U-M Economists: Vaccine Could Boost U.S. Growth in 2021November 24, 2020
The outlook continues to be clouded by COVID-19 but a team of University of Michigan economists sees encouraging signs that could bring economic life close to normal by the end of 2021.
Much, though, will depend on how readily a vaccine becomes available by next summer.
The annual U.S. Economic Outlook, released Thursday morning, indicated that the real gross domestic product is expected to rise by 4.2% in 2021.
Real GDP is expected to decline by 3.6% year-over-year in 2020, according to the U-M forecast.
“Regardless of what happens in the near term with the virus, I think the recovery will be pretty vigorous once we get a wide rollout of a vaccine,” said Daniil Manaenkov, U.S. forecasting specialist for the U-M Research Seminar in Quantitative Economics, in a statement.
The negative risks, he maintained, are mostly short-term and may only influence the timing of the recovery.
“But then again,” he said, acknowledging the shocking disruption to the economy in 2020, “it could be our own fatigue of forecasting gloom talking.”
The forecast was prepared by Manaenkov and U-M economists Jacob Burton, Gabriel Ehrlich, Tereza Ranosova, and Aditi Thapar.
The U-M forecast assumes that a vaccine will be available to workers on the front lines by early 2021, with wider availability by next summer.
What’s ahead this winter?
The U.S. recovery is expected to continue during the winter at a slower pace but not necessarily across the country. Continued strong growth in the warmer states could dominate a potential economic contraction in colder northern states, which are likely to impose restrictions to address seasonal spikes of new cases and hospitalizations in the winter.
Michigan, for example, launched a three-week pause on Wednesday that restricts many activities, including temporarily shutting down indoor dining and ending in-person classroom instruction at high schools and colleges.
The University of Michigan researchers are set to release their economic forecast relating to Michigan on Friday.
What are others forecasting?
The U-M call is close to the view of economists elsewhere.
Moody’s economist Mark Zandi, for example, is forecasting that real GDP will decline 3.6% this year and increase by 4.1% in 2021. Zandi said his assumptions are based on the passage of a $1.5 trillion fiscal rescue package in February 2021 and a coronavirus vaccine that could be widely distributed by mid-2021.
The depth of the COVID-19 recession in early 2020 — and the unknowns relating to the pandemic — create far less certainty when it comes to any economic forecast. It remains unknown, for example, if the U.S. economy would head into a double-dip recession if the uptick in new COVID-19 cases sharply reduces economic activity this winter.
“We expect to get through the next few quarters with positive momentum, but we recognize that the effects of a double-dip recession in the U.S. could be especially damaging, reinforcing longer-term changes in individual and company behavior,” according to a report issued by Comerica chief economist Robert Dye.
“Tightened social mitigation policies will hurt the economies of Europe. The Bank of England expects to see a double-dip recession in the U.K. The European Central Bank is fearful of a similar result for the European Union,” the Comerica report noted. Economists at Comerica are forecasting real GDP growth of 3.8% in 2021 and a decline in GDP growth year-over-year of 3.6% in 2020.
Where is U-M seeing signs of hope?
The encouraging signs include strong sales in housing, remarkable growth in the third quarter and brisk demand for new cars and trucks.
When it comes to housing, the available supply of homes for sale has not kept up with demand, according to the U-M report. Because of supply shortages, housing starts jumped back strongly over the summer to 11% year-over-year growth in September.
The overall U.S. economic recovery so far has been bifurcated, as some groups are doing very well while others are not.
“The burden of this recession has been distributed extremely unevenly,” according to the U-M report.
Who is still hurting?
The highest-income consumers, the U-M researchers noted, who typically buy new cars and trucks have been insulated from job and income losses. Many in high-paying jobs didn’t lose their paychecks during the past recession because they were able to work from home as social distancing measures were put in place to combat the spread of the coronavirus.
Those who were able to keep working may have benefited from historically low interest rates and a rebounding stock market.
Lower-wage workers at restaurants, hotels, bowling alleys, movie theaters, and elsewhere in the service side of the economy felt far more financial pain. They bore the brunt of the early jobless hit.
“Unfortunately, a more complete recovery and the return of jobs in the service sector will have to wait until 2021,” the report stated.
What are the key trends ahead?
The U-M forecast gives a glimpse into what consumers might expect when it comes to the jobs outlook, car sales, mortgages, and other factors. Here’s a look:
A new hope for a V-shaped recovery. Growth in the 2020 third quarter at a 7.4% quarterly rate was extremely positive and shattered most expectations, the U-M forecasters noted, giving a footing for growth ahead.
Slow growth ahead in some areas. Investment in intellectual property is expected to remain flat in 2020 and slow growth is forecast for 2021, reflecting depressed spending within the entertainment industry. Challenges remain relating to research and artistic production.
More people will be working. The U-M forecast says the U.S. unemployment rate is expected to fall slowly and steadily from 6.9% in October to 5.6% by the end of 2021. The expectation is that the U.S. jobless rate could hit 5.1% by the end of 2022.
Mortgage rates could inch up slightly. The 30-year conventional fixed-rate mortgage could inch up to 3.1% by the end of 2022 — up from an expected 2.8% in early 2021. Low interest rates will continue to boost the housing market.
Car and truck sales gear up to go higher. Sharp declines in the first half of 2020 caused light vehicle sales to slow to a projected 14.5 million in 2020. But car and light truck sales are expected to pick up to 16.3 million vehicles in 2021 and 16.7 million in 2022.