By: Montana Timpson
Economist Mark Schug, Ph.D., Professor Emeritus at the University of Wisconsin-Milwaukee, joined Lightspeed last month to present a live webinar recapping 2020’s unprecedented fiscal year and its economic implications for 2021.
Detailed insights included market predictions regarding ongoing impacts of COVID-19, general economic uncertainty and the recent growth in the GDP.
The real domestic gross product (GDP) increased at an annual rate of 33.1% in the third quarter of 2020, according to the “advance” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP decreased 31.3%.
The increase in real GDP reflected increases in personal consumption expenditures (PCE), private inventory investment, exports, nonresidential fixed investment and residential fixed investment. The increase in PCE reflected increases in services (led by healthcare, food service and accommodations) and goods (led by motor vehicles, clothing and footwear). The increase in private inventory investment primarily reflected an increase in retail trade (led by motor vehicle dealers).
The 2020 Quarter 4 real GDP will be released on January 28, 2021.
Most recessions are caused by unexpected shifts in Aggregate Demand (AG) or Short Term Aggregate Supply (SRAS), temporarily sinking the economy below its full-employment potential. The shifts in AG and SRAS are generally the result of supply shocks, miscalculation by business decision-makers or policy errors.
In contrast to past recessions, this recession was caused by government mandates requiring businesses to close their operations to combat the COVID-19 virus. The effects on output and employment were immediate and massive — in February 2020, the unemployment rate was 3.5%; by April, it was 14.7%, a record high since the Great Depression. As of November 2020, the unemployment rate had fallen to 6.7%.
U.S. stocks ended 2020 strong, with the Dow Jones Industrial Average crossing 30,000 for the first time. Many factors are to credit for the strong finish — expectations regarding the vaccine for COVID-19, the 2020 election passing and businesses recovering from the COVID-19 lockdown are just a few.
Slow Growth in 2021?
Many forces are pointing to slow growth in 2021. Political uncertainty is one. A new president creates unknowns: What about taxes? Regulations? Anti-private sector attitudes?
Consumer confidence rate is another. On November 24, the Conference Board Consumer Confidence Index decreased 5.3 Points in November after remaining flat in October. The Present Situation Index — based on consumers’ assessment of current business and labor market conditions — decreased slightly from 106.2 to 105.9. The Expectations Index — based on consumers’ short-term outlook for income, business and labor market conditions — declined from 98.2 in October to 89.5 in November.
2021 Market Outlook
While the consensus expectations for 2021 show strong GDP growth, some economists estimate that it could take two years to fully recover. However, investors appear optimistic regarding the strength of the economy in the years ahead, cheered on by progress in vaccine development.
Some Wall Street analysts expect equities earnings to rebound to a record high in 2021. As of mid-November, 80% of companies in the S&P 500 had reported Quarter 3 gains that were above expectations.
“Big tech will likely continue to do well, while the travel sector is still slow to recover,” suggested Schug.
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