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2021 Economic Trends
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The COVID-19 pandemic rages on throughout the United States and in Wisconsin. More than 522,000 people in Wisconsin are confirmed to have gotten COVID-19 and more than 5,400 of them have died, according to the state Department of Health Services.
Efforts to slow the spread of the virus, including government mandated restrictions on businesses (especially bars and restaurants) and voluntary social distancing, have significantly hurt the economy since March of 2020.
COVID-19 vaccines, first made available to the public in December, give us hope of finally bringing an end to the public health crisis, which will also give the economy a shot in the arm. But many have been frustrated with the slow rollout of the vaccine, especially in Wisconsin. Republicans like U.S. Rep. Bryan Steil have criticized Gov. Tony Evers for Wisconsin’s slow vaccine distribution, while Evers says federal rules and a lack of supply of the vaccine provided to the state have hamstrung Wisconsin’s vaccine efforts. Several governors, including Evers, have criticized the Trump administration’s vaccine allocation to the states.
Meanwhile, the transfer of power at the White House has been anything but peaceful. Earlier this month angry supporters of Donald Trump, convinced the election was stolen from him, stormed the U.S. Capitol in a shocking act of insurrection. New president Joe Biden now has to confront COVID-19 and a struggling economy while leading a bitterly divided country.
In an attempt to make sense of where we are going in 2021 after an incredibly challenging 2020, BizTimes Milwaukee again turns to economist Michael Knetter for his annual macroeconomic forecast. Knetter is the president and chief executive officer of the University of Wisconsin Foundation and is a former staff economist for presidents George H.W. Bush and Bill Clinton.
Knetter will once again be a featured speaker at the annual BizTimes Media Economic Trends event, to be held virtually on Thursday, Jan. 28. BizTimes Milwaukee editor Andrew Weiland recently conducted his annual interview with Knetter. The following is a recap of that conversation:
BizTimes: OK, well, where do we begin? 2020 was a year unlike any of us has ever experienced. In an attempt to slow the spread of COVID-19 state and local governments imposed numerous restrictions, including stay-at-home orders and business capacity limits. As a result, the economy tanked in the second quarter, but then rebounded significantly in the third quarter as restrictions were eased. Still the economy has not returned to pre-pandemic levels, has it? How would you describe, briefly, the current state of the U.S. economy?
Knetter: “I would modify the causality of the opening narrative slightly. Data disseminated by the Center for Research on the Wisconsin Economy showed that foot traffic to a wide range of businesses was only marginally impacted by government regulations. Virus concerns of individuals and employers led to a sharp contraction in the travel, hospitality and traditional retail sectors. As both the weather and our personal protocols improved, concerns abated somewhat and the economy rebounded. News about vaccine development helped boost optimism. The return to school and fall weather drove more people indoors and we saw a surge in cases and some fits and starts in the economy. Vaccine news continued to be a light at the end of this long tunnel and buoyed markets throughout the balance of the year.
“Our economy is improving and, importantly, so is our economic potential (i.e., the amount we could produce at full employment). The many adjustments forced on producers and consumers during the pandemic stimulated innovation and adoption of new technology. Contactless delivery of groceries and takeout meals became commonplace and many people became facile with video conferencing technologies, which themselves improved functionality. As we move past the pandemic, consumers and producers will retain the new habits and methods that serve them. The associated shifts in supply and demand will create some dislocations in product and labor markets, making it difficult to get back to full employment. Output will recover more quickly than employment thanks to the productivity gains we will reap from pandemic induced innovations.”
BizTimes: COVID-19 appears to be the biggest obstacle to getting the economy fully back on track. Is that fair to say? And therefore, the effectiveness of the COVID-19 vaccines and the distribution of them is not just crucial for public health, but also for the economy, right?
Knetter: “The main obstacle to full recovery is COVID-19, so vaccine efficacy, production and distribution is critical to getting us back near full employment. Other barriers could materialize such as a deterioration in confidence due to large debt and deficits or some unforeseen event that disrupts trade, commodity markets or international relations.”
BizTimes: What types of businesses and industries have been hurt the most by the COVID-19 pandemic and have any actually benefitted? What is your outlook for industries that are struggling the most?
Knetter: “Travel, hospitality, and traditional retail have been hit hardest. Commercial real estate may be in for an extended downturn. I think leisure travel and hospitality will go back to or exceed pre-pandemic levels. Traditional retail will make only a partial recovery as people have come to appreciate home delivery of more goods and services. Business travel and hospitality could take the biggest hit in the post-pandemic new normal. We have all gained familiarity with video meetings and conferences and they will become part of the fabric of business. The pandemic accelerated the ‘death of distance’ as it relates to working life.”
BizTimes: In one of his final acts as president, Donald Trump signed a $2.3 trillion bill that included a $900 billion COVID relief package, including $600 stimulus payments to Americans and extended and enhanced unemployment benefits. Is this going to give the economy the boost that it needs until the end of the pandemic?
Knetter: “Well, it is the boost that we have for now, so I would say it will have to do. I think we will limp through the winter and then things will gather steam in the spring and through the summer. But this requires big improvements in the pace of vaccination.”
BizTimes: How will President Joe Biden’s administration differ in terms of economic policy from the Trump administration, and what impact do you anticipate that will have in 2021 and beyond?
Knetter: “At a broad level, I expect a Biden administration to advocate policies that seek to boost income and opportunity for the least fortunate, shift the balance of regulation in favor of the interests of environment quality, consumer protection, and workers relative to producers, and seek to normalize trading relationships with our main allies but not with China. At this point it is hard to judge the magnitude of these changes. I do not think these policy changes will have a big impact in 2021 relative to the resolution of the pandemic. They could have much bigger effects long term.
“Another point I would make is that President Trump was more focused on economic performance indicators than any president in my lifetime. He crossed many traditional boundaries in using his influence with the Fed, private industry and trade partners with mixed results. In the end, Trump presided over a period of significant growth in output, employment, and wealth at the end of an already long expansion. His dogged focus on the economy surely deserves some credit for that. The Biden administration is unlikely to match that intensity and focus.”
BizTimes: What direction do you think the economy is headed in 2021? A V-shaped recovery (boosted by the COVID vaccines), or something else? What do you expect this year in terms of GDP growth? Is it safe to expect a rough start, followed by growth as the vaccine is distributed and life gets somewhat back to normal?
Knetter: “The economy will gather momentum over the year, with possible hiccups due to vaccine efficacy and distribution progress. Productivity growth will play a larger role than normal in this recovery and employment growth may lag a bit. Overall, real GDP should grow by about 5% in 2021 barring major new disrupters as we close the gap between actual and potential output. In terms of the alphabet, this is really a K-shaped recovery, where some sectors have thrived during the pandemic (technology and delivery) and others have crashed (in-person services).”
BizTimes: While 2020 was a tough year for many, the stock market performed well, reaching new highs in December. The market crashed in March at the onset of the pandemic in the U.S., but bounced back in a big way. Why? How do you think the market will perform in 2021?
Knetter: “The ‘disconnect’ often noted between stock markets and the real economy (real output and employment) is due to three main factors. First is the fact that stock prices are based on current and expected future earnings of companies. Optimism about the future can boost share prices even if current output, employment and earnings are weak. Second is the disproportionate adverse impact of the pandemic on small, privately held businesses linked to travel, hospitality (restaurants, bars and hotels), and traditional retail. Their impairment hurts employment and output but doesn’t drag down the stock market. The large publicly traded companies that dominate the S&P include many technology names that were the big beneficiaries of shifts brought about by the pandemic. Another way to put it is that the publicly traded companies are disproportionately part of the upper arm of the K while most privately owned in-person service businesses are in the lower part and not included in public equities. Finally, the Fed’s aggressive reduction in interest rates to near zero means there is little to no return from owning bonds, making equities more attractive by comparison.”
BizTimes: The Fed continues to hold benchmark rates near zero. Do you expect that to continue in 2021?
Knetter: “Yes. They have even signaled an intention to be less concerned about inflation going beyond the normal target of 2% since we have lagged behind that target for some time now.”
BizTimes: What do you make of the labor market in 2021? A year ago, employers were struggling to find workers. In 2020 there was a massive number of layoffs. Many were later brought back to work, but employment is still well below pre-pandemic levels. Yet, many employers are still struggling to find the skilled workers they need. Some say unemployment benefits have been too generous, incentivizing workers to stay on the sidelines. What do you think?
Knetter: “I think you have hit on the key points that characterize the labor market. Demand is surging for technologically able workers and they command a premium as a result. Generous unemployment benefits may reduce the incentives for less skilled and therefore lower paid service industry workers. Given the structural changes in supply and demand in the economy, I expect pockets of unemployment to persist in certain sectors and regions, although it is possible that remote work opportunities will reduce some of the geographic mismatch of skills.”
BizTimes: Some anticipate that when the COVID-19 pandemic is finally over (hopefully this year), there will be a surge of consumer activity as people travel, dine out, socialize, etc., rushing to enjoy the things they couldn’t do during the pandemic. Do you think we are on the verge of another “Roaring ‘20s,” and what implications would that have for the economy?
Knetter: “I think there will be a strong desire for some of the in-person experiences people have missed, but of course, it is not yet clear how that will play out. Consumers are creatures of habit. The pandemic has gone on long enough that people have changed habits and made investments of time and resources in the new ways of doing things (remodeled kitchens, new home exercise equipment, better home theaters). Some people are likely to conclude these new ways of living are actually better than the more hectic and expensive lives they led pre-pandemic.
“I think leisure travel is most likely to snap back quickly. Restaurant meals, gyms, yoga, studies, business travel, maybe not. Even if demand for dining out returns, many restaurants are out of business. So maybe it will be the ‘Boring 20s’ as we selectively choose those out-of-home experiences we missed but forego others that we have concluded weren’t worth all the time, effort and added expense.
“The thing that could make the economy roar is the technological boost we might get from new and still developing business tools that we learned in the pandemic and emerging technology platforms, many of which got a boost from the pandemic. Robotics, AI, blockchain, DNA sequencing and energy storage are all capable of driving further big transformations in the economy in the years ahead. Their impacts will cumulate over time.”
BizTimes: Anything keeping you up at night, or are you resting easy now that 2020 is in the rearview mirror?
Knetter: “COVID should still keep us all on our toes. (I’m in quarantine as I write this ...). The vaccine rollout is not going as smoothly as one might have hoped.
“I also believe that one day we will wake up and be worried about the level of government debt, probably when we see some uptick in borrowing rates. If people thought we were not leaving our children in a better place before the pandemic, we should be much more worried now. One scenario that seems quite plausible is Charles Goodhart’s thesis on the Great Demographic Reversal. The past three decades have benefitted from an enormous surge in global labor supply, due to demographic trends and the entry of China and Eastern Europe into the global trading system. The demographic trends are about to reverse sharply, and there appears to be a retreat from the global trading system. The result is that an aging society with ample purchasing power among its elderly can expect rising inflation and interest rates, which creates a host of problems for an over-indebted world economy.
“I’ve said for a while that the monetary transmission mechanism of late seems to be working through asset prices more than goods and services prices. But we should not assume those retirement accounts will be able to purchase in the future anything like they can purchase today. When baby boomers try to cash in those saving for future consumption, we might not have the workforce to deliver the goods and services we would like. The only way out of this looming challenge will be if we see enough technological progress that robotics, AI, and other advances deliver a greater share of output.
“Polarization of politics also keeps me awake at night. It has gotten harder to solve problems in our political system. As efficient and effective as the U.S. business sector has become, there are some social and economic problems that must be addressed through government action, such as the provision of public infrastructure, national defense, the regulation of industry and environment, etc. Our ineffectiveness in that domain is problematic.
“I believe this problem is rooted partly in the major gap we have today in the volume of information and people’s ability, or perhaps desire, to find accurate and trusted information sources. It is somewhat ironic that we have never had access to more data and greater capability to process it, yet ordinary people have a harder time than ever knowing what is fact and fiction.
“American media seems to build its content to fit the worldview of their target audience. It is rare to see a media story built around data that captures the full reality and uses anecdote to illustrate the “typical” situation in the data. Instead, we are presented with an (often sensational) anecdote, with no mention of the aggregate data, leaving the viewer or reader at best wondering if the anecdote is the exception or the rule and at worst concluding it is the rule. I believe the tendency to use anecdotes over data is what supports the wide range of beliefs about the pandemic, police violence, election results, etc. There are very granular facts available on the health impact of COVID-19, which don’t align with the dominant narratives about the virus on either FOX or CNN. You have to know where to look to find details on excess deaths during COVID or the low mortality rate for youth.
“Another concern is the widening dispersion of economic opportunities and outcomes which will continue to cause us ever greater problems, in my opinion. If economically successful people don’t want to see a drift toward socialism in America, it will be important to reckon with the growing disparity in economic opportunity. We have tried to pass laws and change cultures in the workplace to protect people against various forms of discrimination and I believe there have been substantial gains. But when you look at the vast differences in the lives of rich and poor children, it is obvious that the problem will be whether mawny of our children can even acquire the habits and skills needed to gain entry to the labor market to benefit from the better environment they would find there. Socialism looks like a better idea to more people when competition isn’t fair.”
BizTimes: “Anything I’m missing that we should talk about?”
Knetter: “There is likely to continue to be a lively debate about whether remote work opportunities will lead to a decline of cities’ dominance over economic activity. It will be interesting to see how cities and commercial real estate evolve in the years ahead.
“Lastly, I would add that ice fishermen deserve more credit for the tiny house movement than is popularly recognized.”