High-wage remote workers have been relatively unscathed during the pandemic, have benefited from rising home equity, and are likely to require more space as remote working persists. Companies in areas such as these will not only be faced with higher costs—they will lose the ability to exploit economies of scale. In fact, consumption recovered much faster than our forecast assumed—May’s consumer spending was up 8.1%. Despite the withdrawal of the US$600 weekly supplement to unemployment insurance at the end of July, and despite rising cases of COVID-19 across the country, people continue to be willing to spend. Spending on durable goods has been particularly strong, rising 13% from January through March. These considerations may cause business investment to remain muted for some time. When people first reacted to the pandemic in February and March by canceling travel plans and restaurant reservations, most expected the disruption to be short-lived. "Chart Book: Tracking the Post-Great Recession Economy." Accessed Dec. 22, 2020. See Kiplinger's latest forecast for gross domestic product. In a world of high unemployment, businesses will have little pricing power but will face higher costs. Once we are at the stage of deploying the vaccine, policymakers will need to determine whether further stimulus is necessary. A well-designed relief bill would address three main issues: As of the end of November, the chances of a significant lame-duck relief bill passing seem slim. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ("DTTL"), its network of member firms, and their related entities. He is an experienced US and international macroeconomic forecaster and modeler. Unless otherwise noted, all data supplied by Haver Analytics, which compiles statistics from the US Bureau of Labor Statistics, the Bureau of Economic Analysis, and other databases. Vaccine development is undeniably good news for consumers and businesses. Percent Change From Preceding Period in Real Gross Domestic Product.” Accessed Dec. 22, 2020. View in article, According to a recent poll, just 58% of Americans would agree to be vaccinated against COVID-19; see: R.J. Reinhart, “More Americans now willing to get Covid-19 vaccine,” Gallup, November 17, 2020. Also see: Kathy Frankovic, “Half the public are willing to get vaccinated against COVID-19, the highest level yet,” YouGov, November 30, 2020. The most critical economic indicator is GDP, which measures the nation's production of goods and services. But the International Monetary Fund is downgrading its forecasts for next year, … 7. Banks remain well capitalized and able to lend, and businesses are solvent and willing to spend money to make money once customers return. While this has unfortunately concentrated the economic impact of the pandemic on those least able to manage, rehiring can take place quickly once demand recovers. But companies will likely begin to reduce their dependence on foreign suppliers, or attempt to have a portfolio of suppliers rather than a single source, even if the single source is the cheapest. It would be a bad idea to wait too long once those conditions lift. Roger Wohlner is a financial advisor and writer with 20 years of experience in the industry. Managing to operate during the pandemic for over a year is a different challenge—and a daunting one. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the "Deloitte" name in the United States and their respective affiliates. Bureau of Labor Statistics. Once the labor market recovery is clearly underway, we might see a further spurt in housing activity. "Credit and Liquidity Programs and the Balance Sheet." More than 20 million people are receiving unemployment insurance, and many will lose their incomes if the expansion of unemployment benefits does not continue. The number of new daily COVID-19 cases in the United States neared 150,000 by the end of November—with almost 100,000 people hospitalized—prompting authorities in a number of states to call for reinstating restrictions on, for example, restaurant and bar operations. The recovery would be stronger if vaccines are rolled out fast, boosting confidence and lowering uncertainty. The unavailability of either treatment or an effective vaccine means that the cycle of restart attempts and subsequent reclosing continues. Since state governments cannot run deficits, without federal aid they may need to accelerate the budget-balancing layoffs and program shutdowns they have already begun. Without a relief bill, many industries will feel the drop in spending, from both lower unemployment benefits and state and local layoffs. "Federal Reserve Press Release, Sept. 16, 2020." The Deloitte baseline shows the annual federal deficit remaining at over US$2.4 trillion through 2025, the end of our forecast horizon; this is larger than the largest deficit run during the global financial crisis. The pandemic is intensifying, statewide curfews are back and Washington is asleep at the wheel. Fed’s Powell Pledges Long-Term Support for Economy, How the Current US Inflation Rate Affects You and the Economy, Federal Open Market Committee (FOMC) meeting, Chart Book: Tracking the Post-Great Recession Economy, National Income and Product Accounts Tables: Table 1.1.1. U.S. Bureau of Labor Statistics. The supply shock of the pandemic has clearly raised certain prices. Second-quarter GDP … One possibility (consistent with our baseline) is that consumers will remain wary for some time. Vaccination campaigns, concerted health policies and government financial support are expected to lift global GDP by 4.2% in 2021 after a fall of 4.2% this year. Those practices will also raise prices—and reduce productivity. The need for stimulus depends on how well policy has “frozen” the economy. But it can’t maintain the incomes of unemployed people, or lend to state and local governments, or fund necessary health care spending. First, many businesses will need to spend on safety equipment that will neither improve productivity nor add to profits. March 2020 Update: While the Corona Virus scare is punishing China's economy, the US seems to caught an economic flu, driven by media reports. This suggests that households will maintain a higher level of savings, and that consumer services spending will recover slowly. Discover Deloitte and learn more about our people and culture. Extended unemployment benefits, and unemployment benefits for gig workers, will stop in January. We won’t know until recovery really gets underway. Potential GDP remains about 2% below the prepandemic trend in 2025. And good news about vaccines has enabled us to lower the probability of our long slog scenario from 25% to just 10%. Promoting more efficient labor markets might help to speed the recovery—but it would mean admitting that the prepandemic economy will never return. And the big employment gains may be at an end. How things turn out depends largely on the response of economic policymakers and public health authorities—and the nature of that response is changing hourly. That’s a massive hole. Our fast return scenario assumes that economic growth is much faster, and the economy quickly returns to full employment, even without a major stimulus bill. ... Expect GDP growth for 2020 as a whole to be -3.5%, but +4.4% for 2021, if a stimulus bill is passed. Efforts to reshore parts of the supply chain, and to build more robust manufacturing systems, will likely mean that jobs will become available in manufacturing and related industries. By buying bank securities, the Fed reduces supply in the Treasury market, which increases the prices and lowers the return (or yield) on these long-term notes. View in article, Jerome H. Powell, “COVID-19 and the economy,” speech, Board of Governors of the Federal Reserve, April 9, 2020; Jerome H. Powell, “Current economic issues,” speech, Board of Governors of the Federal Reserve, May 13, 2020. Schools turning to virtual learning prevent potential workers (especially women) from returning to the labor force, so employment growth slows. Investing in certain specific areas that supported virtual operations registered an impressive gain—business purchases of information processing equipment, for instance, rose 5% even as GDP fell in the second quarter. The Biden plan to ensure the future is ‘made in all of America’ by all of America’s workers, McConnell says $2T bill is ‘emergency relief’ and not a ‘stimulus’, COVID-19: Urgent actions needed to better ensure an effective federal response, Trump administration leaves states to grapple with how to distribute scarce vaccines, These ‘little land mines’ could prevent a summertime boom, Estimated macroeconomic impacts of the American Recovery and Reinvestment Act, Funding, credit, liquidity, and loan facilities, Three themes likely to drive 2021 outlook: Rehabilitation, rectification, and reform, Federal Reserve monetary policy in the time of COVID-19. As the pandemic hit the second wave in the fall, though, sales started falling again, declining by 1.1% in November., Also in April, the unemployment rate skyrocketed to 14.7% as companies furloughed workers. It remained in the double digits until August, when it steadily declined. In the week ending Dec. 12, though, claims rose sharply to 853,000, marking the largest increase in claims filed since mid-September., According to the most recent forecast released at the Federal Open Market Committee (FOMC) meeting on Dec. 16, 2020, U.S. GDP growth is expected to contract by 2.4% in 2020. There were 820 natural disasters in 2019, compared to less than 600 a year between 1980 and 2006.. The Fed's Dec. 16 forecast said that wouldn't occur until at least 2023.. But the damage to the economy, from shutdowns and withheld aid, has already been done. View in article, Daniel Bachman, Federal Reserve monetary policy in the time of COVID-19—Issues by the Numbers, Deloitte Insights, November 19, 2020. But this is likely several years away. The Consumer Price Index (CPI) for food at home rose 4% in the second quarter as supply chain problems caused spot shortages for consumers—with some reversal afterwards as things settled down. Long slog (10%): COVID-19 cases continue to climb through the winter, and states are forced to attempt to again limit economic activity. Before the outbreak of the novel coronavirus, the US economy look… The fall spike in COVID-19 cases requires additional closures and prevents many people from wanting to resume normal activities. These include banks' prime rate, the Libor, most adjustable-rate loans, and credit card rates. Moreover, an aging demographic means that more than a quarter of the nation’s existing owner-occupied homes are likely to become available over the next 20 years as the current owners either pass away or vacate their homes.9. Certain services may not be available to attest clients under the rules and regulations of public accounting. © 2021. View in article, Alexander Bolton, “McConnell says $2T bill is ‘emergency relief’ and not a ‘stimulus’,” Hill, March 25, 2020. There was a cost, of course: the Fed’s intervention in many different markets. In the longer term, we expect the pandemic to exacerbate existing consumer problems. It is estimated to then rebound up to a 4.2% growth rate in 2021, and slow to 3.2% in 2022, and 2.4% in 2023. The Fed can keep financial markets operating, provide liquidity for markets, and even lend directly to companies so that they don’t shut down. Such labor market adjustments are usually slow to occur, one reason why we expect the overall economic recovery in the baseline to be relatively slow. Federal Reserves Issues FOMC Statement, March 15, 2020. Taking action against systemic bias, racism, and unequal treatment, Key opportunities, trends, and challenges, Go straight to smart with daily updates on your mobile device, See what's happening this week and the impact on your business. Under those conditions, a stimulus (which we have not assumed) would be useful. He specializes in financial planning, investing, and retirement. Positions in health care and social assistance are projected to grow to 3.1 million jobs over the course of the decade, reaching 23.5 million come 2029. Computer and math occupations, and those based on alternative energy production, will also grow rapidly. Dr. Bachman came to Deloitte from IHS economics, where he was in charge of IHS’s Center for Forecasting and Modeling. COVID-19 has thrown the problem of inequality into sharp relief, straining the budgets and living situations of millions of lower-income households. Essentially, the economy would suffer a significant depreciation of its capital stock. That crisis may be many years away, and current conditions argue for waiting. The pandemic dramatically changed patterns of spending, however. Although the pandemic is a global phenomenon, leaders have made major decisions about how to fight it—in both health and economic policy—on a country-by-country basis. 16, 2020: FOMC Projections Materials, Accessible Version." Health Care Costs Will Continue to Increase. For example, it is asking Florida banks to have risk management plans for hurricanes. DTTL and each of its member firms are legally separate and independent entities. But the US economic forecast in 2020 and for the next 5 years, is bolstered by strong investment, low taxes, strong consumer wealth and spending, and the fact consumers can't buy China's shut in production. Accessed Dec. 22, 2020. How to entice people to switch to manufacturing from, say, food service, and accommodation? CBO projects that from 2020 to 2030, annual real GDP will be 3.4 percent lower, on average, than it projected in January. In 2020, the U.S. experienced damage from both hurricanes and wildfires, as it has in past years. Forecast is based on an assessment of the economic climate in individual countries and the world economy, using a combination of model-based analyses and expert judgement. This encouraged us to revise up our forecast for growth in 2020 from -4.0% to -3.5%. That’s why Fed Chairman Jerome Powell has emphasized the importance of action by Congress and the president.18 As he points out, the Fed has “lending, not spending, powers.” It would be foolish to expect Fed action alone to solve this economic crisis. The March recession ended 128 months of expansion, the longest in U.S. history. In Q2, the economy contracted by a record 31.4%. We do assume a slow rise in long-term interest rates as financial markets “normalize.” But that leaves the 10-year Treasury yield at 2.5% by 2025. At this point, investors show no sign of concern about US debt. This encouraged us to revise up our forecast for growth in 2020 from -4.0% to -3.5%. Forecast is based on an assessment of the economic climate in individual countries and the world economy, using a combination of model-based analyses and expert judgement. "Labor Force Statistics from the Current Population Survey." The upward revision primarily reflected larger increases in personal consumption expenditures and nonresidential fixed investment. Real gross domestic product (GDP) increased at an annual rate of 33.4 percent in the third quarter of 2020, as efforts continued to reopen businesses and resume activities that were postponed … Consumers are sitting on considerable savings and are ready to spend. These permanent changes may also leave capital stranded—invested, for example, in a surplus of aircraft if travel does not recover. The World Bank’s growth forecast for 2021 would be indicative of a … The relatively small federal relief bill that is the most probable policy intervention will likely provide too little help, and in the baseline the damage done to business and labor markets takes years to fix. Just how bad will the damage prove to be? This is on top of the loss of the US$600 unemployment insurance supplement in July. Central bank paints bleak outlook for economy in 2020 and plans to keep rates close to zero, but forecasts 5% growth next year and 3.5% in 2022 View in article, Biden for President, “The Biden plan to ensure the future is ‘made in all of America’ by all of America’s workers,” accessed December 1, 2020. Insurance Information Institute. This has been a major attraction for buyers despite the weak labor market. The 2020 coronavirus pandemic has brought about widespread economic disruption. And the need for state and local governments to cut spending creates an additional drag on GDP. It is estimated to then rebound up to a 4.2% growth rate in 2021, and slow to 3.2% in 2022, and 2.4% in 2023., The FOMC estimates that the unemployment rate will be 6.7% for the year of 2020. Once the global economy recovers, investors may demand less of this ultra-safe investment, increasing yields and interest rates. Does indeed need that boost, the economy. came to Deloitte from economics... 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