|As we begin the new year, it is a good time to take a high-level look at where the economy is right now and where it may be going the rest of the year.
The good news: The economy will pick up steam as the year goes on. The virus is still in control of the economy, constraining its growth as cases remain high. As vaccinations drive down caseloads, economic activity will improve.
The big boost to growth will come when we can gather in larger numbers without fear of contracting Covid-19. Once that occurs businesses such as restaurants, bars, live sports, theaters, events, conventions, theme parks, travel, tourism, film production, and more can resume more completely. Perhaps most importantly, schools should be able to reopen fully, and parents that have been driven from the workforce can re-enter it.
In the meantime: The economy was clearly slowing at the end of 2020. Several key data points showed the pullback. Income and consumption fell in December. Consumer sentiment dropped sharply. In November, small business optimism declined, as did the outlook of the manufacturing and service sectors. Most troubling was a 1.1% fall in retail sales in November, leading up to the all-important holiday shopping season. Retail sales are still above their pre-pandemic high, but the big drop in November coming off a small decline in October is concerning.
This slower growth is likely to continue into early 2021. The recently passed relief bill with $600 per person payments, already arriving in many peoples’ accounts, should buoy spending this month, though. The resumption of the PPP program will help, too.
Looking ahead: We will get the initial reading on how fast the economy grew in the fourth quarter of 2020 on January 28th. Estimates show it growing over 5%. It grew more than 33% in the third quarter, coming off the 31% contraction in the second quarter.
As of now, the economy is on track to grow more than 4% in 2021. At this pace, it should return to its pre-pandemic size by next quarter. That would be a quick bounce back.
Bottom line: If we can kick the virus sooner in the year, growth will exceed current estimates. We cannot get the vaccinations fast enough when it comes to restoring economic health.
—Curtis Dubay, Senior Economist, U.S. Chamber of Commerce