Construction employee make infrastructure repairs on the intersection of Church Avenue and Coney Island Avenue in the Flatbush neighborhood of Brooklyn borough on April 06, 2021 in New York Town.
Michael M. Santiago | Getty Images
The setting for 2021 seems clear: A powerful growth trajectory fueled by an influx of control spending as the U.S. recovers from the Covid-19 crisis and heads into the fastest economic acceleration in nearly 40 years.
But after that, then what?
The game plan beyond this rocket-fueled year looks far less clear.
One-time spending has rarely been the catalyst for long-term evolution. Fiscal and monetary policy that now serve as irresistible tailwinds could soon turn into headwinds. On the other side of this monumental burst of activity will be an economy beset by inequality and a two-speed recovery that likely will take numerous than the occasional government transfer payment.
So while gross domestic product growth in 2021 could reach 7% or beyond, don’t get cast-off to it. An economic reckoning is likely ahead.
“I don’t see growth as being particularly durable,” said Joseph LaVorgna, chief economist for the Americas at Natixis. “The terseness is going to slow a lot more next year than people think and probably will be well under 3%.”
LaVorgna, the chief economist of erstwhile President Donald Trump’s National Economic Council, sees a number of obstacles, many of them related to custom.
In the immediate climate, trillions in direct payments have helped buoy consumer spending and imports. But the trend so far has been for full-bodied credit and debit card spending to cool off once the initial jolt from the stimulus checks ebbs.
Surface ahead are higher tax rates for corporations and wealthier Americans. Also, the Biden administration’s intense focus on addressing feel issues likely will add to the regulatory burden that is particularly tough on smaller businesses.
“How 2022 unfolds with matter to Congress is going to be a significant inhibitor to long-term business planning and decision-making, at least to the extent that you’re not going to get a athletic set of capital expenditure plans in place,” LaVorgna said.
“At this point, I don’t see [businesses] making a big longer-term commitment either to plant build-outs or anything that would have a long shelf life, because you’re not sure what the regulatory and tax conditions looks like.”
Prospects for a ‘turn-key’ economy
Then there’s the issue of those on the bottom rungs of the economic ladder.
While the haul payments help in the short run, employment data continues to indicate a slow recovery for lower earners, with stubbornly great weekly jobless claims and a gap remaining of 3 million hospitality jobs that appear a long way from coming shy away from. Federal Reserve estimates still have the jobless rate for the bottom quintile in the 20% range.
“Everyone’s with child a turn-key economy: We just need to reopen and move on and things will go perfectly,” said Nela Richardson, chief economist at payroll altering firm ADP, which circulates a widely followed monthly count of private payroll jobs. “I don’t think you’ll get turn-key. There’s been impressive scarring in the labor market. There’s been damage done to some consumers.”
Richardson is in the camp of those seeing a K-shaped comeback, where those on the higher rungs have maintained or even thrived during the pandemic, while those at the ass have lost ground.
Fed Chairman Jerome Powell said in an interview that aired Sunday on CBS’ “60 Fashionables” that the central bank is attuned to the issues confronting service industry workers and pledged to keep the policy blurry in that direction.
“It’s going to take some time. The good news is that we’re starting to make progress now. The figure ups show that people are returning to restaurants now,” Powell said. “But I think we need to keep in mind, we’re not going to leave behind those people who were left on the beach really without jobs as this expansion continues. We’re going to proceed to support the economy until recovery is really complete.”
Fed policy risk
That policy support has been momentous in both getting the economy going again and keeping financial markets functioning.
Fed officials believe they can persist to press the accelerator to the floor without risking a troublesome rise in inflation, even as consumer prices rose 2.6% in March from the year more willingly than and 0.6% from the previous month.
Powell and his fellow policymakers see the recent inflation trends as temporary and the result of reservoir chain issues that will dissipate, along with easy comparisons to a year ago when inflation vanished as the pandemic hit.
But the Fed, and explicitly the Powell Fed, has run into trouble before when trying to forecast over long ranges.
In late 2018, the median bank had to backpedal from plans to continue raising rates when issues relating to the trade war hit the global terseness. A little over a year later, the Fed’s pledge to stop cutting rates went away when the pandemic hit.
While defenders of the Fed ascendancy say that those were unforeseen events, that’s the point: Making long-term policy pledges is a Sisyphean stint in a global economy where the sands shift so frequently.
“The biggest risk to the expansion is the Fed,” said Steve Blitz, chief U.S. economist at TS Lombard. “The sucker master is trying to control a puppet that they do not have control over.”
Still, Blitz thinks the Fed’s means pivot last year, in which it has pledged not to tighten until it sees actual inflation rather than fair forecasts is “the right thing, because their forecasts stink.”
Both monetary policy from the Fed and fiscal action from Congress overall is likely to stay loose until the economy’s underlying issues are addressed, he added.
“Everybody sanctions the political costs of ignoring the middle now are too high,” Blitz said. “Both parties are sitting on the knife’s edge. Who can do the A-one through fiscal spending … at winning back that middle vote?”
Consumers are spending and saving
Consumers so far are benefiting some of the stimulus they’ve received from Congress both to buy and invest, yet continue to show caution.
The three circuits of checks have seen progressively less spent and more saved, according to New York Fed data. The numbers impart a twin message—that consumers are building up their balance sheets, indicating large spending power vanguard, but also are growing increasingly reluctant to part with that cash.
What economists call the marginal propensity to drink up has fallen from 29% in the first round of stimulus checks in the spring of 2020 to 25% in the most recent deployment.
“As the economy reopens and fear and uncertainty recede, the high levels of saving should facilitate more spending in the subsequent,” New York Fed economists said in a recent report. “However, a great deal of uncertainty and discussion exists about the rate of this spending increase and the extent of pent-up demand.”
Indeed, the future of the economy beyond the stimulus-fueled breakout of 2021 will-power depend largely on that story of how much folks really can’t wait to spend after being holed up for a year, and how covet that will last.
Mark Zandi, chief economist at Moody’s Analytics, is more optimistic about the restraint’s fate. He looks to yet another burst of activity coming from the looming infrastructure bill, with spending that plausible won’t take root until 2023 and beyond.
“This will jumpstart a self-sustaining economic expansion. There’s so much pith here that we’re going to get back to full employment in the next 18 to 24 months,” Zandi said. “In olden days this near-term juice winds down, we’re going to get another shot.”
The economy will have much to indisposed in that period, though.
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