by Calculated Risk on 1/02/2021 12:03:00 PM

## Saturday, January 02, 2021

### Question #1 for 2021: How much will the economy grow in 2021?

Earlier I posted some questions for the new year: Ten Economic Questions for 2021. I'm adding some thoughts, and maybe some predictions for each question.

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?

Here is a table of the annual change in real GDP since 2005. Prior to the pandemic, economic activity was mostly in the 2% range since 2010. Given current demographics, that is about what we'd expect: See: 2% is the new 4%., although demographics are improving somewhat (more prime age workers).

Note: This table includes both annual change and q4 over the previous q4 (two slightly different measures). For 2020, I used a 5.0% annual growth rate in Q4 2020 (this gives -2.2% Q4 over Q4 or -3.4% real annual growth).

Real GDP Growth | ||
---|---|---|

Year | Annual GDP | Q4 / Q4 |

2005 | 3.5% | 3.1% |

2006 | 2.9% | 2.6% |

2007 | 1.9% | 2.0% |

2008 | -0.1% | -2.8% |

2009 | -2.5% | 0.2% |

2010 | 2.6% | 2.6% |

2011 | 1.6% | 1.6% |

2012 | 2.2% | 1.5% |

2013 | 1.8% | 2.6% |

2014 | 2.5% | 2.9% |

2015 | 3.1% | 2.2% |

2016 | 1.7% | 2.1% |

2017 | 2.3% | 2.7% |

2018 | 3.0% | 2.5% |

2019 | 2.2% | 2.3% |

2020^{1} | -3.4% | -2.2% |

^{1} 2020 estimate based on 5.0% Q4 SAARannualized real growth rate |

The FOMC is projecting real GDP growth of 3.7% to 5.0% in 2021 (Q4 over Q4).

Goldman Sachs recently projected real "GDP growth of +5.9% in 2021".

Merrill Lynch recently projected 4.6% real GDP growth in 2021.

GDP growth in 2021 depends on how quickly the pandemic subsides (I'm assuming mid-year), and how much economic scarring has occurred (permanent job losses, business closings, commercial real estate issues). With minimal scarring, GDP could return to path growth (about 2.3% per year real GDP growth). That would put GDP up 7% or so in 2021 (Q4 over Q4).

Here are the Ten Economic Questions for 2021 and a few predictions:

• 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?