Oxford Economics' Chief U.S. Economist Gregory Daco joins Yahoo Finance Live to discuss what news of the Pfizer vaccine means for the U.S. economy, and the key indicators to watch under a Biden administration.
JULIE HYMAN: Well, let's now turn to the economy and talk about the implications of this news, but, also, of course, the election. I want to bring in Gregory Daco. He is Oxford Economics' Chief US Economist.
So, Greg, let's take this vaccine news first if we could because, as Myles alluded to, the market is taking this very enthusiastically here this morning. From an economic perspective, how enthusiastically are you taking it? And I would ask-- sort of the key question, in my mind, is does vaccine trump stimulus. In other words, does this make stimulus not as necessary? Or is the timeline such that we still really need it?
GREGORY DACO: No, I think, broadly speaking, we have to focus on the timing of such a health solution. We've always said that an economic recovery, a sustainable economic recovery, would be dependent on a strong health solution. And, as we just heard, yes, the news is very encouraging, but, before we get a broadly diffused health solution in the form of a vaccine, it's going to be another seven, eight months.
And, right now, the health situation is quite concerning, and the economics situation is also quite concerning in the absence of additional fiscal aid. So I think, right now, we should really be focusing, from a policy perspective, on delivering additional fiscal aid to households, businesses, and state and local governments.
BRIAN SOZZI: Greg, under-- under a scenario where a vaccine from multiple pharma companies next year gets distributed, what does GDP in the US look like?
GREGORY DACO: Right now, we're estimating GDP growth next year to be around 3 and 1/2%. That's little change to, actually, after the elections because we expect that, under a Biden administration, we're still going to have a Senate that's Republican. And, in that environment, we're not likely to see Biden's fiscal agenda be developed, and we're likely to see more of a stamp from Biden being imposed via executive orders, executive actions.
In that environment, that's still expected to be relatively moderate growth, again, coming out of this very deep hole that has been left by the COVID crisis. I don't think the vaccine, if it's developed around the middle of the year, really changes that picture that much because that's been our underlying assumption for a few months now.
Granted, the news is very good this morning from a markets perspective. We have to be very cautious that there are going to be ups and downs with vaccine developments over the coming months. And let's not forget what's essential is the distribution of that vaccine and that everybody takes it so that we actually get over this COVID crisis.
MYLES UDLAND: And, I guess, Greg, related to that, I kind of hear you saying-- and, you know, you have a great chart in your note showing how, even in your most optimistic forecast, we're like barely back at trend growth by the middle of 2022. And is there a risk here, perhaps, that economic policy takes its eye off the ball, as it were, and doesn't focus on things like getting the unemployment rate back under 4%, getting GDP growth back on trend if we become so enthused about the re-opening of movie theaters and whichever restaurants haven't yet closed? I mean, there is still a very deep hole to climb out of over the next decade, not just the next 18 months.
GREGORY DACO: That's my concern for the immediate future. It's that rear-view economics are quite alluring. We've seen a significant rebound in economic activity over the past few months, but momentum has slowed quite sharply. Our latest real-time data indicators are pointing to a real slowdown at this point of the year, and that's worrisome.
Yes, the market news, again, is quite encouraging, but we still have some ways to go. As of the third quarter, there was still a 1/3 output loss relative to where we were back in April. Employment is still down 10 million jobs. We still have a lot of millions of people that are dependent on unemployment benefits, which are expiring-- have expired, or are still dependent on a lot of aid for small businesses, a lot of aid to state and local governments. And the extension of benefits, which a lot of unemployed people have fallen into, that extension expires at the end of the year.
So we're really looking at a critical period now where we need to have additional fiscal stimulus to sustain a strong recovery. Without that, it doesn't really matter if we get a vaccine in six months' time. The economy is going to suffer in the very near term. And that means people suffering and not being able to spend as they would normally do.
MYLES UDLAND: And then, I guess, Greg, the natural follow would be we talked about fiscal, but, of course, on the monetary side, we've heard from the Fed just last week, and they've been quite steadfast in how they see the situation evolving. But I can imagine that, you know, let's say, the end of next year, we're talking about 1 and 1/2% on the 10 year. We're talking about steepening yields, sort of all the dynamics that I think some hawks might look at and say maybe the Fed will lose its conviction here. But do you see a Powell-led Fed changing their view on rates being at 0 through 2023, as they've currently outlined?
GREGORY DACO: No, I think that's, most likely, going to be the environment. Under the new flexible average inflation targeting framework, we're going to see a very dovish Fed for the foreseeable future. What the Fed may do, actually, in the very near term, is actually contemplate additional actions. It doesn't have as much firepower as it did, but it can still prevent a rise in long-term yields, for instance, if that becomes a hindrance in terms of the interest rate-sensitive sectors.
It can also increase access to its different-- different emergency lending programs, but really the ball right now lies in Congress' court. And they will have to deliver additional fiscal aid imminently to prevent quite a sharp slowdown by the end of the year and a very slow entrance into 2021, a year that we likely foresee as a policy gridlock year, which will not mean much additional fiscal stimulus going into 2021.
JULIE HYMAN: So, if all of that is the case, Greg, are there any other measures that President-elect Biden could take once he takes office? Is there anything else you expect on the economic front that he's going to be able to accomplish?
GREGORY DACO: Well, I think there are two elements that are quite important. The first one is policy certainty. We tend to underestimate uncertainty and the effect it can have on private sector action, but, in effect, certainty, in terms of what the outlook is from a policy perspective, is quite beneficial to most businesses. And I think, after the last 3 and 1/2 years, that will be a big plus.
The other thing that could be positive is some reach across the aisle, perhaps, increased collaboration between Republicans and Democrats to do the right thing for the economy. That might be a positive. Outside of that, it's likely going to be focused on executive actions, looking at trade, perhaps, as a sign of goodwill, reversing some of the tariffs on China, but we know Biden is not a pure free trader-- so that's unlikely to be a big game changer-- perhaps, more of a pro-immigration stance, but, again, that's not going to have an immediate, strong effect on growth.
So we're back to that fiscal stimulus question. Will we have a Congress that is going to deliver more fiscal stimulus in the near term? And, sadly, the paradox here is that, if markets are doing well, that might actually push policymakers to delay further fiscal action, assuming that markets represent the economy, which is not necessarily true.
JULIE HYMAN: Right, interesting point. Thank you so much. Gregory Daco is Oxford Economics' Chief US Economist. And we are continuing to watch futures here push higher this morning on that Pfizer news, Pfizer and BioNTech, its German partner, announcing, in a trial, that they showed 90% efficacy in their coronavirus vaccine. So we'll keep tracking that news.