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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?
BY: JIM GLASSMAN, HEAD ECONOMIST, COMMERCIAL BANKING
JAN 12, 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 quar ter, 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 quar ter. For tunately, 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 monetar y support. The target for shor t-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 shor t 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 quar ter saw unemployment returning to
the 3.5%-4.5% range of recent years.
Inflation worries are premature: Despite a $3.3 trillion federal deficit, inflationar y 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 suppor t, 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: Investor s are confident that COVID’s disruptions will prove transitor y.
Equities markets have long assumed the health crisis would be shor t-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.
3/11/2021 5 Economic Trends to Watch in 2021
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The pandemic has done little to diminish the oppor tunities 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.
The bottom line
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