Friday, December 25, 2020

Ten Economic Questions for 2021

by Calculated Risk on 12/25/2020 01:11:00 PM

Here is a review of the Ten Economic Questions for 2020

Below are my ten questions for 2021.  These are just questions,  I'll follow up with some thoughts on each of these questions.

The purpose of these questions is to provide a framework to think about how the U.S. economy will perform in 2021,  and if there are surprises - like in 2020 - to adjust my thinking.


A key question is when will the pandemic subside?  This will have a huge economic impact, but is a question for infectious disease experts.  I'm assuming that by mid-year people will engage in normal economic activity.

1) Economic growth: Economic growth was probably around negative 3% in 2020 due to the pandemic (maybe 2.5% Q4 over Q4). The FOMC is expecting growth of 3.7% to 5.0% Q4-over-Q4 in 2021. How much will the economy grow in 2021?

2) Employment: Through November 2020, the economy lost 9.37 million jobs.   By April 2020, the economy had lost 21.7 million jobs, and then added back 12.33 million jobs by November.  But job growth slowed over the last few months.  Will all the jobs lost in 2020 return in 2021, or will job growth be sluggish? 

3) Unemployment Rate: The unemployment rate was at 6.7% in November, up 3.2 percentage points year-over-year, but down from the peak of 14.7% in April.   Currently the FOMC is forecasting the unemployment rate will be in the 4.7% to 5.4% range in Q4 2021.  What will the unemployment rate be in December 2021?

4) Participation Rate: In November 2020, the overall participation rate was at 61.5%, down year-over-year from 63.2% in November 2019.   Long term, the BLS has been projecting the overall participation rate will decline to 61.2% by 2028 due to demographics.  Will the overall participation rate increase to pre-pandemic levels (63.4% in February 2020) , or will it will only partially recover in 2021?

5) Inflation: Core PCE was only up 1.4% YoY through November. Will the core inflation rate increase in 2021? Will too much inflation be a concern in 2021?

6) Monetary Policy:  The Fed cut rates to zero in 2020 in response to the pandemic, and has signaled they will be on hold for some time.  Will the Fed raise rates in 2021?  Will the Fed end - or taper - the asset purchase program?

7) Residential Investment: Residential investment (RI) was solid in 2020, and housing was a strong sector during the pandemic.  Through November, starts were up 7.0% year-over-year compared to the same period in 2019. New home sales were up 19.1% year--to-date through November.  Note: RI is mostly investment in new single family structures, multifamily structures, home improvement and commissions on existing home sales.  How much will RI increase in 2021?  How about housing starts and new home sales in 2021?

8) House Prices: It appears house prices - as measured by the national repeat sales index (Case-Shiller, CoreLogic) - will be up around 8% to 9% in 2020.  What will happen with house prices in 2021?

9) Housing Inventory: Housing inventory decreased sharply in 2020 to record lows.  Will inventory increase as the pandemic subsides, or will inventory decrease further in 2021?

10) Economic Scarring: Some sectors were hit especially hard during the pandemic, like travel (hotels, airlines, cruise ships), and entertainment (restaurants, theaters, concerts). Also some areas of Commercial Real Estate (retail, hotels, offices) might suffer long term damage. How much damage did the pandemic do to certain sectors?

Some thoughts:

Question #1 for 2021: How much will the economy grow in 2021?
Question #2 for 2021: Will all the jobs lost in 2020 return in 2021, or will job growth be sluggish?
Question #3 for 2021: What will the unemployment rate be in December 2021?
Question #4 for 2021: Will the overall participation rate increase to pre-pandemic levels (63.4% in February 2020) , or will it will only partially recover in 2021?
Question #5 for 2021: Will the core inflation rate increase in 2021? Will too much inflation be a concern in 2021?
Question #6 for 2021: Will the Fed raise rates in 2021? What about the asset purchase program?
Question #7 for 2021: How much will RI increase in 2021? How about housing starts and new home sales in 2021?
Question #8 for 2021: What will happen with house prices in 2021?
Question #9 for 2021: Will inventory increase as the pandemic subsides, or will inventory decrease further in 2021?
Question #10 for 2021: How much damage did the pandemic do to certain sectors?