IN THIS ISSUE:
1. Second Half 2021 Could See Sharp Economic Recovery
2. Coronavirus to Hamstring Economy in First Half 2021
3. Vaccine Rollout Provides a Path to Economic Recovery
4. US Savings Rate & Household Net Worth Hit Record Highs
5. World Poised For Strong Economic Growth – Post Pandemic
Overview – 2H 2021 Could See Sharp Economic Recovery
Over the holidays, I spent a lot of time reading forecasts for 2021 from leading economists, big banks, think tanks and other so-called experts. Coming off one of the most volatile economic years in history due to the coronavirus pandemic, I was very interested to see what forecasters were predicting for the New Year.
What I found was there is a broad consensus about what we are likely to see in 2021.
As we all know, we are currently experiencing a record spike in COVID-19 cases, hospitalizations and deaths, and most forecasters believe this will continue to stifle the economy in the first half of this year. In fact, the evidence suggests we’ll experience yet another recession in the 1Q and 2Q. However, most also believe the pandemic will be mostly under control by mid-year thanks to widespread vaccinations in the months just ahead.
Given that, there is a near unanimous agreement among forecasters that the US economy will see a powerful rebound/expansion in the second half of this year. Economists cite the record savings rate in the middle of 2019 and pent-up demand among consumers and conclude that a powerful economic boom is all but certain as soon as we get the virus under control.
This outlook sounds good, of course, but I always worry when there is such a broad consensus among leading forecasters for what the future holds. The crowd, so to speak, is often wrong. Despite that, today I’ll summarize the prevailing forecasts for this year and their likelihood of coming true.
Coronavirus to Hamstring Economy in First Half 2021
The coronavirus pandemic continues to dominate the global economic outlook, with the second wave of the virus prompting renewed national lockdowns in Europe and tighter restrictions in the US. This will compress economic activity in the immediate months ahead, and a first half recession looks likely.
Yet several COVID-19 vaccines have been approved around the world and are being widely distributed, and this raises the prospect of a significant improvement in the global health crisis by the middle of 2021 – and a more sure-footed economic recovery thereafter.
The rebound in economic activity in 3Q of 2020, after lockdowns were eased, was much faster than anticipated in nearly all global economies, particularly in Europe. Unfortunately, the latest surge in COVID threatens new economic lockdowns and restrictions around the world, and most forecasters agree a double-dip recession in the first half of 2021 is entirely possible.
Mandatory closures of non-essential businesses are said to be widespread in Europe even though the second wave of COVID appears to have peaked there at least for now, as you can see above. While most health experts in the US concede the initial wave of lockdowns last year were not effective, it remains to be seen what the Biden administration will do just ahead.
While a double-dip recession is unfolding in Europe, it is uncertain what will happen in the US over the next several months. However, for many businesses and whole industries, activity never returned to anywhere near normal even when COVID severity temporarily subsided last year. Thus, the US and global economy will not be able to fully rebound until the pandemic has subsided for good.
Vaccine Rollout Provides a Path to Economic Recovery
With two COVID-19 vaccines having been approved by the FDA and being widely distributed and increasingly administered – with more on the way – there is hope we can contain the virus by the middle of this year. That remains to be seen, of course, but we are making rapid progress.
The other good news is, the parts of the global economy that can function during a pandemic are doing so. In fact, many are thriving. Global manufacturing has staged a V-shaped recovery, as has the US housing market – thanks to shifting demographics, continued ultra-low low interest rates and consumer living preferences migrating toward the suburbs.
Most importantly, consumers are exhibiting considerable resilience. With limited spending options last year and financial aid from the federal government, household balance sheets have strengthened, on average. As a result, most forecasters expect a strong recovery in the second half of this year. Here’s a snapshot of what most economists expect for last year when the final results are released and 2021:
So, even if there is another COVID pullback in the economy in the first half of this year, most forecasters believe there will be a strong recovery in the second half – with the average GDP estimate coming in at just over 3% for all of 2021 in the US and even stronger in Europe and emerging markets. We’ll see.
US Savings Rate & Household Net Worth Hit Record Highs
Americans’ saving habits changed dramatically last year as people stayed home, ate out less and canceled travel and other plans. The personal savings rate soared to a record 33% of disposable income in the 3Q of last year, according to the Federal Reserve. While that rate has come down considerably since the peak, the savings rate is still well above the historical average.
Meanwhile, the net worth of US households rose to a record in the third quarter as savings soared and the value of stock portfolios and real estate surged, according to a Federal Reserve report in December. Household net worth rose 3.2% in the 3Q from the 2Q to $123.52 trillion.
The median net worth of the average US household was $97,300 last year. Household net worth is the total value of everything you own – including your house, cars, investments and cash – minus your liabilities (debts).
Now let’s look at household income. While we don’t have data for 2020 yet, the median household income hit a new record in 2019 of $68,703, up 6.8% from 2018. And finally, the US poverty rate fell to 10.5% in 2019, the lowest since records started in 1959, according to the Census Bureau. Some 34 million people were in poverty last year, 4.2 million fewer than the year before. That’s great news!
World Poised For Strong Economic Growth – Post Pandemic
It’s worth emphasizing how unusual it is to see record savings rates, much higher income growth and stronger spending growth all happening at the same time, just six months removed from a deep recession. Yet this pattern is similar in other large economies, and this may explain why so many forecasters believe global growth is well positioned for a dramatic acceleration once the virus is contained.
To ensure the economy emerges from the pandemic intact, policymakers have enacted aggressive fiscal stimulus to support individual incomes and prevent businesses from going under due to lack of revenue. Government relief remains in place in most countries except the United States, but President-elect Biden has recently promised additional stimulus of $2,000 per person soon after he takes office.
I’ll close by admitting that all this optimism about a strong recovery in the second half of the year may well be warranted; however, such bullish thinking does depend on defeating the virus, and we are not there yet. Cases, hospitalizations and deaths are at new highs and still rising.
With several vaccines approved and being distributed widely, most epidemiologists believe we should get the virus under control by the middle of this year – assuming most Americans are willing to take it (which remains to be seen).
Yet if for any reason we do not get the virus under control later this year, much of the recent optimism could evaporate quickly – and markets could react violently. This argues for maintaining a well-diversified portfolio, including strategies which can move to cash and (if appropriate) take short positions.
Wishing you profits in 2021,
Gary D. Halbert
© Halbert Wealth Management
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