I’ve used some of my free time during the pandemic to become a bigger fan of European soccer. If you pay attention to it, you’ll see teams with vast resources get beat or held scoreless by teams that spend a small fraction on player wages when compared to their larger counterparts. They use a strategy called parking the bus – where they focus exclusively on defending and work to exploit the few opportunities they get when the opposing team makes a mistake and commits too many people forward. In the case of our economy, the virus has kept us on the defensive, where we’ve limited travel and commerce. Over the past year, the U.S. economy has held off much of the effects of COVID-19 by injecting the economy with money to keep it afloat. We’ve essentially parked the bus on the virus, but now, armed with several vaccines, more knowledge of the virus, and another round of stimulus, we’ll need to see a true recovery to make the vast sums of stimulus worth it.
Outlook
The Federal Reserve officials upgraded their expectations of the 2021 economic recovery in mid-March. The December mean estimate in GDP growth was 4.2 percent, but the Fed updated that to 6.5 percent in their most recent meeting.[1] Goldman Sachs also recently boosted their economic expectations for 2021.[2] As I write this, vaccine distribution is at a 7-day average of over two million, with more than twenty percent of the population at least partially vaccinated. The CDC recently released newer guidance on what people will be able to do once vaccinated, including small indoor gatherings without masks.[3] This all leads me to think that the general feeling is that people expect everything to look more like 2019 soon, with increasing travel, a boost in the service sector, and restaurants and entertainment venues able to increase capacity again.
Risks
Outside of the obvious health risks that have been present in the U.S. for a bit over a year now, I think there are a handful of threats to think about concerning the 2021 economic outlook. For starters, there are new strains of COVID that have spread through other parts of the world, namely the United Kingdom. Although the U.S.’s aggressive fiscal stimulus helped widen the COVID economic gap between the U.S. and U.K.,[4] there are questions of how this spending can hurt us going forward. Inflation is one potential consequence of pumping trillions into the economy. In 2020, the Federal Reserve changed from a 2% target rate to an average target of 2% – meaning they would be okay with slightly higher inflation to offset lower years.[5] In their March meeting, after the new spending package had been approved, Federal Reserve officials increased their estimate of 2021 core inflation up to 2.2%, compared with a 1.8% estimate in December[1]. Tax hikes are another possible long-term outcome of increased government spending that some expect in the coming years.
Unknowns
The biggest wildcard for 2021 is the course of the virus, whether there will be new strains that run through the population, whether we’ll have enough vaccinated to reach herd immunity, and whether vaccines will be able to adapt to new variants. Another wildcard is how the U.S. consumer will react once the economy gets the green light to get back to the pre-pandemic normal. It’s possible that consumer behavior has been completely altered due to the pandemic, in how much we eat out, travel, go to big events, etc. It appears some countries and corporations will require a vaccine passport of sorts.[6] I question the American appetite for a vaccine passport requirement to do certain things. I imagine there would be a legal and ethical pushback to anything resembling that.
Costs
While I write from economy’s perspective, the human costs of the virus still weigh heavy on most of us. News media outlets like to keep a statistic reminding us of the amount of death we’ve suffered during the pandemic. That is only part of the human costs – the fear, sickness, unemployment, and loneliness have affected many of us. While I’m glad the economic outlook is improving, I’m ecstatic that we may be able to resume our lives and see more of the people that mean the most to us. Stay safe and have a great 2nd quarter!
Ben Tiller
Principal Financial Officer
[1] Smith, Colby, and James Politi . “Fed Signals No Rate Rise until at Least 2024 despite Growth Upgrade.” Financial Times, Financial Times, 17 Mar. 2021, www.ft.com/content/3d7704d3-a312-4294-95bc-90233f469ccd.
[2] Nagarajan, Shalini. “Goldman Sachs Boosts US GDP Forecast to 6.8% in 2021 and Now Expects $1.5 Trillion in COVID-19 Stimulus.” Business Insider, Business Insider, 2 Feb. 2021, markets.businessinsider.com/news/stocks/economic-outlook-us-gdp-2021-forecast-coronavirus-stimulus-goldman-sachs-2021-2-1030059281#:~:text=Goldman%20Sachs%20upgraded%20its%20outlook,%25%20from%204.3%25%20in%202022.
[3] “When You’ve Been Fully Vaccinated.” Centers for Disease Control and Prevention, Centers for Disease Control and Prevention, 9 Mar. 2021, www.cdc.gov/coronavirus/2019-ncov/vaccines/fully-vaccinated.html.
[4] Politi, James. “Mind the Economic Gap: Europe and the US Are Drifting Further Apart.” Financial Times, Financial Times, 16 Mar. 2021, www.ft.com/content/0e9396cf-13b2-4034-ab09-c2366c264f91.
[5] Cox, Jeff. “From Inflation Targeting to Average Inflation Targeting.” CNBC, 27 Aug. 2020, www.cnbc.com/2020/08/27/powell-announces-new-fed-approach-to-inflation-that-could-keep-rates-lower-for-longer.html.
[6] Mzezewa, Tariro. “Coming Soon: The ‘Vaccine Passport’.” The New York Times, The New York Times, 4 Feb. 2021, www.nytimes.com/2021/02/04/travel/coronavirus-vaccine-passports.html.