Describing 2020 as a turbulent year for the U.S. economy would be an understatement. In this article we look at the damage to the U.S. economy wrought by the global pandemic, the subsequent rebound, the current trends as 2020 draws to a close and the outlook for 2021. A series of key economic indicators that impact commercial real estate are examined including GDP, employment, consumer spending, business activity, trade and inflation. In addition, we comment on the potential impact of the latest coronavirus emergency relief package.
Economic Growth & GDP
The economy entered 2020 on a positive note with a prolonged, albeit slowing, period of expansion reflected in annualized real GDP growth of 2.2% in 2019. A similar level of growth was anticipated for 2020.
The global economic and health crisis caused by the COVID-19 pandemic drove the economy into sharp contraction in the first half of 2020. As the potential impact of the virus first became apparent, the U.S. economy contracted by a 5% annualized rate in Q1 2020. The full impact of the pandemic was felt in Q2, when the combination of stay-in-place orders and business closures resulted in an unprecedented record 32.9% drop in annualized GDP growth – more than three times larger than the previous record quarterly contraction.
While there was a record rebound in GDP of annualized 33.4% in Q3 2020 – recouping two-thirds of the COVID output loss – the economy remains smaller than at the end of 2019. Putting this into context, the pandemic has caused a cumulative 10.1% contraction in the U.S. economy in 2020 to date. This is lower than both the 26.3% cumulative GDP decline that occurred in the Great Recession of 1929 and the drop of 13.5% in 1946 that followed the end of World War II.
Looking ahead, the health crisis should continue to determine the path for the economy. In Q4 2020, GDP growth, as measured by Consensus Forecasts, is projected to slow to 4.2% resulting in growth of negative 3.6% for 2020 overall. While the approval and first deployment of COVID vaccines developed by Pfizer and Moderna gives cause for optimism, the current resurgence of the virus with record daily levels of fatalities has the potential to fetter economic growth in the near term. GDP growth forecasts for 2021 have been downgraded in recent weeks to around 4%, with the strongest expansion likely occurring in the second half of the year.
Impact of Fiscal Stimulus
After a prolonged period of delay and impasse, Congress negotiators agreed to a further fiscal relief package, this time totaling $900 billion. This has been passed by Congress and signed by President Trump. Provisions of the package include the extension of emergency unemployment benefits for 14 million Americans through mid-March 2021, plus $600 checks for those eligible and a $300 weekly top-up to unemployment benefits for 11 weeks.
In addition, the latest stimulus package provides $280 billion in aid to small businesses, along with funding for vaccines, education, and transportation. However, the agreement does not include any new funding to state and local governments whose budgets could remain under pressure through the end of their fiscal year in June 2021.
At a minimum, it is hoped that the latest fiscal boost will enable the economy to survive the current coronavirus wave. However, the stimulus package could cause increased optimism for the 2021 economic outlook and an upward revision of GDP projections. A key determinant will be the balance between growth in consumer spending, driven by the $600 checks, and higher than average savings levels. With the renewed severity of the health situation, including restrictive lockdowns and a softening labor market, there may be calls for further fiscal stimulus once the Biden administration takes office.
The pandemic-driven loss of 22 million jobs across March and April drove the U.S. unemployment rate up to 14.7% – a level that is unprecedented in modern times. While that level has now been more than halved, the economy still has 9.8 million less jobs than back in February before the pandemic took hold.
The unemployment rate fell to 6.7% in November, but this was largely driven by people dropping out of the workforce rather than through job creation. The pace of hiring has slowed with 245,000 jobs being added in November, which is down from 610,000 in October and the lowest monthly total during the pandemic. At the same time, the renewed restrictions put in place, in an attempt to combat the rapid escalation of the virus, are resulting in a renewed rise in jobless claims. Driven by the continued rise of e-commerce, transportation and warehousing is one of the few bright spots where employment levels are rising.
While the further aid to small businesses included in the latest stimulus package provides some cause for optimism, the rise of the pandemic and new lockdown measures is likely to stall short-term job gains and may drive some losses. Most economists are taking a sanguine view on job prospects with the unemployment rate forecast to still be at an elevated rate of 5.5% to 6.0% at the close of next year. It could be quite some time before there is a return to the pre-pandemic rate of 3.5%. The substitution of technology for staffing will also act as a drag on employment growth.
Following a mid-year rebound, consumer confidence has stalled in Q4 2020 to date. Retail sales fell by 0.1% in October and 1.1% in November. Black Friday sales were somewhat subdued this year and there is the possibility that holiday sales may follow with renewed pandemic restrictions weighing on the economy.
Barring the first quarter, the outlook for 2021 is more promising. The combination of vaccine rollout, high savings ratios, and another round of stimulus checks, have the potential to drive up consumer spending. The December Consensus Forecasts survey of economic forecasts projects that personal consumption will grow by 4.6% in 2021 following a 3.8% contraction in 2020.
There are variations within this overall picture with only food stores, building supplies and online retailing currently showing rising sales volumes. Clothing purchases remain strongly impacted, dropping by 6.8% in November, along with big-ticket items such as cars, furniture and electronics. Spending at bars and restaurants fell by a further 4% in November. Colder weather and restrictions on indoor dining look set to exacerbate this trend over the winter months.
Business Activity & Trade
Business activity remains in recovery mode, but the expansion is slowing and headwinds are building, driven by the pandemic’s resurgence. Industrial production rose by a marginal 0.4% in November and remains close to 5% lower than its pre-COVID level. The possibility of a reduction in consumer spending coupled with a softer labor market has the potential to derail this recovery in the short-term at a time when inventories are rising.
There are contrasts within the overall business economy, with the manufacturing sector remaining more resilient than a softening services sector. Service sector growth cooled in both October and November and consumer-facing industries such as food services and transportation are again being impacted by the return of lockdown measures. There is the potential for this trend to flip in 2021, with the most beleaguered areas of the business economy, such as leisure and transportation, posting outsized gains as the economy strengthens.
Corporations remain better placed to weather the current storm than small businesses. The latest Consensus Economics forecasts project that business investment will contract by 4.7% in 2020 followed by growth of 3.5% in 2021, which is slightly below overall GDP projections.
Trade activity also highlights the contrasting fortunes of the manufacturing and services sectors. Although both imports and exports are expanding, service sector trade activity is still 23% below pre-pandemic levels compared to less than 2% below for overall goods trade. Oxford Economics projects that trade volumes will fall by almost 12% in 2020, followed by a relatively modest rebound in 2021 of approaching 6%. The Biden administration is expected to bring both greater stability in trade policy and a less protectionist approach.
Inflation & Interest Rates
The U.S. economy is in a low inflation environment that is expected to persist over the short to medium-term. Headline inflation rose by 0.2% in November but stands at a modest 1.2% year-over-year. Within this overall picture, transportation and energy prices are rising, food price growth has slowed and used auto prices fell by 1.3% in November following a period of outsized gains.
Looking to 2021, there is the potential for inflation to break through 2% around mid-year should vaccine deployment reach critical mass and business and consumer confidence improve. Projections for 2021 suggest that inflation will run at 2% for the year overall, which is slightly below the upper end of the Fed target.
The interest rate climate also remains benign with both 3-month T-Bills and 10-year Treasury notes at around 0.1%, roughly half the level of one year ago. Although there may be some modest increases in interest rates in 2021, these are expected to remain low. The latest Consensus Forecasts average places short-term interest rates at 0.2% at year-end 2021 while the 10-year interest rate is projected to rise to 1.2%.