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Monday, December 20, 2021

Review: Ten Economic Questions for 2021

by Calculated Risk on 12/20/2021 02:21:00 PM

At the end of last year, I posted Ten Economic Questions for 2021. I followed up with a brief post on each question. Here is review (we don't have all data yet, but enough).  I've linked to my posts from the beginning of the year, with a brief excerpt and a few comments.

Note: Every year, I've posted a disclaimer that a recession could be caused by "An exogenous event such as a pandemic, significant military conflict, disruption of energy supplies for any reason, a major natural disaster (meteor strike, super volcano, etc), and a number of other low probability reasons" (emphasis added).

Unfortunately, 2020 saw one of those "low probability" events, and many of my predictions weren't even close.  And I was wrong again on several questions in 2021 (I assumed "by mid-year people will engage in normal economic activity").   In a way, this is the point of the predictions.  I don't have a crystal ball, but I think it helps to outline what I think will happen - and understand - and change my mind, when the outlook is wrong.  As an example, when the pandemic hit, I switched from being mostly positive on the economy to calling a recession in early March 2020.

10) Question #10 for 2021: How much damage did the pandemic do to certain sectors?
"However, my sense is people will return to travel and entertainment activities once the pandemic ends (maybe less business travel - that would be a negative for airlines and hotels). The return might be slow at first, but people will gradually gain confidence.

So, once the pandemic subsides, my guess is certain sectors of CRE will still struggle, and possibly sectors related to business travel will be negatively impacted. "
This has generally been correct, as the Seven High Frequency Indicators for the Economy shows. Also, certain areas of commercial real estate struggled in 2021, and business travel has been slow to return (compared to leisure travel).

9) Question #9 for 2021: Will inventory increase as the pandemic subsides, or will inventory decrease further in 2021?
This might be one of the most important housing questions for 2021!
The bottom line is inventory will probably increase, especially in the 2nd half of 2021 (with the assumption that the pandemic will be mostly over by mid-year) - maybe back up to the 2017 - 2019 levels.
According to the October NAR report on existing home sales, inventory was down 12% year-over-year in November, and the months-of-supply was at 2.4 months. In 2020, inventory really declined due to a combination of potential sellers keeping their properties off the market during a pandemic, and a pickup in buying due to record low mortgage rates, a move away from multi-family rentals and strong second home buying (to escape the high-density cities). Inventory will be down again in 2021 and will probably set new record lows this Winter.

8) Question #8 for 2021: What will happen with house prices in 2021?
"My guess (based on my inventory forecast and a recovering economy) is that year-over-year price increases will probably be the strongest early in the year, and then soften somewhat towards the end of 2021. It seems likely that price appreciation will decrease from the 2020 pace, but still be in the mid-single digit range in 2021."
This was way off.   The CoreLogic data for October showed prices up 18.0% year-over-year. The September Case-Shiller data showed prices up 19.5% YoY. With inventory lower than expected, house prices picked up much more than expected.

7) Question #7 for 2021: How much will RI increase in 2021? How about housing starts and new home sales in 2021?
"My guess is starts will be up year-over-year in 2021 by high single digits. However, my guess is new home sales will soften in the second half of 2021 (based on my expectation of more existing home inventory), and will be up mid single digits (a decline from the sales rate over the last 5 months). It is even possible that sales will be flat to slightly down in 2021, but that will depend on inventory and the course of the pandemic."
Through November, starts were up 16.3% year-over-year compared to the same period in 2019.  New home sales were down 4.4% year--to-date through October.   Starts were stronger than expected, but new home sales were down.

6) Question #6 for 2021: Will the Fed raise rates in 2021? What about the asset purchase program?
"There will be no rate hike in 2021, and since I'm assuming the pandemic will subside by mid-year 2021, it seems likely the Fed will taper asset purchases sometime in the second half of 2021."
This was correct.

5) Question #5 for 2021: Will the core inflation rate increase in 2021? Will too much inflation be a concern in 2021?
"My guess is core PCE inflation (year-over-year) will increase in 2021 (from the current 1.4%), but I think too much inflation will NOT be a concern in 2021."
According to the October Personal Income and Outlays report, the October PCE price index increased 4.1 percent year-over-year and the October PCE price index, excluding food and energy, increased 5.0 percent year-over-year. Inflation was higher than expected and is now a concern for many.

4) 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?
"My guess, based on the pandemic ending around mid-year, is that most of these people will return to the labor force. I don't expect that participation rate to increase to pre-pandemic levels (63.4%), but it seems reason[able that] the participation rate will increase to the mid-to-high 62s by year end."
The Labor Force Participation Rate was at 61.8% in November. This remained lower than expected as many people didn't return to the labor force.

3) Question #3 for 2021: What will the unemployment rate be in December 2021?
"Depending on the estimate for the participation rate and job growth (next question), my guess is the unemployment rate will decline into the mid 5% range by December 2021 from the current 6.7%. Hopefully I'm too pessimistic."
I was too pessimistic. The unemployment rates was at 4.2% in November, partially because participation remained lower than I expected.

2) Question #2 for 2021: Will all the jobs lost in 2020 return in 2021, or will job growth be sluggish?
"With 3.7 million permanent job losers - about 2.5 million more than at the beginning of 2020 - it seems unlikely the economy will add back the remaining 9 million jobs lost within a year, and also add jobs for new entrants in 2021. I think something like 6 to 8 million jobs could be added in 2021, but it will depend on ending the pandemic and appropriate fiscal policy. "
As of the November employed report, the year-over-year change was +5.8 million jobs.. This was close to my guess.

1) Question #1 for 2021: How much will the economy grow in 2021?
"My guess is there are certain sectors that will be slow to recover, and some - like some sectors of commercial real estate - that will barely contribute to growth in 2021. These factors suggest real GDP growth probably in the 4.5% to 5.5% range in 2021, with some upside potential."
It appears GDP growth will be close to 5.5% in 2021.

This was another difficult year.  My biggest misses were on inflation, housing inventory, house prices and the unemployment rate.   I was correct on the Fed, GDP growth, and close on new home sales and job growth.