Economic Growth to Slow But Be Above Trend in Q420

Stocks ran into trouble last week as the overbought tech sector began to unwind and Washington appeared deadlocked over further stimulus.   These factors may have more room to run.  In the background is another potential negative -- a deceleration in US economic growth (but still strong).  This is almost inevitable after the sharp bounce-back in Q320 Real GDP.  Along with the likelihood of growing caution ahead of the November elections, this macroeconomic story could hold back further stock market gains in the near future. 

The economy's recovery has been V-shaped so far.  The Atlanta Fed model's forecast is now up to 29.6% (q/q, annualized) and will likely be revised up further.  The rebound goes a long way to unwind the -31.7% plunge in Q220.  But, there is still not a full recovery in the labor market:

                                                                     Shortfall Relative to Pre-Virus February Peak 

                    Unemployment Rate                             4.9%  pts      

                    Private Payrolls                                  10.7 Mn

                   Total Hours Worked                              7.7%

Real GDP Growth in Q420 is most likely to be well below the Q320 pace, although it still should be above trend -- and thereby eliminate some of the labor market shortfalls.   One piece of evidence pointing to slower Q420 GDP Growth is the deceleration in Total Hours Worked over Q320.  THW in August is 2.4% (annualized) above the Q320 average, versus 27.7% above the Q220 average.  This sets the stage for slower Q420 Real GDP Growth, unless THW pop in the next couple of months.  But, it also suggests a solid take-off point for above-trend growth in Q420 -- which will help to reduce labor market slack.  In part, Q420 growth would reflect a full quarter's worth of re-openings, after they happened over the quarter in Q320.

Inflation data will be the highlight of US economic calendar this week.  Consensus looks for a pre-virus trend-like 0.2% m/m for August Core CPI, keeping the y/y at 1.6%.  The risk is that recovery-fueled price hikes, as well as the weaker dollar, will push the Core CPI up by more.  In either case, the report should not change the Fed's intent to keep rates low and allow inflation to rise above 2.0% to make up for past shortfalls.