This past year was an interesting one, to say the least. Although 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 […]
This past year was an interesting one, to say the least. Although 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. Now that we have flipped the calendar to 2021, great uncertainty surrounding COVID-19 remains. Nonetheless, our 2021 economic outlook is 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 of 2020 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, while the vaccine-distribution process has been disappointingly slow, it is widely expected to accelerate. And as additional vaccines will soon be approved (hopefully), there is even greater potential to dramatically increase the supply of vaccines.
In particular, the Johnson & Johnson vaccine has two attractive characteristics; it is a one-time injection and does not require deep-freeze storage. This creates potential for much broader distribution through doctor’s offices and local pharmacies, which 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 significant areas of economic momentum have carried over from 2020 that should sustain growth until the vaccines are widely administered. Capital-goods investment and consumer spending remain 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 mostly effective. Large companies have managed rather well throughout the crisis and corporate earnings have remained strong. 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 was 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 was 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 Biden called the
$900 billion program a “down payment” and has proposed an additional $1.9 trillion program.
Further fiscal stimulus focused on infrastructure is highly likely. Washington, D.C. will haggle over the ultimate size and scope, but there is no doubt that massive additional spending is on its way. This additional fiscal support will bridge the economy through what is hopefully the last stand of the COVID-19 pandemic.
The Federal Reserve will supplement the fiscal stimulus with continued easy monetary policy. Fed Chairman 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 stay awash in liquidity. Again, this will aid the economy as we await widespread vaccination.
The 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 in the second half of the year.
Interestingly, the financial markets have barely skipped a beat, with the S&P 500 [up more than 2.6 percent year-to-date, through Jan. 25 — following a nearly 16.3 percent gain in 2020.] There seems to be an emotional tug of war in the markets, focused on three major risk factors: COVID, politics, and stimulus. As ugly as the virus and politics are, they are counter-balanced by hopes of greater vaccine dissemination and massive stimulus.
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 accelerated vaccination programs will diminish the virus risk early in 2021 and that 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. Happy New Year!
Kenneth J. Entenmann is senior VP and chief investment officer at NBT Wealth Management. Entenmann has more than 33 years of investment experience. In his current role, he oversees more than $6 billion in assets under management and administration in trust, custody, retirement, institutional, and individual accounts. Entenmann regularly shares his perspectives on the economy on his Market Insights blog at www.nbtbank.com/marketinsights.