Social, cultural, and behavioral patterns create economic forces evident in the buying and selling of goods and services. The pandemic shocked demand and supply channels of the real economy causing social, relationship, geographic and financial dislocations. These dislocations have changed social behavior, desires, relationships, and expectations temporarily and, in other cases, permanently. The crisis created profitable opportunities for some businesses and jobs for workers. Yet, other companies experienced losses, debt, and threats to survival. The pandemic is a once in one hundred year event. As such, there is limited experience and knowledge about the economic consequences of shelter in place lockdowns and health policy. However, we can see critical social, cultural, and behavioral forces begin to emerge.
Looking Back At 2020 To Look Ahead at 2021
To understand how the 2021 economy may unfold, we have identified five fundamental driving forces that shaped the real economy in 2020. Some of these forces are driving the economy while others are weak retarding growth. The key forces are the virus, jobs engine, work-from-home migration, housing debt bubble, and trade. The status of each force is examined with suggested indicators to monitor.
The virus continues to be the controlling factor in the economy as it penetrates every aspect of social life. The virus fractures the U.S. economy as it suffocates social activity. Health care providers are in crisis mode as I.C.U. capacity is at near-zero levels across hotspot states like California and New York. As such, Health officials implemented more restrictive lockdowns of non-essential businesses, indoor gathering places like restaurants and bars, and entertainment venues. The rate of infections is at the highest level recorded since the March emergency declaration. Dr. Jeff Smith, medical officer for Santa Clara County, California, summarized the staggering number of deaths in this way: “It’s as if we have the loss of life that we had for 9/11 each day.”
Source: The New York Times – 12/31/20
Vaccinations Fail To Hit Inoculation Targets
COVID-19 vaccines from Pfizer and Moderns were produced in record time and approved for distribution in early December. Federal officials set a goal of vaccinating 20M health workers and the elderly by December 31st. Yet, the distribution and injection program has been a failure by achieving only 15% of that goal or 2.8M doses by year-end.
The Biden administration has set a goal of 100M doses in the first 100 days after the presidential inaugural on January 20th. If state and federal government vaccination programs come close to 90% of the 100M goal in inoculating people, it may reach the tipping point of control. Thus, the impact of the virus may decline by late spring or summer. We can recognize the tipping point when people stop worrying about catching the virus and venture out of their homes. The boost in consumer confidence will trigger new economic activity.
Indicators To Monitor: Look for a steady decline in virus cases and deaths over weeks and months, increased capacity of I.C.U.s, rapid rise in vaccinations, the achievement of 70 – 80% of the population vaccinated for herd immunity, and a steady rise in consumer mobility as people begin to venture out into the community.
2. Jobs Engine
The executives’ expectations that business revenues, profits, and markets will show consistent long term growth fuels the jobs engine. Job losses have surged to extent that 19M workers are on continuing unemployment rolls. Yet, most professional employees can work from home and maintain employment. The number of jobs increased for warehouse workers, transport workers, and couriers supporting e-commerce. Yet, steep job declines of 70 – 80% occurred in the hospitality industry, including restaurants, bars, gift shops, and rental car firms. Small businesses in core cities like New York and San Francisco experienced 70 – 80% declines in sales. And, as the pandemic wore on, workers furloughed began to see their jobs permanently terminated. Accordingly, the shift to permanent layoffs is evident in the increasing number of workers on extended unemployment benefits programs.
Sources: Oxford Economics, Haver Analytics, The Daily Shot – 12/18/20
10.7M Jobs Gap
The economy has lost 22M jobs since February. The CARES Act and Federal Reserve injections of liquidity have spurred job growth to regain about 12M jobs. Therefore, there still is a 10.7M job growth gap since the pandemic hit the U.S. This gap in job growth will continue to put a drag on the recovery.
Source: Bureau of Labor Statistics – 11/15/20
Congress moved to close the job loss gap by passing the $900B Bipartisan COVID Relief Act in December. The law includes a one-time $600 payment to most Americans, an extension of unemployment benefits for 11 weeks, an additional $300 weekly unemployment benefit, and $319B in Payroll Protection Loans and small business funding.
Will The $900B Stimulus Bill Increase Hiring?
The question remains, will the $900B stimulus bill be enough to increase hiring? Consumers did increase spending with CARES Act $1, 200 checks buying cars, appliances, and internet services. But, executives lack confidence in consistent business growth, which would trigger hiring. A recent survey of 238 CEOs showed that 64% planned labor force reductions in the next year. The survey responses were collected before the relief bill passed. But, experts at the Philadelphia Federal Reserve analyzed hiring in past recessions and found that recessions accelerated automation and slowed hiring. The report noted:
“Since the 1980s, almost all employment losses in routine occupations, which are relatively easier to be automated, occurred during recessions. Automatable jobs held by minority workers were hit particularly hard by the pandemic, putting these workers who were already vulnerable in the job market at a greater risk of permanent job loss.”
Executives will remain hesitant to resume hiring until substantial domestic spending growth is evident for 3 – 6 months. Also, management at S&P 100 companies dependent on international sales for 60 – 70% of their growth will be looking for global markets to open, travel to resume, and orders to increase consistently. We are skeptical that executives will quickly ‘bounce back’ into firm hiring action even after vaccinations reach herd immunity levels. The herd immunity level is a necessary first step in recovery. But it is not sufficient to shift a manager’s perspective that sales are on a strong growth track.
There Are Growth Opportunities
However, there are growth opportunities amid the crisis and its aftermath. The economy’s growth is likely to be highly unevenly, skewed to upper-income consumer spending and work from home digitally based markets. New small business applications are up 20 – 25% as entrepreneurs identify new business opportunities for services businesses, and pandemic triggered demand. Plus, the Biden campaign has proposed a $2.4T clean energy infrastructure investment in bridges, roads, renewable energy systems, and grid improvements. If enacted, Moody’s Analytics estimates that it will create 18.6M jobs to focus on small business development while holding major corporations accountable for clean energy standard compliance. A slim Democrat majority in the House of 5 votes and a divided Senate make the passage of a significant bill unlikely.
Indicators To Monitor: C.E.O. Confidence in sales growth, and hiring, Department of Labor State Unemployment reports for decreases in initial and continuing unemployment in parallel to increases in job openings, small business hiring reporting from Homebase, surveys of worker expectations for having a job in the next 6 – 12 months. The Census Household Pulse Survey, Opportunity Insights Track the Recovery.
3. Work-From-Home Migration
Sixty-seven million workers are estimated to be working from home today, or about 44% of the workforce. Over 240k workers have moved out of the top five metro urban cities since the pandemic started. Professionals who had saved up to buy a home saw an opportunity to move to a less expensive area and spend more time with their families. New and existing home sales have surged through the spring and summer and are now declining as this buyer segment has made the moves they plan to make.
The latest report from Kastle Systems, a key fob security firm, shows 2,600 buildings in the top ten metro areas at an average occupancy rate of 22.9% for the week of December 21st. Occupancy rates range from 37% in the Dallas metro to 12% for New York City.
Source: Kastle Systems – 12/21/20
Small Businesses Struggle, CRE Valuations Drop
The work-from-home (WFH) migration has impacted small businesses in core cities like New York and San Francisco, where sales dropped 60 -70%. We noted in our post on commercial real estate valuations, that there is a real probability that property valuations will drop due to high vacancy rates. A recent survey by the Society for Human Resource Management (SHRM) of 238 corporations showed that executives expect 20% of their employees to permanently work from home. The lack of office space demand is a massive headwind for the commercial real estate market and a drag on the recovery. In our post, we noted:
“Thus, if 20% of employees WFH will mean a 20% reduction in office space requirements nationwide. In the same survey, employers expected to bring back only 16% of permanently laid-off workers. Managers will look for ways to reduce office space costs by increasing the number of employees who WFH. Executives will find WFH an excellent way to increase profit margins. Therefore, corporations are interested in leveraging WFH culture and are doing it with fewer employees overall.”
The Long Term Impact of WFH Is Unknown
The economic impact of millions of employees working from home has yet to be determined. However, trends are emerging, showing permanently working from home professionals, accelerated software automation, and small business sales losses. Offsetting these trends are entrepreneurs working on attractions to bring people back into core cities and managers requiring workers to return to the office. The recently passed stimulus bill will provide relief to workers and help to stabilize the economy. But, the funding will not change the migration out of core cities. Conversely, the relief money may trigger a second wave of moves from additional employees looking to lower living costs.
Indicators to Monitor: Kastle Systems Occupancy Barometer, surveys of employee interest in working from home, social mobility tracking data gathered from smartphones as people travel to inner cities, commercial real estate company delinquency rates, rate of defaults on office space loans, bond values for office space companies.
4. Housing Debt Bubble
A $90 – 100B debt bubble has grown since March for renters and low-income homeowners out of work. This debt bubble is above the ongoing payments that renters and homeowners need to pay monthly. About 12M renters faced eviction for January 2021. The December relief bill extended an eviction moratorium signed by President Trump in August based on C.D.C. virus containment to January 31st. Also, the bill provides $25B in funding for a renter assistance fund. The move does not offer much time for renters to pay back debt and bring monthly payments current. The total amount of aid is inadequate for the massive size of the debt bubble. Unemployed renter households have an average of $5,379 of debt accrued since March.
Sources: Federal Reserve Bank of Philadelphia, The Washington Post – 12/7/20
Sixty-five percent of renters behind on payments have resorted to credit cards to pay their rent bill. Credit card debt is surging for renters. The predicament creates the possibility that renters will be evicted and become delinquent on their credit cards. Delinquency on their credit cards will trigger a reduction in their credit rating. With a low credit rating, renters will have difficulty renting again once the economy begins growing.
Small Business Landlords Are Financially Stressed
Landlords receive no funding from the December relief act. Small business landlords who own 22M of the 44M multi-unit buildings gaining new funding or loans are crucial. A November UC Berkeley study reported that 40% of small business landlords were not confident they could make mortgage payments in the next few months. We noted in our post about the Housing Debt Bubble that a solution must be found fast:
“…, small business landlords may evict tenants to find a paying renter… finding another paying tenant could be problematic. Small business landlords facing declining income and poor prospects for new paying tenants will likely default on their mortgage. There is likely to be a surge in multi-unit buildings for sale, causing a decline in multi-unit building construction.”
The $25B in aid to renters and $600 stimulus checks may mitigate a wave of evictions over the next few months. However, the huge debt remains.
Homeowner Delinquencies Are Increasing
Low-income homeowners continue to have difficulty making payments as mortgage delinquencies jumped to 8.2% last August from 6.1% in July. Delinquencies have stabilized with more forbearance lender agreements.
Black Knight reports that 3M mortgages were in forbearance as of last November. Eighty percent of those homeowners have requested a six-month extension providing more time to find funding until March 2021. Without further assistance, they will likely default on their mortgage and causing a forced sale or foreclosure.
Indicators to Monitor: renter surveys of percentage missing next month’s payments, Mortgage Banker Association reports on total mortgage debt, forbearance totals, and delinquencies and defaults, landlord multi-unit outstanding debt, landlord defaults, number of evictions.
Broad-based tariffs on China have resulted in the highest trade deficit in U.S. – China trade history. The trade imbalance with China was supposed to grow smaller due to broad tariffs on Chinese goods. Instead, the trade imbalance surged as U.S. consumers continued to buy Chinese goods. While U.S. companies faced declining market share and sales as a result of retaliatory tariffs.
Source: Bloomberg, The Daily Shot – 12/5/20
‘America First’ Has Become ‘America Isolated’
The program to put ‘America First’ has become ‘America Isolated’ while other countries set up new trade ties. On December 30th, the European Union and China announced a trade investment agreement negotiated over the past decade. The agreement paves the way for German car manufacturers to lower costs while making it easier to access Chinese buyers. China is now the European Unions’ number one trade partner with $590B in total trade in 2020. The U.S. fell out of first place as an EU trade partner.
Four years ago, when the U.S. left the Transpacific Partnership Pact, the Chinese took America’s place with 12 South East Asian countries. As a result, China has expanded the agreement to include three more countries in a new pact. The pact is called the Regional Comprehensive Economic Partnership or RCEP. The agreement calls for lowering trade tariffs, easing customs entry, and standardizing trade protocols. The deal includes all the ASEAN trade countries, Australia and New Zealand, along with China. The RCEP is the world’s largest trade bloc of 2.2 billion people and G.D.P. of 26.2T.
To improve trade, the Trump administration successfully renegotiated the NAFTA agreement with Canada and Mexico. Accordingly, the new agreement provides more access for U.S. farmers to North American markets, ensures job protections domestically, and increases U.S. content of manufactured goods.
World trade will fall by 13 to 32 %, depending on whether the optimistic or pessimistic forecasts prove true for 2020. The World Trade Organization (W.T.O.) forecast 2021 calls for a year to year increase of 5%.
Source: W.T.O. – 6/12/20
However, the W.T.O. sees virus containment, increased trade restrictions, and general deterioration of trade relations as significant headwinds for trade growth.
World Trade Growth Is Critical To Global U.S. Corporations
World trade growth has been a critical growth engine for U.S. multi-national corporations. S & P 100 companies realize 60 % of their sales and 70 – 80% of total profits from overseas operations. With world trade uncertain, U.S. corporations will seek to replace weak international sales with domestic customers. But, the U.S. economy is in a deep recession now and will likely take at least a year or two to recover fully. It is likely to be 4 or 5 years to return to pre-pandemic employment levels based on previous deep recession history. The U.S. consumer provides 30% of world consumer spending. Thus, executives looking for growth overseas to jump-start U.S. sales may be disappointed.
Biden Administration Will Focus on Rebuilding Global Partnerships
The Biden campaign proposes to bring the U.S. back into the international world order. The first step is rejoining the Paris Climate Agreement. Plus, the Biden government will fulfill obligations to fund the World Health Organization and the World Trade Organization. Yet, the new Democratic administration has signaled that it will not reverse all the present trade barriers with China. So, U.S. companies will have difficulty navigating an uncertain trade relationship in a 1 billion consumer market. It will be a slow grind to retool trade relations with China. Trade relationships take years to build and sustain, so we do not expect international trade to provide economic tailwinds anytime soon.
Indicators to Watch: W.T.O. trade volume, Canada and Mexico to U.S. trade volume and sales, U.S. company international sales, multi-national trade agreements, trade deficit – export and imports, global sales and profits for companies like Apple, Microsoft, Applied Materials, Intel, and other high technology firms.
Major Obstacles Remain To Achieve a Solid 2021 Recovery
The $900B stimulus bill is a band-aid for the 2021 economy. The liquidity injection is not a cure for the pandemic induced recession. Intelligently structured, innovative initiatives are required. Plus, to shift the economy onto a recovery track, trillions of dollars need to be invested.
Mohamed El-Erian, Chief Economist at Allianz, notes the need for policymakers to do the economic structural work necessary for a healthy recovery:
“The immediate injection of fiscal relief should help moderate what recent data suggest is an accelerating loss of momentum for the economic recovery. But it will not alter significantly the general direction of the bumpy road in the short term. Nor will it do much to offset the longer-term risks to economic, social, and institutional well-being.”
Significant headwinds are picking up strength:
Too Slow A Vaccination Program To Achieve Herd Immunity by Summer
The Jobs Engine Is Stalled or Shut down For Many Sectors
WFH Migration Hollows Out Core Cities:
– Creating Huge Vacant CRE and Driving Small Business Closings
Housing Debt Bubble Ready to Burst
Trade Sales & Profits Will Be Slow to Return
The bottom line is the virus still is in control of the economy. Until the virus is under control, the recovery will continue to sputter. Plus, permanent changes to social, geographic, and spending patterns will dislocate existing companies if they don’t change their business models quickly. The Federal Reserve will continue to provide liquidity. However, the Federal Reserve is propping up zombie companies, speculative hedge funds, junk bonds, and high risk real estate loans. Will the Fed have enough monetary firepower to support real investment initiatives if they pass in the next Congress?
Will the Biden Administration Be Successful in Passing Stimulus Bills?
If the Biden Administration can pass major fiscal legislation, then the economy will likely recover quickly. The first six months of the new administration’s work to control the virus, pass fiscal initiatives, and apply innovative policymaking will set the stage for a recovery. Or, a lack of federal leadership will lead to a stalling economy that continues to lose jobs, cut profits, and undermine asset valuations.