Forecast for the 2021 economy

Early last year, the global pandemic brought a sudden end to the U.S. economy’s longest expansion on record.

Tens of millions of people lost jobs as the economy all but shut down to try to stem the pandemic, which has so far killed more than 560,000 Americans.

For all of 2020, the government estimates that the economy shrank 3.5% — the sharpest annual contraction since 1946.

So what’s in store now? Most analysts foresee a robust recovery in the coming months as vaccinations accelerate and government aid flows through the economy.

The Associated Press spoke recently with Gregory Daco, chief U.S. economist with Oxford Economics, a forecasting firm.

How will the economy perform this year?

I think 2021 is shaping up to be one in which the country will emerge from one of the deepest recessions in the last 100 years. We are going to see a combination of better health conditions as well as government stimulus supporting greater growth.

What level of growth do you expect?

The economy is likely to expand about 7% this year, which would be the strongest gain since 1984. The ingredients to support a strong rebound are all present. The risks, in my opinion, are tilted toward the upside. I think we could have positive surprises on the vaccination front, and we could also have positive surprises on the policy side, with consumers spending more freely than anticipated and more government support.

Do you have any concerns that all the government spending and the easy-money policies of the Federal Reserve could fuel unwanted inflation?

I think it’s undeniable that we will get firmer inflation this year. At Oxford Economics, we say inflation is unavoidable but not uncontrollable. Anchored inflation expectations should prevent runaway inflation. Plus, the Fed need not raise rates to curb inflation. Simply changing the tone of its forward guidance would be a big policy shift.

The Fed has signaled that it doesn't expect to begin raising rates before 2024. Do you think it will wait that long? We think they will raise rates in 2023. But that will only happen if the Fed signals that its conditions for rate increases have been met regarding higher inflation and maximum employment. If those conditions are not met in 2022, they would likely delay the tightening process.

We have seen some pretty dramatic swings in the stock market over the last year. What should investors be doing? Investors need to be cautious, especially in an environment that is as volatile as it is today. There is some misconception that stock prices can only go up. That tends to be dangerous for anyone who believes that. Having an eye to the long run is the best place to be.