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THE ECONOMIC OUTLOOK FOR 2021

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By Craig Erwin, Ph.D.

2020 was a very difficult year for many individuals and businesses, thanks to Covid-19. 2021 is shaping up to be a great deal better. Growth should shift into high gear soon, as some semblance of normality returns, with Covid-19 waning, consumer and business demand returning, and the labor market strengthening. Two weeks ago jobless claims rose, but Texas drove half the rise, and Texas was terrorized by a deadly winter storm recently. Nationwide, jobless claims are actually trending downward, aided by 355,000 jobs added in leisure and hospitality in February.

A number of industries are facing healthy demand for their products (thanks to increased consumer spending), including manufacturing, some service industries, the automobile industry, and housing. However, the housing industry and some manufacturing industries, such as the automobile and gaming industries, are plagued by a shortage of raw materials and finished goods, and even with high unemployment, some industries are struggling to hire enough workers.

Congress recently did its part to get the US economy back on its feet, approving $1.9 trillion in stimulus payments, which will boost the economy, helping release pent-up demand for all kinds of services. But some manufacturers are already struggling to meet demand, which is rebounding after Covid-19 crushed demand for many products and services last year. Products such as computer chips, have become scarce and will become even more scarce before suppliers can catch up.

A strong dollar can stifle an economic rebound, crippling exporters such as computer chip suppliers and automakers. When interest rates rise, the dollar usually goes along for the ride. Fortunately, the dollar is staying weak this time, even as the promise of a booming economy has driven Treasury yields skyward. So far, so good for exporters, except those struggling to procure sufficient raw materials to meet consumer demand.

The outlook is brighter now than in December, 2020 when the Federal Reserve predicted 2021 US GDP of 4.2%. At its latest meeting (last week) it projected GDP growth of 6.5% in 2021. The Wall Street Journal expects 2021 US GDP to be nearly 6%, so the consensus is that economic growth should be vigorous this year. The Federal Reserve expects to keep Fed funds rates near zero until 2023. Faster growth could change that, but the Fed fears making any changes that could choke off growth, so it has pledged to keep rates near zero for the next couple of years to ensure it stimulates, rather than stifles, economic growth. Conditions look set to continue to support healthy economic growth.

Although signs appear to be pointed in the right direction for the US, most foreign economies are expected to recover later than the US economy, including European and emerging economies. The US did a better job of supporting consumer income and spending during the pandemic and now it seems the US is likely to lead the global recovery because it’s tackling the pandemic better too. The future for America looks bright, but much of the rest of the world may lag behind the US quite a bit.

All in all, the US economic outlook looks quite bright for the next couple of years. Although there are still risks such as Covid-19 and inflation flare-ups, the near-term future looks likely to pleasantly surprise us. Let’s hope that there are no nasty surprises lurking out there that are not yet on our radar.

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