Economic Outlook for 2021

Mark Zandi, Chief Economist at Moody's Analytics and Penn IUR Fellow, offered his forecast for the year ahead at a recent webinar on state and local fiscal stability hosted by Penn IUR and the Volcker Alliance (listen to clip above or read the transcript below). The full webinar, held January 14, 2021, featured Shelby Kerns, Executive Director, National Association of State Budget Officers; Eric Kim, Senior Director and Head of US State Ratings, Fitch Ratings; Vikram Rai, Managing Director and Head, Municipal Strategy Group, Citigroup; and Mark Zandi. William Glasgall, Senior Vice President and Director of State and Local Initiatives, Volcker Alliance, and Penn IUR Co-Director Susan Wachter moderated the conversation.

Penn IUR and the Volcker Alliance created the Initiative for State and Local Fiscal Stability to inform improved federal-local government coordination and issues related to state and local fiscal policy. As part of this Initiative, Penn IUR and the Volcker Alliance have convened experts regularly since April 2020 to discuss solutions to the massive economic and societal disruption brought on by the coronavirus pandemic; click here to watch all 19 events in the series.

Transcript

Mark Zandi: With regard to the economy, we’re getting off to a tough start. Twenty-twenty-one is starting much like 2020. The economy is struggling. And it goes, not surprisingly, right back to the pandemic, as you pointed out, Susan. The pandemic is raging. Infections, hospitalizations, deaths, are all on the rise. And it’s disruptive. It’s doing damage to the economy.

You can see that most clearly in the job market. Job growth has stalled out. In fact, in December, employment declined. And in the industries that are most directly affected by the pandemic—restaurants, accommodation, recreational activities, retailing activity, transportation. And it’s in part because local officials need to put restrictions on business activity to try to contain the virus. You know, Susan and I, we’re from Philly. And the city of Philadelphia and the state of Philadelphia has had restrictions on for the past month or two. And that’s slowed activity. And then, of course, people self-quarantine and become more cautious in what they do, and that restricts economic activity.

So the economy is struggling. And I would go so far as to say that if lawmakers had not passed the $900 billion fiscal rescue package back a few weeks ago now, the economy likely would have experienced a double-dip recession. We’d go back into recession in the early part of 2021. But, fortunately, they passed that legislation. And that should stem the declines in employment. We’re not going anywhere fast once the pandemic is raging, but at least we won't go back into recession, with that help.

So it’s going to be a tough start. It doesn't feel like we’re going to make our way to the other side of the pandemic at least for a few months, not until mid-year. And between now and then, the economy is going to struggle to grow.

Now, having said that, I do think there are good reasons to be optimistic as we move to the latter part of spring into the summer. And that goes to two things, really, maybe three. The first is vaccinations. They’ve gotten off to a slow start, but I’m optimistic that it will kick into a higher gear here. The Biden Administration’s coming in and putting a priority on this. And I think with some professional management around vaccine distribution, it should improve. And the consensus view— and I would concur with it— is that about half of Americans will have been vaccinated by let’s say July 4th. And then you consider all the folks that have been already infected by the virus. We’ll be getting pretty close to herd immunity some time in the third quarter. And once we’re there, I think the economy will kick into a much higher gear. There’s a lot of pent-up demand for various consumer services, particularly by high-income households who have saved a lot of money.

Here's a fact for you. Folks in the top quintile of the income distribution now have well over a trillion dollars in excess savings. Savings above which you would typically expect. And that just goes to the pandemic and the self-quarantining that they’ve been doing. So, you know, I think there’s reason to be optimistic around that. Although clearly a lot of risk in terms of timing.

The second reason is fiscal policy. And there’s another billion-dollar support package that was passed back in September. I do expect we’ll get another package here soon after the Inauguration. President-Elect Biden is going to propose a very large support package today, at some point today, rumored to be around $2 trillion. And just for context, there’s already been $3.2 trillion in support provided since the pandemic began, so this would bring it up to $5.2 trillion in total, if you got all $2 trillion through Congress. $5.2 trillion, that’s 25 percent of 2019 GDP, pre-pandemic GDP, so that’s a lot of support. I don’t think he’s going to get 2 trillion through. That would be a surprise. He’ll probably have to go through the reconciliation process, and you still need 50 votes. And just politically, it’s going to be tough. So if you told me we got another $750 billion to a trillion in support, I’d say that sounds about right. But that would get to the economy some time this spring, March, April, May, and that should help the economy get through to the other side of the pandemic.

And then I do expect the Biden team will come up with another fiscal proposal later in the year. Something closer to Build Back Better, the economic policy proposal that Vice President Biden campaigned on. So we’ll probably get a little more support at some point later in the year, as well. But with all that fiscal support, that’s a lot of juice. That should really help the economy get going. Obviously, particularly, on the other side of the pandemic.

And then finally, the third reason is monetary policy. The Fed has got its foot flat on the accelerator and made it very clear that they’re not going to normalize short-term interest rates, which are at the zero lower bound, until the economy is clearly at full employment, inflation’s above the 3 percent target. That’s at least a couple years down the road, so that means very low interest rates for a considerable period of time. And that also should be very supportive. We can see that in housing markets and commercial real estate markets. Equity prices are high because of the low interest rates, and that’s been very helpful.

So the next few months will be difficult as the pandemic is raging. But I think there’s really good reasons to be optimistic about our prospects, as we make our way into— certainly in the second half of this year. And, you know, by this time next year, we should be in full swing.