Bank Economists See Brighter Days Ahead

While the American Bankers Association’s Economic Advisory Committee expects the economy to decelerate in this quarter, it says there are brighter days ahead.

The committee predicts that the US economy will grow at about 4% over the four quarters of 2021, which will be the most robust growth in nearly two decades.

As mass vaccinations across the nation bring many consumers back to stores, restaurants, movie theaters and travel, the committee members agree that the economic outlook will brighten considerably.

Additionally, the committee expects $900 billion of additional federal support to bolster the recovery. The new Congress could provide another shot in the arm for the economy with another stimulus package.

While economic growth should accelerate, the labor market will recover more slowly, according to the advisory committee. Right now, overall employment remains nearly 10 million short of pre-COVID levels. Committee members forecast close to 5 million additional jobs this year, but a return to full employment remains two or three years away. Some of those jobs will never come back since firms have learned to operate with a leaner staff.

Overall, the advisory committee expects the unemployment rate to decline from 6.7% last month to 5.4% by the end of 2021.

“The speed of the labor market recovery normally trails the economic recovery,” Beata Caranci, senior vice president and chief economist at TD Bank Group and the current advisory committee chair, said in a prepared statement. “Many businesses will be cautious in rehiring until they see concrete signs of sustained demand and a reduction in slack.”

If there are delays in vaccines or there is widespread resistance, the committee sees downside risks in its projections. On the other hand, successful and faster-than-expected vaccinations could revive the economy faster, according to the committee.

The committee sees price gains accelerating as the economy recovers, but they will barely meet the Federal Reserve’s inflation goal of somewhat above 2%. It also anticipates that the Federal Reserve will not change the target range for the federal funds rate in the foreseeable future, which means little change for short-term interest rates this year. It projects rates on longer-term US Treasury securities and mortgage rates to rise modestly.

Others expect a more uneven recovery in the year ahead. John Leer, writing for Morning Consult, says the economy will experience four distinct phases in the year ahead. From January to April, the second coronavirus relief package’s initial spending will create a stimulus high as unemployment insurance and stimulus checks offset the virus’s negative economic consequences.

By late April, Leer expects the effects of the second coronavirus relief bill to wane as unemployment benefits expire and the stimulus boost burns off, exposing weaknesses in households’ finances.

But once the vaccine is widely distributed by the end of Q2, Leer anticipates a bounce back as a wave of spending as Americans eat out and travel. That should drive a rebound through most of the remainder of the year. Restaurants and gyms are likely to see a resumption of activity before international travel increases later in the year.

By December, the economy should enter a period of normalization. Leer thinks that if large groups of unemployed workers can’t find work, then the pandemic’s economic scars will likely limit economic activity heading into 2022.

Others expect the recovery to proceed differently for various types of workers. The K-shaped recovery is characterized by two groups of employees: higher-paid workers, who are weathering the recession, and lower-paid laborers, who are struggling.

Marcus & Millichap says the divergence in unemployment rates between low- and high-income workers has “notable implications” for commercial property. This trend affects all aspects of commercial real estate, from multifamily to industrial, which is being bolstered by people who can pay for online products, to retail. =