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Monday, November 02, 2020

The Election and 2021 Economic Forecast

by Calculated Risk on 11/02/2020 12:50:00 PM

Looking ahead to 2021, there are two key economic issues.

The first (and most important) is the course of the pandemic. The course of the economy will be determined by the course of the pandemic.

The second is the size, timing and composition of further disaster relief and economic stimulus.

These are both unknowns, and all forecasts for 2021 are based on assumptions about these two issues. 

As an example, from the minutes of the most recent FOMC meeting, "most forecasters were assuming that an additional pandemic-related fiscal package would be approved this year, and noted that, absent a new package, growth could decelerate at a faster-than-expected pace in the fourth quarter."  

The election is key on both of these issues.

On the pandemic, there is no question that a Biden administration will be more effective in addressing the pandemic, in both health and economic terms, than the current administration. Biden will tell the American people the truth, and Americans can handle the truth!  Trump falsely says we are "rounding the corner" (apparently into an oncoming speeding truck).  And Biden will listen to the scientists, like the CDC's Dr. Nancy Messonnier, who was completely muzzled by the current administration.  This will be a hard winter, but an effective administration will make progress next year.

The size, timing and composition of disaster relief will probably depend on which party controls the Senate.   The recovery will be slower with a divided government.   The analysts at Goldman Sachs are somewhat optimistic, and think a divided government would only subtract about 1pp from GDP growth in 2021, they write today: "A Democratic sweep would likely boost the 2021 growth path by about 1pp​".  That is a significant hit to growth from a divided government - and this will also mean slower employment growth as a GOP led Senate will pivot to austerity.   

Most other key analysts are even more bearish on a divided government, and optimistic if there is Democratic sweep.    Everyone will be updating their forecasts based on the outcome of the election.   I'm voting for an effective response to the pandemic and faster economic and employment growth.