Sailing Into 2021: The Economic Outlook

After 2020’s rough waters, economists predict smoother sailing in 2021—with a few caveats. Here’s what’s on the horizon in the new year. By Carolyn Kmet | Winter 2020



Given the year we’ve had, it seems almost foolhardy to attempt to predict what 2021 will hold—after all, who could’ve foreseen the historic and bizarre events of 2020? But it’s part of the job for economists, and they’re cautiously optimistic for the coming year. As we head into 2021, despite uncertainty surrounding COVID-19 and its wide-ranging impacts, they say that while it will be slow going, growth and normalcy are on the horizon.

The COVID Recovery

According to a survey conducted in October by the National Association for Business Economists (NABE), the median forecast for real GDP growth in 2021 is 3.6 percent. Roughly half of those surveyed put the odds of a double-dip recession at 20 percent or lower.

“NABE panelists have become more optimistic, on balance, but remain concerned about a potential second wave of COVID-19,” explains NABE Survey Chair, Eugenio Aleman, an economist with Wells Fargo Bank. “Thirty-eight percent of panelists believe that the economy will have returned to pre-pandemic GDP levels by the second half of 2021, 32 percent expect it to reach that level in the first half of 2022, and 30 percent believe it will occur in the second half of 2022 or later.”

John Behringer, partner and national financial institutions consulting leader with RSM, describes the U.S. economic recovery as a “Nike swoosh.” He explains that the shallow curve is due in part to uneven recovery across industries. Some sectors experienced a sharp drop-off, like travel and hospitality, while other sectors, such as consumer staples, saw minimal decline.

“Some industries are absolutely going to have a V-shaped recovery,” Behringer says. “Meanwhile, travel may not return to pre-pandemic levels until 2024—definitely not a V-shaped recovery.”

Seth Green, founding director of Loyola University’s Baumhart Center, agrees that recovery will vary sharply across sectors.

“All signs currently point to a K-shaped recovery, where parts of our economy will fully rebound, and other parts will remain challenged. Hotels, restaurants, and retail in particular are likely to see this downturn continue until most of the country is vaccinated, hopefully by mid-2021,” Green says. “The size of that downturn depends most of all on the course of the disease, and whether the political environment enables government stimulus.”

Political Pressures

With Democrats stepping into the White House and retaining control of the House of Representatives in 2021, the likelihood and size of further fiscal stimulus may depend on the outcome of the Georgia Senate runoff race on January 5. In 2020, the deadlock in stimulus negotiations between political parties prevented at least $1.8 trillion of federal government aid from flowing to struggling households, businesses, and state and local governments, says Derek Sasveld, chief strategic for BMO Global Asset Management.

“If they win at least one of the Georgia runoffs in January, Republicans will keep control of the Senate,” Sasveld says. “That would limit the amount of fiscal stimulus that a Democratic House and Biden White House will surely push for. Limited stimulus means lower inflation and interest rates, but it also probably means slower economic growth and lower risk as well.”

Sasveld believes the U.S. economy will benefit from foreign growth, though more through rises in key commodity prices than trade. “Agricultural grains, industrial metals, and energy prices have bounced back since the COVID shock at the end of the first quarter,” Sasveld observes. “Some of this is COVID-related. China has apparently dealt with the pandemic well, while India and Latin America have struggled by comparison. But many countries have applied plenty of stimulus, with China seeing full recovery in exports.”

Sasveld believes that all this stimulus activity will add up to “higher-than- expected, solid-but-not-spectacular” economic growth for 2021. “Also, the Federal Reserve will likely increase its efforts to support economic growth until a vaccine is available,” he notes.

Managing Inflation

Some economists suggest that we’ll see inflationary growth along with recovery. Phillip Allan, economic policy analyst with the New Physiocratic League, an organization that envisions economic reform through land value taxation rather than earned income, warns that further expansion of the money supply could trigger inflation. “At the moment, this risk is subdued due to reduced monetary velocity and weak consumer demand. That might not be the case by the end of 2021,” Allan says.

Despite that, Allan believes the dynamism of the U.S. economy will remain strong when compared to other parts of the world. “The inflation risk is equally great in much of the world. Therefore, the U.S. dollar will maintain its strength, in part due to the relative weakness of its trading partners,” Allan explains.

Certainly, the Federal Reserve is prepared to stabilize the U.S. economy through the use of what it calls “flexible inflation targeting.” In a speech delivered at a Federal Reserve Bank of Kansas City symposium in August 2020, Fed Chair Jerome H. Powell explained how persistently low inflation can pose serious risks to the economy.

“Inflation that runs below its desired level can lead to an unwelcome fall in longer-term inflation expectations, which, in turn, can pull actual inflation even lower, resulting in an adverse cycle of ever-lower inflation and inflation expectations,” Powell said.

In an economic downturn, the Fed typically cuts interest rates to boost employment. However, as inflation decreases, interest rates decline in tandem. As interest rates decline, the Fed has less latitude to stabilize the economy through interest rate cuts. As such, the Fed signaled that it intends to apply appropriate monetary policy to achieve a long-run goal of a 2 percent inflation rate.

To achieve that 2 percent objective, Sasveld explains that Fed guidance indicates near-zero policy rates through 2023 to spur economic growth.

“The Fed’s new five-year statement on monetary policy promises to run the economy hotter than typical for an extended period in order to heal the post-COVID unemployment problem, and eventually bring about higher expected inflation,” Sasveld says.

Shifting Consumer Behavior

Reverberations from shifts in consumer behavior and workplace structure will also play out in the 2021 U.S. economy. “Many families are stretched thin right now,” observes John Kilpatrick, Ph.D., managing director of Seattle-based Greenfield Advisors. “We’re seeing a good bit of refinancing to take advantage of rock-bottom interest rates, but we’re also seeing families tapping out their savings and credit cards.”

This will likely lead to longer purchase cycles on consumer durables, such as cars, appliances, and computers, as well as reduced discretionary spending. Kilpatrick predicts these factors will in turn lead to long-term stagnation in multiple areas of the economy.

“Universities and health care are tapped right now. Health care is already seeing significant declines in discretionary patient load—if you can avoid going to the doctor right now, you do. If you can take a year off from college, you do that, too. Universities are probably less affected than health care, but both sectors are going to see some very real issues in 2021,” Kilpatrick says.

With the almost instantaneous shutdown across the U.S. in March, standard retail operations had to turn on a dime, with many stores and restaurants quickly adding curbside pickup and delivery. “Your customer base didn’t want to come into your buildings, but they still needed to be able to transact,” Behringer recalls. “If now we can just pull up curbside, and they put our purchases in our trunks, why does that have to change because there’s a vaccine?”

The change in transaction processes has led to a shift in payment processes. Digital payment options have become more important than ever. “COVID-19 has influenced consumers to consider digital payments in order to limit physical contact,” Michael Hammelburger, CEO of Cost Reduction Consultants, says. “Going paperless and fully digital allows businesses to save a lot of money in terms of their operational costs. More and more enterprises are offering interesting online services by partnering with fintech companies.”

In 2021, we’ll see these changes in consumer expectations play out. While universities, health care, and consumer spending may eventually revert to pre-COVID standards, other changes, like those in retail, transactions, and payment processes, are likely here to stay.

A New Way Forward

Another COVID change likely to have impacts in the coming year is the decreased demand for corporate real estate. During the shutdown, businesses of all sizes and in all industries shifted to a remote work environment. Prior to the shutdown, Behringer noted that within the consulting industry, many clients preferred in-person meetings and on-site engagements. “Now that we’ve demonstrated that we don’t necessarily need to be on-site to be productive and to finish the audit, the consulting project, or the tax return, that will change how our clients choose to consume our services,” Behringer says.

Behringer predicts that as businesses realize that employees can be effective and productive working remotely, investments will migrate away from office space and toward technology. “Even with a vaccine, are they going to spend hundreds of thousands of dollars a year on occupancy costs, or are they going to spend half of that on technology and have some really happy employees? Not to mention that as a virtual organization, the cost footprint comes down substantially,” Behringer says. “2021 is going to be interesting in that we’re going to see what will revert back to the old way and what changes are permanent even after we get a vaccine.”

Even older generations that have historically been in-person service stalwarts have switched allegiances during COVID-19’s upheaval. Using banks as an example, Behringer explains that branches existed primarily to serve Baby Boomers, since younger generations were already conducting most of their banking online. During the shutdown, Baby Boomers were forced to change their behavior. “Now that Baby Boomers realize they can do their business over the phone and on their computer safely, I don’t see them going back. They love convenience as much as all the other generational cohorts; it was just a trust and comfort issue,” Behringer says.

As the saying goes, the only certainty is uncertainty. 2020 brought more surprises and upheaval than the average year. People and businesses were forced to either accelerate into the future or accept the heightened risks of doing things the same old way as before. As the U.S. economy confronts COVID, re-engineers processes, and shifts fiscal and monetary policy, the 2021 economy may be more of a quantum leap than the continuation of our existing curve.