Vaccines could resurrect a hobbled US economy
Job growth, spending expected to rise in 2021
Ted Adams, 77, has put off myriad purchases while hunkering down during the pandemic. Adams and his wife, who live in Minneapolis, have forgone trips to their Palm Desert, California, vacation home, as well as purchases of new furniture for that house and a new Mercedes-Benz S Class. But the distribution of COVID-19 vaccines “has given me confidence that the stock market will become more stable and life and the economy will be back to normal by summer,” says the retired serial entrepreneur. “I was wavering about buying a new car but am now planning to do it soon after I’m vaccinated…We’ve got a lot of pent-up spending we’ll probably do once this is over.”
The rollout of the vaccines in December has set the stage for the U.S. economy to turn in its best performance in two decades next year as distribution spreads across the country.
First, though, the nation must grind through a first quarter that’s likely to be among the most dismal since the Great Recession of 200709.
In other words, America’s worst health crisis in a century will likely produce a second straight year of wild swings in the economy. This time, however, the overall outcome is expected to be favorable as
growth ultimately surges on the game-changing vaccine and the nation’s gross domestic product returns to its pre-pandemic level by the end of 2021.
“We see really strong growth potentially starting in the second quarter,” says Barclays economist Jonathan Millar. “It’s a pretty strong year.”
That doesn’t mean the economy will be back to normal. The pandemic is leaving a legacy of millions of jobless Americans and thousands of shuttered businesses that will take years to reverse.
Economists surveyed by Wolters
Kluwer Blue Chip Economic Indicators predict the economy will grow at an annual rate of 4% next year, the fastest pace since 2000. That, of course, would come on the heels of an estimated 3.5% contraction in 2020, the economy’s worst showing on record amid a virus that led states to abruptly shutter restaurants, malls and other businesses. The slump featured a record 31.4% decline in GDP in the second quarter, followed by an unrivaled 33.1% jump in the third quarter as many outlets reopened.
A bleak start to 2021
Buckle up for another roller coaster ride in 2021. The first quarter is likely to be grim. The outbreak has been spiking across the country, with cases, hospitalizations and deaths setting records and many states reinstating business constraints and shutdowns. Initial jobless claims, a measure of layoffs, totaled 803,000 on a seasonally adjusted basis the week ending Dec. 17, a sign that many employers are still cutting jobs as the pandemic forces more business restrictions and discourages shoppers.
Millar predicts the economy will flatline the first three months of the year. And JPMorgan Chase reckons output will dip slightly early in the year.
Vaccine distribution is poised to ramp up sharply by April and inoculations are likely to be widespread by mid-year, economists figure, unleashing a well of pent-up demand as millions of Americans resume traveling, dining out, moviegoing and other activities.
Vaccine inspires confidence
The vaccine “will inspire a lot of confidence,” says Gus Faucher, chief economist of PNC Financial Services Group.
Yet much is unclear about the course of the virus and its eradication. How quickly can the vaccine be doled out? How many Americans will feel comfortable taking it? And while many of those laid off could receive additional unemployment insurance if the federal relief measure becomes law, benefits for 11.2 million are still set to expire March 7, according to The Century Foundation, a nonprofit think tank, and the left-leaning Economic Policy Institute.
They could sharply curtail their purchases.
As a result, forecasting economic growth is particularly challenging. Recently, 17 Federal Reserve policymakers published an unusually wide range of GDP growth forecasts for 2021, from near zero to just above 5%.
Better or worse?
“Things could be much better than expected and things could be much worse,” Faucher says.
Most economists don’t foresee the U.S. slipping into another downturn. But 63% of forecasters surveyed by the National Association of Business Economics last month cited a 20% to 39% chance of such a double-dip recession.
Even if the likeliest scenario plays out and GDP reclaims its pre-pandemic mark by the end of 2021, the downturn is certain to leave scars. Nearly four million people have joined the ranks of the longterm unemployed – meaning they’ve been idled more than six months – the most since 2013. That group traditionally has struggled to land a job because employers worry their skills have eroded.
About 100,000 small businesses have closed permanently, according to Yelp, the online review site. It could take years for new enterprises to replace them. U.S. employment won’t return to its pre-crisis mark until late 2023, according to Moody’s Analytics.
Here’s a look at some of the economy’s strengths next year:
Consumer spending
Consumption, which makes up 70% of economic activity, is expected to power growth. Under the CARES Act, passed by Congress in March 2020, the federal government sent $1,200 checks to most individuals, helping Americans squirrel away an additional $1.4 trillion through October, according to Wells Fargo.
After many people are vaccinated in 2021, they’ll likely spend much of that cash, as well as a chunk of any second stimulus check they receive from Uncle Sam and the savings they’ve accumulated by forsaking travel, dining out and other activities in 2020, Millar says. That should boost spending on services, which cratered during the crisis even as consumers stuck at home snapped up
TVs, appliances, tablets, cars, computers and other goods.
The economists surveyed by Wolters Kluwer predict consumer spending will grow 4.5% next year, the most since 2000.
There are risks to that rosy outlook. Forty percent of Americans surveyed by Harris Poll in December said they’re not very likely or not at all likely to take the vaccine as soon as it’s available.
Jobs
The nation has recovered 12.3 million, or 56%, of the 22.2 million jobs lost in March and April as many furloughed workers were called back.
But that means employment is still 9.8 million jobs below its pre-pandemic level. Monthly payroll gains have slowed from 4.8 million in June to 245,000 in November. As COVID-19 surges, the country could shed jobs again in December, January or February, Faucher and Millar say.
The good news: Warmer weather and increasing vaccinations should lead to more business reopenings and brisker activity, stemming the tide of layoffs and fueling stronger job growth by spring, the economists say.
Faucher forecasts average monthly job increases of 350,000 in 2021 compared with 178,000 in 2019 while Millar predicts an average of 344,000. That should lower the 6.7% unemployment rate to a near-normal 5% by the end of 2021, Millar says.
Housing
The housing market boomed in 2020 as people confined to their homes sought bigger spaces, typically in the suburbs, more millennials started families, and historically low mortgage rates slashed monthly costs.
Those trends aren’t going away. Both Faucher and Millar forecast about 1.6 million housing starts next year, the most since 2006.
Housing makes up just 3% to 6% of the economy but it has outsize ripple effects. People who buy houses typically fill them up with new furniture and appliances, for example.
“I think housing is going to help carry us through the near-term” troubles in early 2021, Faucher says. +