Vaccines could unleash a hobbled US economy and spur job growth in 2021, but risks loom

Paul Davidson
 
| USA TODAY
Fed keeps rate near zero, sees brighter 2021The Federal Reserve said Wednesday that it will keep buying government bonds until the economy makes substantial progress — a step intended to reassure financial markets and keep long-term borrowing rates low indefinitely. (Dec. 16)APTed Adams, 77, has put off myriad purchases while hunkering down during the pandemic.Adams and his wife, who live in Minneapolis, have forgone trips to their vacation home in Palm Desert, California, as well as purchases of new furniture for that house and a new Mercedes-Benz S Class.But the distribution of COVID-19 vaccines “has given me confidence that the stock market will become more stable and life and the economy will be back to normal by summer,” says the retired serial entrepreneur. “I was wavering about buying a new car but am now planning to do it soon after I’m vaccinated. … We’ve got a lot of pent-up spending we’ll probably do once this is over.”The rollout of vaccines in December has  set the stage for the U.S. economy to turn in its best performance in two decades next year as distribution spreads across the country. First, though, the nation must grind through a first quarter that’s likely to be among the most dismal since the Great Recession of 2007-2009. America’s worst health crisis in a century will likely produce a second straight year of wild swings in the economy. This time, however, the overall outcome is expected to be favorable as growth ultimately surges on the game-changing vaccines and the nation’s gross domestic product returns to its pre-pandemic level by the end of 2021.“We see really strong growth potentially starting in the second quarter,” says Barclays economist Jonathan Millar. “It’s a pretty strong year.”That doesn’t mean the economy will be back to normal. The pandemic is leaving a legacy of millions of jobless Americans and thousands of shuttered businesses that will take years to reverse.   Economists surveyed by Wolters Kluwer Blue Chip Economic Indicators predict the economy will grow at an annual rate of 4% next year, the fastest pace since 2000. That, of course, would come on the heels of an estimated 3.5% contraction in 2020, the economy’s worst showing on record amid a virus that led states to shutter restaurants, malls and other businesses. The slump featured a record 31.4% decline in GDP in the second quarter, followed by an unrivaled 33.1% jump in the third quarter as many outlets reopened.A bleak start to 2021Buckle up for another roller-coaster ride in 2021. The first quarter is likely to be grim.  COVID-19 has been spiking across the country, with cases, hospitalizations and deaths setting records and many states reinstating business constraints and shutdowns. Initial jobless claims, a measure of layoffs, totaled 803,000 on a seasonally adjusted basis the week ending Dec. 17, a sign that many employers are still cutting jobs as the pandemic forces more business restrictions and discourages shoppers.Millar predicts the economy will flatline the first three months of the year. And JPMorgan Chase reckons output will dip slightly early in the year There’s also renewed uncertainty around the fate of a $900 billion government relief package, which was designed to aid small businesses, renew unemployment benefits for 12 million Americans and send $600 checks to most people.President Donald Trump has slammed the bill and demanded higher payments to Americans. Without the relief, Millar estimates, GDP would fall 1% to 2%.But vaccine distribution is poised to ramp up sharply by April and inoculations are likely to be widespread by midyear, economists figure, unleashing a well of pent-up demand as millions of Americans resume traveling, dining out, moviegoing and other activities.More COVID-19 shutdowns: Apple is temporarily closing all California stores, a dozen more around U.S. amid COVID-19 surgesCOVID-19 vaccines inspire confidenceThe vaccine “will inspire a lot of confidence,” says Gus Faucher, chief economist of PNC Financial Services Group.Yet much is unclear about the course of the virus and its eradication. How quickly can the vaccines be doled out? How many Americans will feel comfortable getting them?  And while many of those laid off could receive additional unemployment insurance if the federal relief measure becomes law, benefits for 11.2 million are still set to expire March 7, according to The Century Foundation, a nonprofit think tank, and the left-leaning Economic Policy Institute.They could sharply curtail their purchases.As a result, forecasting economic growth is particularly challenging. Recently, 17 Federal Reserve policymakers published an unusually wide range of GDP growth forecasts for 2021, from near zero to just above 5%.Better or worse?“Things could be much better than expected and things could be much worse,” Faucher says.Most economists don’t foresee the U.S. slipping into another downturn. But 63% of forecasters surveyed by the National Association of Business Economics last month cited a 20% to 39% chance of such a double-dip recession.Even if the likeliest scenario plays out and GDP reclaims its pre-pandemic mark by the end of 2021, the downturn is certain to leave scars. Nearly 4 million people have joined the ranks of the long-term unemployed – meaning they’ve been idled more than six months – the most since 2013. That group traditionally has struggled to land a job because employers worry their skills have eroded.About 100,000 small businesses have closed permanently, according to Yelp, the online review site. It could take years for new enterprises to replace them. U.S. employment won’t return to its pre-crisis mark until late 2023, according to Moody’s Analytics. Here’s a look at some of the economy’s strengths next year:Consumer spendingConsumption, which makes up 70% of economic activity, is expected to power growth. Under the CARES Act, passed by Congress in March 2020, the federal government sent $1,200 checks to most Americans, helping them squirrel away an additional $1.4 trillion through October, according to Wells Fargo.  After many people are vaccinated in 2021, they’ll likely spend much of that cash, as well as a chunk of any second stimulus they receive from Uncle Sam and the savings they’ve accumulated by forsaking travel, dining out and other activities in 2020, Millar says. That should boost spending on services, which cratered during the crisis even as consumers stuck at home snapped up TVs, appliances, tablets, cars, computers and other goods.The economists surveyed by Wolters Kluwer predict consumer spending will grow 4.5% next year, the most since 2000.Are U.S. manufacturers coming home?: American manufacturers pine for home as COVID disruptions, Trump tariffs shake up suppliesThere are risks to that rosy outlook. Forty percent of Americans surveyed by Harris Poll in December said they’re not very likely or not at all likely to take the vaccine as soon as it’s available.Others seek more safeguards. Tekai Shu, 39, of Bristol, Tennessee, says his family canceled all four of its annual vacations this year – to the beach, Disney World, a national park and New York City. Even after they’re vaccinated, “I won’t be making family-related travel plans” until he’s comfortable that COVID-19 cases at their destination cities are at low levels, Shu says, noting that his wife and daughter have asthma.JobsThe nation has recovered 12.3 million, or 56%, of the 22.2 million jobs lost in March and April as many furloughed workers were called back.But that means employment is still 9.8 million jobs below its pre-pandemic level. Monthly payroll gains have slowed from 4.8 million in June to 245,000 in November. As COVID-19 surges, the country could shed jobs again in December, January or February, Faucher and Millar say.The good news: Warmer weather and increasing vaccinations should lead to more business reopenings and brisker activity, stemming the tide of layoffs and fueling stronger job growth by spring, the economists say.Faucher forecasts average monthly job increases of 350,000 in 2021 compared with 178,000 in 2019 while Millar predicts an average of 344,000. That should lower the 6.7% unemployment rate to a near-normal 5% by the end of 2021, Millar says.Faucher, though, figures unemployment will remain elevated at 6.3% as the improving labor market draws in more discouraged workers who stopped looking, as well as those caring for sick relatives and children who have been distance-learning from home.Mary Roberts, 39, of Tallahassee, Florida, hopes that even the cruise line industry, hit hardest by the health crisis, flickers back to life. Roberts lost her contracting jobs as a choreographer on cruise ships in March. It took her four months to receive unemployment benefits, forcing her to draw down her savings. Now, she’s working four part-time gigs to pay the bills: dance studio instructor, Uber driver, office building janitor and facilities manager at a yoga studio.“It is exhausting and it is tough,” she says.Altogether, she’s earning 60% of her cruise ship pay. She has racked up $10,000 in credit card debt and suspended her car payment. She’s trying to squeeze a week’s worth of meals from a crockpot dinner.“My hope for next year is that the cruise ship industry is able to come back and provide entertainment jobs,” she says. Even if just a few voyages return, “I’m hoping I get to be on that front line of creative directors and entertainers that get to troubleshoot” any glitches.HousingThe housing market boomed in 2020 as people confined to their homes sought bigger spaces, typically in the suburbs, more millennials started families, and historically low mortgage rates slashed monthly costs.Those trends aren’t going away. Although many employees will return to offices after a vaccine is distributed, 90% of human resource leaders plan to let employees work from home at least some of the time, according to a recent Gartner survey.  Both Faucher and Millar forecast about 1.6 million housing starts next year, the most since 2006.Housing makes up just 3% to 6% of the economy but it has outsize ripple effects. People who buy houses typically fill them up with new furniture and appliances, for example.“I think housing is going to help carry us through the near-term” troubles in early 2021, Faucher says.Yet some parts of the economy could be weaker or mixed next year:Business investmentBusiness capital spending jumped 21.8% annualized in the third quarter and equipment outlays, a key category, soared a record 66.6%, pushing the latter past its pre-pandemic level. Much of it was driven by purchases of networking gear for the work-at-home trend, and Faucher says that will continue.The vaccine, he says, will also bolster business confidence. Business optimism will be further buoyed as President-elect Joe Biden eases the trade-related uncertainty generated by Trump’s tariff fights with China and other countries, Wells Fargo says.Millar, however, believes work-from-home outlays will peter out. And with customer demand still well below pre-crisis levels, companies have plenty of capacity to absorb stronger sales and so don’t need to buy new factory machines, computers or printers, he says.Meanwhile, retail and office construction will continue to be hammered by the e-commerce and work-from-home movements, Wells Fargo says.The economists surveyed expect business investment to rise a decent 4% next year, but Millar is looking for just a 1% advance.Government spendingFederal government outlays should increase, partly because of the stimulus, but state and local spending will be weak again as the pandemic increases health care costs and holds down revenue. Millar expects government spending overall to rise just 1.3%.TradeGrowth overseas should pick up, boosting U.S. exports. That should help narrow the trade deficit, Wells Fargo says, a positive for growth.Millar disagrees. As the U.S. economy recovers, American consumers will buy even more goods from abroad, widening the trade gap, he says. The economists surveyed predict the trade deficit will grow slightly.Keep in mind that forecasts for 2021 have a higher-than-usual margin of error.  “There’s more than a lot of uncertainty,” Millar says.

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