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.
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.”
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.
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
“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 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,”
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