By Kenneth J. Entenmann
This past year was an interesting one, to say the least. Though some may prefer to use other adjectives to describe 2020. COVID-19 provided a vast disruption of economic activity, with U.S. GDP declining 31.7 percent in the second quarter.
However, the U.S. economy demonstrated remarkable resiliency and rebounded 32.7 percent in the third quarter. While the economy continued to grow in the fourth quarter, activity did slow, particularly in the labor markets. It is estimated that the full year 2020 U.S. GDP will decline around 3-5 percent.
As we flip the calendar to 2021, great uncertainty surrounding COVID-19 remains. Nonetheless, our 2021 economic outlook remains optimistic.
There is no doubt that the COVID-19 economic disruption has endured longer than most anticipated. The hope of a short duration event prompted by the quick “flattening of the curve” in the spring soon dissipated as COVID spiked in the summer and again during the holiday season. Portions of the country remain in lockdown with severe economic consequences.
However, the vaccines are slowly making an impact and it is widely expected that the vaccination process will accelerate. This provides hope that a return to economic normalcy is coming although the timing is still uncertain. COVID will negatively impact the economy at least through the first quarter, probably into the second. However, the economy is poised for a very strong second half of the year.
Despite the COVID uncertainty, the economy held its own in the fourth quarter and there are significant areas of economic momentum that should sustain growth until the vaccine is widely administered. Capital goods investment and consumer spending remain very strong. The purchasing managers’ indices for both the manufacturing and service sectors continue to expand.
The auto and housing markets are booming. And global equity markets are trading at or near record high levels.
It has been difficult to watch the dysfunction of Washington D.C. The federal government’s response to COVID back in March deserves accolades. While not perfect, it was swift, massive and highly effective. Large companies have managed rather well throughout the crisis.
Unfortunately, many of the programs targeted at individuals and small businesses “expired” in the fourth quarter of 2020 and election-driven political wrangling prevented further response. The disappointing failure to replenish these programs are the main reason for the slower rate of growth in the fourth quarter. However, with the election behind us, further stimulus will be forthcoming.
A new $900 billion program has passed. This “skinny” program (I guess $900 billion qualifies as “skinny”) is targeted at the right places like the long-term unemployed and small business.
President-elect Biden called the $900 billion program a “down payment.” Further fiscal stimulus is highly likely. This additional fiscal support will aid the economy through what is hopefully the last stand of the COVID-19 pandemic.
The Federal Reserve Bank will supplement the fiscal stimulus with continued easy monetary policy. Fed Chairmen Jay Powell has stated the Fed will provide monetary support “for as long as it takes.”
Inflation remains muted with major inflation indicators (PCE, CPI) hovering around 1.5 percent, far below the Fed’s 2 percent target. This green lights easy monetary policy. In short, the interest rates are likely to remain very low and the economy will remain awash in liquidity. Again, this will aid the economy as we await wide-spread vaccination.
Lastly, personal savings rates have grown at record levels and it is estimated that there is over $1 trillion in savings. That is a huge stockpile of money just waiting to be unleashed into the economy. There is much discussion over the long-term impacts of COVID.
It remains to be seen if business travel returns to pre-COVID levels. But we doubt individuals have lost their desire to travel and vacation. When it is safe to go out, we believe people will, with $1 trillion burning a hole in their pockets. This has the potential for explosive economic activity.
Our economic outlook remains positive while acknowledging that the timing of economic recovery is dependent on achieving some degree of control of the coronavirus. It is our sincere hope that the vaccination programs will diminish the virus risk early in 2021 and economic activity can begin the normalization process.
We do not expect an “all clear” siren that ends the COVID-19 crisis. But rather a slow and steady increase in economic confidence as the vaccination programs and herd immunity take hold. In the interim period, we believe there are still areas of strength in the economy that can sustain growth.
Fiscal and monetary stimulus will continue to provide massive liquidity to the overall economy. Low interest rates and huge personal savings will fuel corporate and consumer spending. Our 2021 economic optimism will require patience.
By Kenneth J. Entenmann