Updated 5/11/2023: The
White House declared the end of the Covid-19 Health Emergency May 11,
2023 so some of the details mentioned in this article regarding the
CARES Act or pandemic may have changed.
The year 2020 has been turbulent economically across the
globe, marked by the continued escalation of the COVID-19 pandemic.
In the U.S., economic uncertainty has only been further exacerbated
by the recent presidential election and the continued spread of the
virus leading up to the holiday season. Without clarity on when a
vaccine will become available to the general public, it’s important
to examine both where the U.S. economy currently stands today and
what is expected to unfold in 2021.
In our latest webinar, “Economist
Panel on the Outlook for 2021,” we were joined by three top
economists: Dr. Mark Zandi, Chief Economist at Moody’s Analytics; Dr.
Rob Wescott, President at KeyBridge Public Policy Economics; and Dr.
Amy Crews Cutts, President and Chief Economist at AC Cutts &
Associates LLC. Their combined knowledge and expertise bring a
positive outlook for mid-to-end of 2021, but also point to a long road ahead.
We’re Doing Better, But Not Out of the Woods Yet
While this recession has so far been the shortest in
history, its impacts on the economy have been tremendous with 22
million jobs lost in March and April, explained Mark Zandi. Since
April, about half of the 22 million jobs lost have been regained
(10 – 11 million). However, Zandi also noted that about half of
the 10 – 11 million jobs that have been lost are temporary losses,
while the other half is predicted to be a permanent loss. Amy
Crews Cutts also noted presently we are at a job loss of 10.7
million, which was the peak of the 2008 – 2009 financial crisis
after the housing bubble burst.
Zandi described this recovery as a “K” shape, with the
initial major dip down caused by pandemic shutdowns and then coming
halfway back up as businesses reopened. He explained that we are now
on divergent paths as different groups within our country are
impacted disproportionally, with lower middle income households
being hit the hardest.
Overall, disposable personal income has not shown a major
decrease, however Crews Cutts pointed to the massive scope of the
CARES Act as the driving force behind that. Presently, the U.S.
total consumer debt is at a peak ($14.3T) with residential ($184B)
and auto ($26B) total debt up, while credit card ($115B) total debt
is down and still falling, and new student loan origination is also
down 13.6% YTD*. Additionally, Crews Cutts noted that early
delinquencies have begun to rise with the CARES Act benefits and
other protections expiring.
Services Oriented Businesses Hit Hardest
Rob Wescott expanded on the current economic impacts citing
that global industries experiencing the hardest hits from the
pandemic are those that are more services oriented. Countries with a
GDP performing better, are those who focus more on manufacturing
like Japan and Germany. Countries that are more services based, like
France and the UK, have not been performing as well. At the bottom
are countries whose primary focus is in travel and tourism. The U.S.
is an outlier and has performed better than expected, but this is
largely due to the $3 trillion infused into the economy through the
Wescott further explained that this view can be applied to
states in the U.S., where more rural states that focus on
agriculture have seen less unemployment and thus less economic
impact. These states are contrasted by their more urban
service-focused counterparts like Massachusetts and New York, who
are seeing a more negative impact. Wescott also compared Nevada and
Hawaii to Italy and Spain, all experiencing the most severe economic
impacts, as their primary focus is tourism.
Small Business a Main Concern
It’s important to watch the small business sector, according
to Wescott. “We are seeing pain building up in the small business
sector. It's one of our main concerns about the economy," he said.
Wescott divides the economy into three types of main
activity: manufacturing firms and two types of services, which
includes those with high and those with low human contact. Low human
contact services include management consulting firms, financial
firms and advertising firms who are currently handling the pandemic
led impacts well. High human contact service firms, such as travel,
tourism, restaurants, bars and physical therapists are suffering due
to the pandemic. This area is experiencing the real point of pain in
the economy. And looking forward, Wescott predicts that “those are
the pieces of the small business sector that are going to continue
to be feeling the most pain.” Wescott cited Goldman Sachs data,
highlighting that PPP money helped and months like April, May, and
June showed firms holding strong. However, the default rate of small
businesses is on the rise, according to PayNet, an Equifax company.
What to Expect Looking Ahead: 2021 Predictions
On a positive note, Mark Zandi predicted that the economy
will continue to grow and employment will increase in 2021. But he
cautioned that this will happen at a very slow rate. Zandi also
pointed to the pent up demand by consumers for services, travel,
restaurants and other activities halted or slowed by the pandemic. As
it becomes safer to move back to these in-person activities the
economy will feel the positive impacts and more jobs will be created.
There are two major stipulations to Zandi’s more positive
outlook. He cites two risks that economic growth will hinge on. The
first one is the potential for further job loss as the pandemic
continues to intensify. The second risk depends on economic policy
and if the government will be able to respond with additional fiscal
stimulus now that the CARES Act has run out. Notably, Zandi predicts
that if there isn’t any additional support or not enough, it is
likely that 2021 will see a further rise in unemployment, and
potentially a double-dip recession.
However, if the U.S. gets an additional $1.5 trillion fiscal
support package, it could bring enough economic stability to help get
the country back to full employment by 2023, as seen in the graphic
below. A stimulus package of $3.5 trillion would likely get the
economy and unemployment levels back on track even faster. A stimulus
package coupled with the Federal Reserve keeping interest rates to a
0% rate throughout the next year will be critical to the U.S.
regaining economic stability and employment.
“By my calculation, one fifth of American workers are either
unemployed or suffered a pay cut since the pandemic hit,” said Zandi.
Fiscal Support Package Needed Now
With 7.9% unemployment, Zandi believes the U.S. is in crisis
mode and needs a fiscal support package now. He said is should help
“small businesses, airlines, healthcare providers, schools that are
struggling to stay open, and local governments just to get to the
other side.” In the current economic environment, Zandi warns that he
thinks the U.S. economy needs help now and cannot wait on policies. He
explained, “it's not really about at this point getting back to full
employment, it's kind of trying to make sure that the economy doesn't
evaporate and create even more difficulty for us to get back to full
employment.” Zandi recommended that the support could include
additional supplemental employment insurance, possibly another round
of stimulus checks with a lowered income threshold, more money for
small businesses through Paycheck Protection Programs and PPP to help airlines.
Rental Assistance and Aid to State and Local Governments
Two additional actions that would make a big difference and
haven’t been a big part of previous support efforts are rental
assistance and aid to state and local governments. Zandi explained
that at the end of January when the rental eviction moratoria comes
to an end, the back rent will be about $70 - $75 billion. In many
cases, this would impact middle-class Americans rather than big
financial institutions. At the state and local government level,
budget constraints lead to job and program cuts for workers like
teachers, hospital workers, and fire and police emergency
responders. All of this points to Zandi’s belief that there is
further need for the government to come through with additional
fiscal support. This will not only help stimulate the economy now
and help employment down the road, but it will also make things less
costly for taxpayers overall.
Additionally, Crews Cutts added that research from the JP
Morgan Institute showed that consumer cash flow saw a big increase
as a result of the stimulus checks, with extra funds for households
with children, direct payments, and additional unemployment
insurance benefits. Despite the initial positive effect, now that
those benefits have ended the savings that consumers built up have
all nearly run out as of August. This further points to the urgent
need for additional fiscal stimulus.
Housing Demand Up, Inventory Low
Crews Cutts also explained that the CARES Act forbearance on
federally backed mortgage loans will end in March to June of 2021. But
those who are unable to continue with their payments are in a better
spot than in 2008, according to Crews Cutts. She explained that house
prices and demand are both up. While housing inventory is down, those
who are still experiencing financial distress after their forbearance
ends have the opportunity to sell and “hopefully have some equity that
they can take with them out of that. Contrast that with 2008 when
house prices started slowing in 2005, falling in 2006, and everything
blows up in 2008. Homeowners had no equity.”
Although the results of the election were not yet clear at
the time of this webinar, Zandi pointed to strong financial
markets as clear indicators that investors are confident that a
resolution would come soon. Zandi additionally cited that the
equity market was up, while bond yields were down. This was a
clear message that investors were anticipating a split government.
Wescott added that investors generally have more confidence with a
divided government because it can help block major changes like a
corporate tax increase.
Bright Spots Ahead?
Despite the challenges of 2020, the U.S. has a history of
overcoming obstacles and building on our experiences, explained Zandi.
The country has learned from these challenges and that is partially
why Zandi believes the financial system has held up through the stress
of the pandemic. For example, the reform of the financial system and
the banking system after the 2008 financial crisis placed the country
on more solid ground going into COVID-19. And, Zandi predicts that the
U.S. will learn from the pandemic as well and help make the country
more resistant to healthcare problems in the future.
Wescott also noted that there are 30 firms currently working
on COVID-19 vaccine trials and remains optimistic for a vaccine
becoming available within 12 months that can help save millions of
lives around the world. Finally, Crews Cutts celebrated the agility
of companies as they quickly adapted and moved to virtual platforms.
The ability of financial sectors to move to digital platforms and
the continued innovation in the banking sector are all excellent
examples of overcoming challenges and adapting to changes outside of
our control. Crews Cutts is most optimistic for the role that
alternative data platforms will play in the next months and years.
To access a replay of this webinar or download the
presentation, please visit the Market
*AC Cutts and Associates, Equifax Consumer Credit Trends
Report, Federal Reserve, Cox Automotive