More questions than answers for US economy
What a crazy year it has been. In January 2020, the International Monetary Fund (IMF) predicted global economic growth of 3.3 percent for the year ahead. One year later, its retrospective estimate of 2020 growth: -3.5 percent. That’s an epic miss, and the IMF was hardly alone in being shocked by the economic devastation of the COVID-19 pandemic.
So, what will the next year bring? The IMF says 5.5 percent global growth in 2021 and 5.1 percent growth in the United States. That could happen, but I have a few questions.
First, how will we do against the pandemic? It was a major victory to develop effective vaccines against COVID-19, but important hurdles remain. Can the vaccines be produced in sufficient quantity and distributed to those who need them? Will people be willing to take the vaccines? What kind of immunity will the vaccines confer, particularly in the face of new variants? Will this get us to a level of herd immunity in which people feel free to shop, to attend events, to work and to spend their money freely?
Over the past year, we have seen experiments in which regions tried to go about business despite the virus and others in which there were tight lock-downs. The central lesson seems to be that a raging pandemic is hard to ignore, and until the health situation improves, there will be a toll to pay.
Second, how temporary are our new behaviors? In high-income economies, services usually account for about 70 percent of GDP (a little less in Europe, a little more in the United States). The pandemic changed that, hitting services such as travel and hospitality especially hard. Instead of going to the gym, people ordered home exercise equipment. Instead of going to the bakery, there were bread machines and cloches. The question is what happens when the pandemic health threat is behind us. Do consumers revert back to previous form? Or do they stick with newly acquired habits? This makes a difference because economies are well-stocked with malls, stadiums and movie theaters to meet the old tastes; a more permanent shift away could require difficult adjustment.
Third, how much scarring will there be? The goal of many of the stimulus measures was to help businesses and individuals pass through a temporary but very difficult time. That was successful, in part, if we look at the rate of business bankruptcies. But in some cases, problems were deferred, for example when there was leniency on paying rent, or when companies or individuals took loans rather than grants. In general, pandemic difficulties have proved much less temporary than we had hoped when Congress passed the CARES Act last March. In a recent small business survey by the Federal Reserve banks, 30 percent of responding firms doubted they could survive without additional government aid. For individuals, the number unemployed for 27 weeks or more rose from 1.16 million in Jan. 2020 to 4.02 million in Jan. 2021. When firms disappear or individuals slip into long-term unemployment, it is difficult to revert quickly to previous economic form.
Fourth, how coordinated is the global recovery? For health, even if a country were to conquer domestic infections, it matters if there are still pandemic pools around the world waiting to reenter the country. For demand, it matters whether other countries will be there as markets for exports. For supply, it matters whether supply chains will function well. At the core of this will be policy — health measures to contain the pandemic, stimulus measures to try to revive economic growth and trade policy measures meant to raise or lower barriers between countries.
Finally, what happens to financial markets? We’ve had remarkable euphoria since the spring plunge. If we compare the S&P 500 now to where it was on the eve of the IMF’s wildly optimistic forecast in Jan. 2020, the index has risen over 17 percent, despite the incessant litany of bad news. One can argue that financial markets are forward-looking and see better days ahead. What happens when they look forward and see climbing expectations of inflation and, ultimately, a central bank tightening of monetary policy? Or if the answers to the questions above prove more negative than stock-buyers had hoped? Booming markets and low interest rates will encourage optimism, growth and generous government funding with borrowed dollars. Falling markets and rising rates would do just the opposite.
For 2021 forecasts like last month’s IMF prediction of a healthy economic rebound to prove out, a lot of things need to go right. Some of the subsequent data releases, such as last week’s jobs report, seem instead to show a stalling recovery. Specifically, look at the employment-population ratio holding nearly constant for four months, at a level well below its minimum during the global financial crisis. On the IMF’s 5.1 percent U.S. 2021 GDP growth call, I would take the under.
Phil Levy is chief economist at Flexport, a freight forwarding and customs brokerage company based in San Francisco.