Darkest Before the Dawn: Annual Outlook
By Diane Swonk, chief economist, Grant Thornton
We are still down 9.8 million jobs since the peak in February, one million more jobs than we lost during the 2008-09 recession. Employment added only 245,000 jobs in November, less than half the pace of October and the weakest pace since April.
Public health conditions will no doubt get worse before they get better. COVID hospitalizations and deaths are hitting new records. Hospitals and health care workers are overwhelmed. Beds are growing scarce, health care workers are getting sick. The care of COVID and non-COVID patients is suffering.
Those who have escaped the worst effects of COVID have relaxed social distancing measures (including masks), which has exacerbated contagion. State and local governments are being forced to reinstate containment measures to stop the health care system from collapsing.
“December, January and February are going to be rough times. I actually think they’re going to be the most difficult time in the public health history of this nation,” warned Dr. Robert Redfield, director of the CDC.
Employment will no doubt contract again as we weather the worst of the COVID storm between now and February. Restaurants, bars and traditional retailers were already cutting payrolls in November. Small business openings and revenues are falling. Elective surgeries are being canceled as hospitals are forced to ration beds. Many schools and universities have moved back online. Government offices are being temporarily shuttered.
The losses will pale when compared to those endured last spring. Workers who escaped the worst in the economic turmoil triggered by COVID have acclimated and shifted their spending from services to goods. The threshold from which we are cutting jobs is considerably lower than it was in March; fewer firms are affected by shutdowns. Manufacturers are allowed to stay open this time around.
A vaccine brings the hope of herd immunity and a more complete reopening of the economy in the second half of 2021. That is an eternity for those who are scheduled to lose their unemployment benefits in late December and the rising ranks who will suffer layoffs in the months to come. Rents are going unpaid as food insecurity is worsening. Donate to your local food bank.
This edition of Economic Currents weighs the costs of the resurgence in COVID cases against the benefits associated with positive news on vaccines. The vaccine can’t come soon enough to prevent the economy from stumbling again but does set the stage for a more robust rebound in late 2021. The greatest threat to that outlook is the timeline on a vaccine, which is still a work in progress. States have been left to fend for themselves when it comes to coordinating the actual distribution of vaccines.
We are assuming that Congress finally reaches a compromise. We are expecting a little less than the bipartisan deal the “Gang of 8” in the Senate was able to cobble together. Senate Majority Leader Mitch McConnell and many of his Republican colleagues still want less. Congress needs those votes to get a deal done.
The 2020-21 OutlookEconomy Stumbles Before ReopeningChart 1 lays out two scenarios for the speed with which we achieve herd immunity. The base-case scenario assumes that all goes as planned and we get there in the third quarter of 2021. Real GDP is expected to contract by 3.5% in 2020 and rebound by 3.4% in 2021, the strongest pace in 15 years. The economy is now expected to reach its previous peak in the fourth quarter of 2021.
The second scenario assumes we hit some speed bumps in the distribution of the vaccine, which delays herd immunity to year-end 2021. The economy doesn’t reach its previous peak until early 2022.
Consumers Determine Contour of GrowthA spurt in spending on goods – homes, vehicles, RVs and boats – helped to buoy spending over the summer and into the fall. Those gains helped to blunt the blow to the service sector but will not be enough to keep consumer spending from faltering again in the first quarter.
The degree to which we rebound depends on how much consumers are willing to deplete saving accrued. Wealthy households saved the most and will book more lavish, but not more, vacations. Big-ticket spending on home remodeling and vehicles is expected to slow.
