Read the January Economic Currents in PDF
What we hoped would be a sprint has turned into a marathon. We are in the hardest mile when fatigue sets in, causing our minds and bodies to hit a wall.Marathoners train for this inevitability, but most of us were caught unprepared.
Employment lost ground in December for the first time since April when the post-Thanksgiving surge in COVID cases triggered another round of layoffs at restaurants and bars. Traditional holiday parties and New Year’s celebrations were nearly nonexistent. Schools that had reopened were forced to close and move back online, which prompted job cuts in education.
Conditions will get worse before they get better. Cases, hospitalizations and fatalities have hit new records in the wake of family gatherings during the holidays.
More contagious variants
of the virus have emerged. The speed with which they are spreading is staggering. Ireland has seen a tenfold increase in cases in the last month; it is now exceeding the U.K., which is a much larger country. Our health care system and morgues could become overwhelmed, which would force states to adopt much more aggressive containment measures.
Vaccinations are lagging. Dr. Anthony Fauci, who is joining President-elect Joe Biden’s COVID task force, is optimistic that the glitches at the outset of vaccinations can be resolved.
Fauci recently asserted
that 100 million vaccinations in the first 100 days of the new administration is “a very realistic, important, achievable goal.” This is a 24/7 proposition and requires a reset to deploy vaccines currently in warehouses.
The newly passed, $900 billion in fiscal aid will help to blunt the pain we are enduring and help get us to herd immunity. Funds for vaccinations, testing and tracing were included in that plan and will be deployed to kick start the process. Biden has also pledged to set up federal vaccination sites.
Prospects for additional fiscal stimulus have picked up now that Democrats have gained a slim majority in the Senate. Republicans will likely join Democrats in approving additional stimulus. The goal will be to show unity. The events of January 6 rattled elected officials on both sides of the aisle. (Understatement.)
In our forecast, we have added another $700 billion in checks, unemployment insurance (UI) benefits and transfers to the states. We assumed:
- An additional $1400 per adult, which brings it to $2000 per check, but limits checks for children under 17.
- An extension of the current expansion in UI benefits from March to June.
- Direct transfers to state and local governments.
- Additional rent forbearance, student loan forgiveness and funding for small businesses. (The latter may come too late to save many.)
That brings total additional aid and stimulus to $1.6 trillion. Funds for infrastructure, including clean energy are also possible but not included in the initial ask by the new administration. To get any new legislation passed, all Democrats and independent Senator Bernie Sanders will be required to vote ”aye,” with the vice president casting the tie-breaking vote, unless Republicans can be persuaded.
This edition of Economic Currents
takes a closer look at
the outlook in light of recent tectonic shifts in Washington.
COVID remains the largest challenge, with the third and
largest wave making economic conditions worse before
they start to improve. An additional $1.6 trillion in aid will
provide a much needed shot of adrenaline when we hit
our hardest mile and act as a tailwind for a rebound on
the other side of the crisis.
We are still hoping to reach herd immunity by early
autumn, which could be a stretch given the late rollout of
vaccines. Biden has pledged to rejoin the World Health
Organization (WHO) to better coordinate vaccinations
across developed as well as developing countries. That
will facilitate a broader reopening of the global economy
and allow us to better hedge against the next pandemic.
A Stronger Rebound
Chart 1 shows the effects that the Biden bump in stimulus
has on the outlook through 2023. The economy will
struggle at the start of 2021 and recover more rapidly
thereafter. GDP is expected to cross the peak hit in the
fourth quarter of 2019 during the summer of 2021, three
months earlier than we last predicted.
Growth is now expected to hit 4% in 2021, the strongest
pace in 20 years after contracting at a record-breaking
3.6% pace in 2020. The trajectory in 2022 is higher, as
that is when the bulk of catch-up occurs.
The economy is now expected to come closer to catching
up to its previous trend by the end of 2023 but shortfalls
will remain. We need to do more than recoup the jobs lost
to COVID; we need to replace what could have been. We
were generating about 200,000 jobs a month before the
crisis, or 2.4 million jobs a year. We need to recoup those
jobs as well as the nearly 10 million we are still in the hole
due to COVID.
Consumers Closer to Becoming Whole
Larger stimulus checks are not well-targeted; they go to
those who do and do not need them but are at least quick
to hit consumers’ wallets. They have proven to be more
effective than antiquated state UI programs in getting
money into the hands of those who need it most.
Those hardest hit by the crisis will use the lifelines to pay
for the basics of food and shelter. Moody’s
that nearly 12 million renters will owe nearly $6000 in
back rent and utility bills alone by January; that was
before the recent round of layoffs hit.
Others will be able to cushion their savings and use it to
unleash more of the pent-up demand triggered by the
crisis. The strength of the rebound in growth last spring
and summer can be directly traced to the checks and
generous supplements to UI benefits provided by the
. It didn’t provide enough resources to carry the
economy through the third and worst wave of infections
in the fall.
The timing of the rebound will depend upon whether
we embrace masks and leverage testing and tracing
to reopen the economy. Other countries have proven
that those tools can suppress contagion and allow more
businesses to safely reopen. That would leave more
room in hospitals to treat the few who do get sick with
improving therapeutics instead of the rationing of care
we are seeing today.
Housing Remains Robust
Home buying and building are expected to continue
to rise in 2021 before leveling off in 2022. Gains will
be concentrated in single-family over multifamily
construction. First-time buyers are expected to supplant
vacation home buyers and housing appreciation should
Multifamily construction is expected to remain elevated
as builders shift from luxury apartments and condos
in the country’s largest cities to second-tier cities and
suburbs. Urban life will not die but could take time to
recover. COVID accelerated the move from cities to
suburbs but did not eliminate the desire to congregate or
wipe out the benefits of agglomeration, or the clustering
of like industries.
Investment Recovers Unevenly
Much like 9/11, COVID will siphon away funds earmarked
for offensive investments. This means we will see more
defensive investments in technology and protocols to
hedge against the risk of another pandemic. A surge
in bankruptcies and firm consolidations will accelerate
the shift toward technology that cuts costs and helps
The push to regionalize supply chains has not yet
happened. The trade war with China simply shifted
production from China to Vietnam, while China has
solidified its role in the global supply chain. Some efforts
to regionalize are still possible but not at the pace that
many expected. Manufacturing jobs actually declined by
more than 200,000 in 2019 before the crisis took hold.
An overhang of debt and the losses endured during
the crisis could undermine investment and hiring in the
hardest hit industries. Bailouts were largely limited to the
airlines and the firms that service them.
Commercial real estate has taken it on the chin,
especially in urban cores. I don’t know of a single firm
that isn’t trying to rethink how to use its downtown office
space. This has prompted many to predict a shift in
services from urban areas to the suburbs.
That said, Silicon Valley discovered that much was lost in
translation when employees shifted to work-from-home.
Some returned to their offices to improve collaboration.
Elevated Government Spending
Government spending is expected to remain elevated
over the next several years as aid and stimulus work their
way through the economy. Transfers to the states take
longer to reach spending than checks, bailouts, PPP loans
and unemployment benefits do.
The newly passed aid package has funding for vaccines,
testing, tracing, schools and hospitals. That will help to
turn state and local employment around and prevent
them from cutting jobs as they did in the wake of the
2008-09 crisis. There is funding to keep mass transit
going, which is needed to get low-wage workers to work.
A bipartisan infrastructure bill would go further in
repairing our dilapidated infrastructure and speeding
a shift toward clean energy. The costs of clean energy
alternatives have fallen dramatically, while jobs in clean
energy have multiplied.
Record low rates have given us a rare opportunity to
fill the dire needs triggered by the pandemic. The yield
on long-term Treasury bonds is actually negative after
adjusting for inflation; it is likely to remain that way for
some time to come. That means the world is willing to
actually pay us to spend more right now. The argument
against spending more today was predicated upon
higher interest payments crowding out private sector
investment. That is not the case now.
Trade Deficit Widens
Global trade had recovered more rapidly than most
expected but harsher lockdowns abroad, coupled with
less robust and uneven recoveries across the emerging
markets, are now expected to suppress exports relative to
imports. That will keep the trade deficit widening well into
A weaker dollar could provide an additional lift to exports
late in 2021 and into 2022. The U.S. remains the 800-
pound gorilla in the room when it comes to the sheer
volume of imports consumed; that will keep the trade
deficit widening for some time to come.
Biden has no love for China or Russia and is expected
to repair frayed relationships with traditional U.S. allies.
He favors a return to multilateral as opposed to bilateral
trade agreements, as they are better suited to pressure
China and Russia with a combination of sanctions, tariffs
and loss of market access.
The near-term risks remain to the downside due to the
surge in COVID cases, delays in vaccines and emergence
of more contagious variants. We may need to adopt
more aggressive containment measures to alleviate the
pressure on our health care system. This could take a
larger toll on the first quarter and lengthen the timeline
for herd immunity.
Threats of more violent conflicts on and around the
inauguration add to those downside risks. They fuel
uncertainty, which is its own tax on the economy. They
could also roil financial markets. Corporate America has
taken notice and suspended campaign contributions to
members of Congress that voted against certifying the
Downside risks diminish as we move into 2022. Risks could
shift to the upside if worst case scenarios are avoided.
Additional stimulus could reduce the scars left by COVID
by providing hardest-hit households with needed support.
Bottlenecks Could Emerge
Chart 2 shows the forecast for core PCE inflation, which
strips out the volatile food and energy components.
This is one of the best predictors of future inflation. A
rapid slowdown in inflation during the height of global
lockdowns last spring set the stage for a temporary bump
in inflation in early 2021. Inflation will pick up modestly
and move above the Federal Reserve’s 2% target in late
Fed officials want to see a modest overshoot on inflation
to allow for a more complete and “inclusive” recovery.
They are looking for unemployment to dip low enough to
force firms to tap a larger pool of workers, including those
who have suffered from systemic bias. The Fed would like
to see the wages of the lowest paid workers - those hit
hardest by COVID-related layoffs - accelerate.
Supply disruptions, which trigger a spike in some prices,
are likely given the prospects for additional stimulus. Any
jump in prices associated with those disruptions should
A massive stimulus package on the other side of the crisis,
combined with a faster drawdown in saving, could trigger
a more rapid pickup in prices. Such increases would be
harder for the Fed to ignore but can be dealt with by
simply raising short-term interest rates.
Fed Moves to the Sidelines
The Federal Reserve has been begging Congress for more
fiscal stimulus. The recent aid package and prospects
for more will alleviate pressure on the Fed to act. Fed
Chairman Jay Powell has stated that the Fed will look
past any temporary spikes in prices. Fed officials plan to
wait for inflation to return before raising rates. They are
planning to hold rates close to zero through 2023.
Focus has already begun to shift from inflation to
financial stability. The Fed has shunned raising rates to
pop burgeoning asset price bubbles. Officials prefer to
leverage the institution’s regulatory authority to deal with
The Fed has been forced by outgoing Treasury Secretary
Steven Mnuchin to abandon many of the emergency
lending facilities. That leaves the Fed with fewer tools to
counter financial market volatility until his successor is
Incoming Treasury Secretary Janet Yellen will not hesitate
to reinstate emergency lending facilities. Powell served
with and under Yellen when she was a Fed governor and
chair. As friends and colleagues, they have a great deal
of respect for one another and will work closely together.
At least one bond rating agency has threatened to
downgrade U.S. government debt if we don’t see a
peaceful transition of power. Credit markets could seize,
which would force the Fed to intervene. Treasury bond
yields could spike and derail the opportunity that record-low
rates have provided to stimulate the economy.
There is no precedent for such an extreme event in recent
American history. This begs the question of whether the
Fed would actually be able to do much if such a scenario
is realized. I have to hope it’s averted.
Economic conditions will weaken before they get better
but we now have a much needed shot of adrenaline to
help us push through that hardest mile. The stimulus we
are likely to get in light of the shift in the composition of
the U.S. Senate will provide the tailwind needed to cross
the finish line to herd immunity. Getting to herd immunity
is no small task but it is attainable.
Biden’s greatest challenge will be to bridge the gulf that
COVID has exposed and widened and enact reforms that
spur more even and, therefore, more robust growth. Only
then can we address the grievances that divide us and
attempt to heal. What was a marathon will become a
relay race; that requires teamwork. I have no choice but
to be hopeful we can do that.
Copyright © 2021 Diane Swonk – All rights reserved. The information provided herein is believed to be obtained from sources deemed to be accurate, timely and reliable. However, no assurance is given in that respect. The reader should not rely on this information in making economic, financial, investment or any other decisions. This communication does not constitute an offer or solicitation, or solicitation of any offer to buy or sell any security, investment or other product. Likewise, this communication serves to provide certain opinions on current market conditions, economic policy or trends and is not a recommendation to engage in, or refrain from engaging, in a particular course of action.