wealth. That’s a positive for consumer spending going forward,” said Gus Faucher, chief economist at PNC Financial Services. “We’re not out of the woods, obviously. We are going to have setbacks, but hopefully this sets us on the right path.”

Following a record-breaking third quarter that helped offset most though not all of the damage from the early days of the pandemic, the outlook ahead was unclear and looking dimmer. That’s because surging coronavirus cases raised the prospects of a tough winter ahead, with business slowdowns and less commercial activity as people became more cautious.

American business has had to retool itself greatly during the pandemic, adjusting to less travel and nightlife and more stay-at-home activities in both work life and personal life.

However, the Pfizer news sends a signal that things could be getting back to normal sooner instead of later.

“My big concern was that we would see slow growth for a long time because it would take time for the economy to adjust,” Faucher said. “If we have a viable vaccine, then we don’t have to do as much restructuring.”

Fueled by a surge in consumer spending and residential and business investment, gross domestic product exploded at a 33.1% growth rate in the third quarter. That helped offset some but not all of the – also unprecedented – 31.4% plunge in the second quarter, brought on by a massive shutdown in March and April.

The economy relied largely on accommodative fiscal measures from Congress and looser monetary policy from the Federal Reserve.

Data has been almost universally positive of late, with the October payroll growth of 638,000 the latest sign of continued strength. Private payrolls actually rose more than 900,000 as part of a continuing trend in which economic reports have easily outperformed Wall Street expectations.

Adding vaccine-fueled confidence to the economy provides an even stronger platform.

“The big news to me is just how strong the economy already is,” said Jim Paulsen, chief investment strategist the Leuthold Group. “What’s underestimated is the lagged effect of past policies. It’s well established that there’s a pretty long lag, a year or more, on the impact of these, and we’re just entering the window of when that might show up.”

Though he acknowledged that the help from a vaccine won’t be immediate, it’s “going to add a ton of stimulus to the economy just in terms of animal spirits lifting. I think you’re talking high growth,” Paulsen said.

“What the pandemic did in a big way was it put corporate America into a survivability mode in a manner that has never really happened before,” he added. “What that means for profitability is it put the entire corporate world at maximum operating efficiency, maximum profit leverage, minimum breakeven points, which means that if you get any incremental demand that falls to the bottom line, it could be immense.”

Markets rallied strongly on the news, with major averages approaching new highs and the Dow Jones Industrial Average nearing 30,000.

To be sure, though, there was some caution that there’s still work to do and progress on the disease front could still come in fits and starts.

“Obviously, this is great news, though I still haven’t changed my forecast as a result of it for the near term or next year,” said Mark Zandi, chief economist at Moody’s Analytics. “It doesn’t change the reality that the pandemic is raging and will likely cause business and consumers to be a little more cautious over the next two or three months while we work through this.”

“I’ve long been expecting we’d have an effective vaccine or vaccines that are widely distributed or adopted by mid-next year, and I don’t think that changes that timeline, it’s just consistent with that timeline,” he added.

One other question that was front of mind whether the latest developments would change Fed policy.

Central bank officials have recently affirmed a policy commitment not to raise rates even if inflation starts to rise above the Fed’s 2% target or if unemployment starts to fall sharply. Stronger-than-expected economic growth could pull the Fed off its ultra-easy policy, though most of those interviewed Monday said that would be more likely come in terms of the Fed’s bond-buying and lending programs and not so much from its rate stance.

“Moving from expectations to reality on the vaccine has to bring in the timeline for when the Fed thinks it’s going to begin to raise rates,” said Steve Blitz, chief U.S. economist at TS Lombard.

However, he doesn’t see any major changes to Fed policy coming until at least 2022. In the meantime, he expects a gradual boost to growth with the Fed reluctant to move until it sees a much tighter labor market and a strong outlook for national health.

“This is not going to change the economy in Q4 or Q1 next year. You and I are not going to suddenly go and sit in an arena with 20,000 of our best friends or sit in a bar with 100 of our best friends on top of each other drinking and yelling at each other because I’m going to get an injection in June,” Blitz said. “In terms of the broader economy, you’re going to be getting back to the world much more quickly because the damage done will prove to be less than we originally anticipated.”