It really is different this time. While this is not the first pandemic the US has faced, our reaction to it — the restrictions placed on portions of the US economy, and the policy response — are truly unprecedented.

First, there are lots of reasons to be optimistic about the US economy over the longer term. Official productivity statistics likely understate the impact of innovation occurring in the US, and the economy’s flexibility and dynamism have allowed it, again and again, to rebound from difficult times. This will be the case again.

Then there is 2021. The most important variables for the economic outlook are the virus itself (which has been the case for a while), and now, the vaccine. While vaccine approvals and early immunisations are encouraging, it could still be six to nine months before it is widely distributed enough to allow a broad-based “return to normal”. That is still a long time for the economy to function under the cloud of the virus, particularly with some of the current restrictions in place and no further fiscal support.

Fiscal policy is really the only thing that can fill the demand and income gap created by the virus’s resurgence and enhanced restrictions. Large-scale coronavirus relief legislation has a greater chance of passing under a Biden administration and a Democratic majority in both houses of Congress. Nevertheless, any near-term growth hiccup will likely elicit a “whatever it takes“ monetary policy easing by the Federal Reserve. However, there is a limit to what monetary policy can do to mitigate the impact of business closures and lost income. Even with the $900 billion package passed in December, we still need to see if the money reaches those who need it most, and is large enough to get us to the vaccine-created finish line that we are all longing to reach. In short — the first half of 2021 could still be bumpy.

In the first half of 2020, fiscal stimulus did a good job of supporting the economy when activity was severely hampered by government-ordered shutdowns of businesses. People received payments of $1,200 or $2,400 whether they were employed or not. If they were unemployed, they received an additional $600 a week in unemployment benefits up to July. The Paycheck Protection Program (PPP) provided financial support to small businesses in the form of grants. All of that came together to create a huge surge in disposable income. In fact, disposable income grew faster in mid-2020 than it would have had the pandemic never occurred!

Government stimulus has helped keep US consumers afloat

Sources: Federal Reserve Bank of St. Louis, U.S. Bureau of Economic Analysis. As of 31/10/20.

 

That support was meant to get the economy through the pandemic, but clearly, the virus is still here. Unfortunately, the recovery is beginning to take on a ‘W’-shape: portions of the economy reopen, only to be shut down again, which prevents the economy from generating the type of momentum that ultimately feeds on itself and builds a robust recovery. It also makes it difficult for businesses to plan. They will be reluctant to hire, build inventory, et cetera if they believe they may be shut down again. Thus, it would not surprise me to see some of the economic data weaken in coming months. My baseline expectation for annualised US gross domestic product growth for 2021 is around 3%, with most of the growth coming in the second half of the year.
 

 

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