June 13, 2021
By Harris L. Kempner, Jr., President
Each quarter we share our projections about the state of the U.S. economy – where it is and where we believe it will go. Once again, the projection is an eye-popper.
We think the economy will end 2021 with a real, inflation-adjusted Gross Domestic Product (GDP) gain of 8%, and perhaps somewhat more. If we are correct, it will be the highest annual GDP growth the country has experienced since 1951, i.e., in the last 70 years. This is despite the fact that there are still relatively large numbers of Covid cases every day, and in some states, they are growing. And this is despite a first quarter, which was handicapped by the fact that vaccines were not completely accessible and that there were major weather traumas. The real growth rate for the first quarter was “only” 6.4%. Yet with all that, there are enough things aligned that make us reasonably confident in projecting an exceptionally strong, real GDP estimate that is higher than we have ever projected in our lifetimes. This is due to the confluence of the following influences:
1) The already existent recovery which has benefited a good many people in the middle- and upper-income levels in the country and multiple corporations as well. This recovery has been “K-shaped” in our opinion because, remarkably, more jobs were created during the Covid year 2020 for these upper-level income people. This trend will continue. However, a whole cohort of the middle- and lower-income people lost a considerable number of the jobs that they once had (the lower leg of the “K”). It is the return of these people to the work force that will be a good piece of the overall recovery we are talking about. Now a “V”, not a “K”.
2) At long last, the vaccines, particularly Pfizer and Moderna, are being produced apace and more importantly, are being injected apace. This is a key to the thesis because we believe that this massive present and future increase in vaccinations will be sufficient to blunt any “surges” in infection from Covid and permit the country during this year to gradually reopen the significant areas impacted. Most specifically, the service industries such as restaurants, hotels, bars, and other areas will reopen. These areas have been blasted by Covid and when they open fully from a standing start, significant growth can take place in the economy overall. The only possible drawback to this is the Delta variant, which might severely affect under-vaccinated states.
3) The Fed policy toward interest rates has been to keep them as “low as possible” according to Fed Chairman, Mr. Jerome Powell. Whether that holds true or not, there is really no indication whatsoever that the Fed is going to increase rates in calendar 2021 and therefore the economy will have lower rates as a tailwind pushing it along as well.
4) The two major stimulus/recovery bills that were passed in the latter part of 2020 and in March of 2021 will inject some $3.25 trillion into the economy, in many cases via direct checks to lower income people – the very same lower income people that have been left behind in the recovery of 2020. Many people will also benefit from the new Child Care dollar infusion, which will begin this quarter. It must be continuously kept in mind that our economy is a consumer-based economy with over 70% of it attributed to consumer spending (and about 15% each for business and government spending). When large numbers of consumers who have been without significant resources suddenly get them, they tend to spend some and save more for later, a factor which will lead to months long spending growth as the economy benefits from these additions.
5) Finally, overseas economies, in some cases, will benefit gradually as the vaccinations roll out and this is particularly true in Asia and along the rim – Japan, Australia, Taiwan, Singapore, and China – all of which are major trade partners with the United States. The rest of the world is much spottier. Importantly, this year we feel that the U.S. can be more on its own than usual, less dependent on trade successes with others, because there is so much internal propulsion of the U.S. economy as outlined above. For example, this will be the first time in 15 years that we expect the U.S. economy to grow faster than China’s economy in terms of real GDP.
When you put all this together, we feel fairly confident that unless inflation is significantly higher than we expect, which would require the Feds to raise interest rates despite its protestations and/or unless there is a massive increase in Covid cases due to the new Delta variant, the U.S. is on its way to one of its strongest economic years in the last century.
Past Letters