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Markets and Economy

5 Economic Trends to Watch in 2021

With several COVID-19 vaccines moving into wide distribution, will the economy continue its rebound in the coming year?

Key points:

  • GDP is already closing in on its pre-pandemic high. Output has climbed to 98.7% of its February 2020 peak.   
  • Consumers accumulated an estimated $1.5 trillion in excess savings over the past year. As the pandemic wanes, a wave of pent-up demand could be released.
  • Monetary conditions are tranquil. Interest rates and inflation remain low, despite massive deficit-financed relief packages.
  • Workforce recovery has considerable ground to make up—the economy remains approximately 10 million jobs short of full employment.
  • Equities investors are optimistic that coronavirus disruptions will soon fade, allowing globalization and digitization to continue lifting profits in 2021.

Return to normal on the horizon: GDP is rapidly closing in on its pre-pandemic high as COVID-19 vaccines begin to roll out.

  • After growing at a 5%-7% annualized pace in the fourth quarter, economic output has almost recovered its pandemic losses.
  • However, due to lost growth, the economy may be operating at only 98.7% of its true potential, leaving plenty of room for above-trend growth in 2021.
  • Though vaccinations are off to a slow start, many experts believe the pandemic in the U.S. will subside by late summer.
  • As life returns to normal, forecasts call for real economic output to expand at 5% or greater in 2021, bringing a steady return to full employment.
  • The household saving rate almost doubled last year to 12.9%. This could translate into a potential $1.5 trillion supporting pent-up consumer demand as the pandemic subsides.
  • The 2021 rebound may be buoyed by stabilizing energy prices and resumed production of Boeing’s 737 MAX 8 aircraft. 

Fiscal relief in the first quarter: The pandemic’s disruptions are likely to persist through the first quarter. Fortunately, Congress has passed a $920 billion relief bill aimed at rescuing struggling households and businesses.

  • The relief package amounts to about 4.5% of nominal GDP.  Many economists believe this latest stimulus could boost real GDP in 2021 by at least 3 percentage points.
  • It provides a $300 weekly supplement for unemployment insurance, as well as $600 direct payments to many individuals.
  • While the legislation does not include funding for state and local government, the shortfall in tax receipts has not been as severe as anticipated. Tax revenues actually expanded 3% over the 12 months ending September 2020.
  • The Fed is continuing to provide monetary support. The target for short-term interest rates remains pegged at zero, and long-term interest rates are resting 2 percentage points below their theoretical equilibrium.

The job market lag: Coronavirus shutdowns dislocated workers in labor-intensive industries like dining and hospitality. While GDP has come roaring back, employment may recover more gradually over the coming year.

  • The headline unemployment rate has fallen to 6.7%. However, it doesn’t count the 4 million workers who left the job market in 2020 or independent contractors still working but not earning what they were before the pandemic.
  • Recent history suggests that workers will likely return to the labor force as conditions improve.
  • Broader measures of joblessness suggest that the economy is approximately 10 million jobs short of full employment. 
  • The Federal Reserve anticipates steady job creation throughout 2021, with the median forecast calling for unemployment to fall to 5% by year’s end.
  • The job recovery estimate may be conservative. It would not be surprising if the fourth quarter saw unemployment returning to the 3.5%-4.5% range of recent years.

Inflation worries are premature: Despite a $3.3 trillion federal deficit, inflationary pressure is unlikely to appear anytime soon.

  • COVID relief bills are more akin to a rescue package than traditional stimulus—the legislation largely replaces lost income, rather than creating new demand.
  • The targeted nature of the spending makes it unlikely to fuel inflation. As unemployed workers find jobs and business revenues climb, federal aid will taper off.
  • Bond markets were largely unaffected by this spring’s deficit-financed CARES Act, as most of the newly issued debt was absorbed by the Fed’s asset purchasing program.
  • Eventually, the Fed will need to unwind its excess holdings. But as quantitative easing demonstrated, the Fed’s growing balance sheet will not necessarily create inflationary pressure.
  • With central banks abroad also providing extraordinary monetary support, the U.S. dollar should hold its value against major global currencies.
  • The U.S. still faces long-term fiscal challenges but they are largely driven by demographics. 2020’s deficit spending has done little to worsen the nation’s long-term outlook.

Equities are looking ahead: Investors are confident that COVID’s disruptions will prove transitory.

  • Equities markets have long assumed the health crisis would be short-lived.
  • Pandemic shutdowns have hardly threatened the long-term forces of globalization and digitization, which are transforming the economy and lifting corporate profits.
  • If anything, the pandemic has demonstrated the adaptability of the U.S. economy and accelerated adoption of labor-enhancing technologies.
  • Investors are also optimistic about the economy’s true potential. The pre-pandemic business cycle saw the coexistence of low unemployment and tame inflation, which implies that the maximum level of sustainable output may be higher than commonly assumed.
  • The pandemic has done little to diminish the opportunities presented by Asia’s emerging economies. The rise of China and India promises to create the world’s largest consumer markets, and American corporations are eager to expand abroad.

Jim Glassman, Head Economist, Commercial Banking

Jim Glassman

Jim Glassman, Head Economist, Commercial Banking

Jim Glassman is the Managing Director and Head Economist for Commercial Banking. From regulations and technology to globalization and consumer habits, Jim's insights are used by companies and industries to help them better understand the changing economy and its impact on their businesses.

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