- We wish all of our readers a happy, healthy, and prosperous 2021. In the last US Economics Analyst of the year, we discuss what we believe are the most important questions for 2021.
- We expect the economy to make it through the winter virus resurgence in decent shape and avoid a second dip in GDP. By Q2, the recovery should accelerate as mass immunization greatly reduces the virus threat, unleashing a spending boom in the high-contact consumer services that account for most of the remaining output gap. For the year as a whole, we expect GDP growth of +5.9% in 2021, 2pp above consensus expectations.
- The labor market should outperform expectations as well. The still-high share of temporary layoffs, a healthy level of labor demand, and a mid-year hiring jolt from vaccine-sensitive industries should push the unemployment rate to about 5.2% by year-end. We also expect labor force participation to rebound meaningfully as virus-related obstacles to participation are cleared away and workers are lured back by far better job prospects than in the last cycle.
- In addition to a robust pace of cyclical recovery, we also expect productivity to outperform the pre-pandemic trend. The pandemic has accelerated the shift to e-commerce, forced closures of less productive companies and business units, and presented companies with new opportunities to cut costs on travel and office space, all of which should offer lasting productivity gains.
- Core PCE inflation should briefly bounce above 2% next spring as we lap the weakest pandemic base effects, but then return to a sub-2% trend with the shelter and medical services categories running soft. We think a very tight labor market will be required for inflation to exceed 2% sustainably in the years ahead, and we therefore do not expect liftoff until early 2025. We do not expect the Fed to begin tapering its asset purchases next year either.
- We expect the incoming Biden administration to begin to reverse the tariffs that the Trump administration imposed and to abstain from any new broad tariffs. The rest of the 2021 policy outlook should become clearer after the Senate runoff elections in Georgia on January 5.
1. Will the third wave of Covid-19 cause GDP to fall again in Q1?
No.
2. Will the virus threat fade enough for dense cities and high-risk service industries to recover?
Yes
3. Will the saving rate fall below 10%?
Yes.
4. Will full-year GDP growth exceed consensus expectations?
Yes.
5. Will productivity exceed the level implied by the pre-pandemic trend?
Yes.
6. Will the unemployment rate decline by more than expected?
Yes.
7. Will the labor force participation rate rebound meaningfully?
Yes.
8. Will core PCE inflation exceed 2% at the end of 2021?
No.
9. Will the Fed begin to taper asset purchases?
No.
10. Will the average US tariff rate on imports decline?
Yes.