January 15, 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. This time somewhat more of an explanation than usual is required.

We think the economy will end 2021 with a real, inflation-adjusted GDP gain of at least 5%, and perhaps as much as 6%. If we are correct, it would be the second highest recovery from a recession the country has experienced since 1982-1983. This kind of strong recovery may seem unlikely, considering large amounts of the population continue to be unemployed and the Covid-19 virus is still raging. Cases and deaths are higher than they have ever been, and there is now a brand-new variant which may make it more transmissible, if not more virulent. As a matter of fact, the effects of the virus will likely result in negative GDP growth for the first month or so of 2021. And yet with all of that, there are enough things aligned to make us reasonably confident in a very strong real GDP estimate. This is due to the following:

1. We now have vaccines, and more are anticipated. Despite the glitches in the vaccine rollout, there should be ample availability in the next few months, and most willing Americans will likely be vaccinated by late spring to early summer.

2. The new Covid-19 stimulus bill was funded for roughly $900 billion, which represents about 3% of the nation’s GDP. It will obviously benefit the survival of many small businesses, who will be eligible for new PPP loans. What is more important, in terms of the overall economy, is that over $500 billion of the funds will be paid directly to consumers. Though the stimulus check for $600 was not as much as the $2,000 many hoped for, $600 per person is a substantial injection of liquidity and comfort to the consumer that should not be underestimated, particularly because it’s a benefit to those who will most need to spend it rather than save it.

3. In addition, there are strong indications that a brand-new stimulus will be added in the early days of the Biden Administration, that could add to liquidity and support. The consumer already has a very high savings rate of over 11% waiting to be spent. Any additional government check will provide a booster shot for purchases. Please remember, we are a society whose economy is 70% based on consumer spending. Anything that gives us a major positive jolt will be of considerable help, particularly in the first half of the year as a counter action to the increase in COVID-19 hospitalizations.

4. We expect the Fed will remain benign with no sign of tightening. This is because we do not expect inflation to be significant in 2021. We do think there will be a mild increase over the level of last year, but not enough for the Fed to tighten the money supply.

5. Manufacturing and industry are solid already and are, in many cases, going to benefit directly from this resurgence of the consumer economy as well as basic benefits of PPP. In addition, there are a lot of industries that have been knee-capped by Covid-19, especially service industries. As more Americans are vaccinated, many industries, are going to benefit disproportionately. Restaurants, hotels, and tourist related activities will resume operating normally, and that will contribute substantially to the consumer related surge we see coming in the U.S. economy.

6. Overseas economies are such that the same kind of recovery pattern is going to take place in Europe and Asia generally. In China it already has, and that is another addition to the U.S. economy because China is a major market for U.S. manufacturers and other trade activities. This all contributes to the overall picture of growth in 2021.

When put together, all this leads us to believe that we are going to overcome the weakness in the first couple of months of this year and will be having one of the stronger recoveries from a recession that the country has seen in 40 years. Another way to put it – the 11 million unemployed can now be looked on as a potential boon to economic growth as many get new jobs.

Two things could cause our analysis to be incorrect and delay the economic growth we are anticipating. The first is if the variants of the new strain of the COVID-19 virus overwhelm the efficacy of the vaccine. The second would be a much greater resurgence of inflation requiring early Fed tightening. If either of those possibilities happen, the recovery will be slower than we presently think. For now, however, we feel confident in our projections.