Construction workers perform infrastructure repairs at the intersection of Church Avenue and Coney Island Avenue in the Flatbush neighborhood of Brooklyn on April 6, 2021 in New York City.
Michael M. Santiago | Getty Images
The framework for 2021 seems clear: a strong growth trajectory fueled by an influx of government spending as the US recovers from the Covid-19 crisis and heads for the fastest economic acceleration in nearly 40 years.
But then what then?
The way beyond this rocket-propelled year looks far less clear.
One-time expenses have rarely been the catalyst for long-term growth. Fiscal and monetary policy, now serving as an irresistible tailwind, could soon turn into headwinds. On the other side of this huge surge of activity will be an inequality economy and two-speed recovery that will likely require more than the occasional payment of government transfers.
While gross domestic product growth could reach 7% or more in 2021, don’t get used to it. An economic settlement is likely to come.
“I don’t see growth as particularly sustainable,” said Joseph LaVorgna, Natixis’ chief economist for America. “The economy will slow much more than you think next year and will likely be well below 3%.”
LaVorgna, chief economist on former President Donald Trump’s National Economic Council, sees a number of obstacles, many of which are political-related.
In the immediate vicinity, trillions of direct payments have helped boost consumer spending and imports. So far, however, the trend has been for spending on sturdy credit and debit cards to cool off once the initial jolt of stimulus checks subsides.
We have higher tax rates ahead of us for businesses and wealthier Americans. The Biden government’s intense focus on addressing climate issues is likely to add to the regulatory burden that is particularly difficult for smaller businesses.
“How 2022 plays out in relation to Congress will be a major drag on long-term business planning and decision-making, at least to the extent that you fail to come up with solid investment plans.” LaVorgna said.
“At this point I don’t see [businesses] Make a big long-term commitment, either for factory expansion or anything that would have a long shelf life because you’re not sure what the regulatory and tax environment is like. “
Prospects for a turnkey economy
Then there is the problem of those who are at the bottom of the business ladder.
While the transfer payments help in the short term, employment data continues to point to a slow recovery in low paid workers, with stubbornly high weekly jobless claims and a remaining gap of 3 million hospitality jobs that is far from coming back. The Federal Reserve estimates the unemployment rate for the bottom quintile is still in the 20% range.
“Everyone expects a turnkey economy: we just have to open up and move on, and things will go perfectly,” said Nela Richardson, chief economist at payroll firm ADP, which distributes a widespread monthly number of personal payroll jobs. “I don’t think you will be turnkey. There have been significant scars in the job market. Some consumers have been damaged.”
Richardson is in the camp of those experiencing a K-shaped recovery, where those on the higher rungs maintained or even thrived during the pandemic while those on the ground lost ground.
Fed chairman Jerome Powell said in an interview broadcast on CBS ’60 Minutes on Sunday that the central bank is attuned to the problems of service workers and is committed to keeping policy focus in that direction to judge.
“It’s going to take time. The good news is we’re making progress now. The numbers show people are now returning to restaurants,” Powell said. “But I think we have to remember that as this expansion continues, we will not forget the people who were really unemployed on the beach. We will continue to support the economy until the recovery is really over.” “
Fed policy risk
This political support has been vital to both the recovery of the economy and the functioning of the financial markets.
Fed officials believe they can keep pushing the accelerator to the ground without risking a disruptive spike in inflation even if consumer prices rose 2.6% yoy in March and 0.6% yoy .
Powell and his policymakers view recent inflation trends as temporary, the result of supply chain problems that will resolve, as well as simple comparisons with the previous year when inflation disappeared as a pandemic hit.
But the Fed, and the Powell Fed in particular, got into trouble before trying to forecast over long distances.
In late 2018, the central bank was forced to back out of plans to further hike interest rates when problems related to the trade war hit the global economy. Just over a year later, the Fed’s pledge to end the rate cut disappeared when the pandemic hit.
While Fed defenders might say these were unforeseen events, this is the point: making long-term political commitments is a sisyphic task in a global economy where the sands of things are shifting so often.
“The greatest risk to expansion is the Fed,” said Steve Blitz, chief US economist at TS Lombard. “The puppet master is trying to control a doll that you have no control over.”
Still, Blitz believes that the Fed’s policy over the last year of pledging not to tighten until it sees actual inflation, not just forecasts, “is the right thing because their forecasts stink”.
Both the Fed’s monetary policy and the congressional fiscal policy as a whole should remain relaxed until the underlying problems of the economy are addressed, he added.
“Everyone realizes that the political cost of ignoring the center is now too high,” Blitz said. “Both parties are on the edge of the knife. Who can do the best on budget spending … to get that middle voice back?”
Consumers spend and save
So far, consumers are taking advantage of some of the incentives Congress gave them to buy and invest, but they continue to be cautious.
According to the New York Fed, less and less was spent and more saved in the three control rounds. The numbers speak for a twofold message: consumers are building their balance sheets, which indicates great purchasing power, but they are also increasingly reluctant to part with that money.
What economists call marginal propensity to consume has fallen from 29% in the first round of stimulus controls in spring 2020 to 25% in the most recent distribution.
“As the economy reopens and fear and uncertainty subside, the high savings should enable more spending in the future,” said New York Fed economists in a recently released report. “However, there is great uncertainty and debate about the pace of this spike in spending and the extent of the pent-up demand.”
Indeed, the future of the economy after the momentum-triggered 2021 outbreak will largely depend on the story of how much people really can’t wait after being entrenched for a year, and how long that will take.
Mark Zandi, chief economist at Moody’s Analytics, is more optimistic about the fate of the economy. He expects a further surge in activity, which results from the emerging infrastructure bill. Spending is unlikely to gain a foothold until 2023 and beyond.
“This will fuel self-sustaining economic expansion. There is so much juice here that we can find full employment again in the next 18 to 24 months,” said Zandi. “Once that short-term juice wears off, we’ll get another shot.”
However, the economy will have to endure a lot during this period.
As always, there is the pandemic. While almost all of the news with vaccines has been good, a sudden spike in the variants could cause some nervous elected officials to block parts of the economy again.
And there is the question of inflation.
If the Fed gets it right, it can keep politics loose and growth can continue. If it goes wrong, Powell has admitted that the main tool will be rate hikes, which, while unlikely to wipe out the recovery, could slow it down significantly. Housing construction, which dragged the economy out of the upswing, would take the biggest blow.
St. Louis Fed economist Fernando Martin said a combination of rising inflation expectations, falling unemployment and increasing money supply for the economy could result in longer-lasting inflation than policymakers are currently suggesting.
“If those pressures come in and prove to be sustained, the Fed will have to step in at some point to bring inflation down and meet its target of 2% average inflation,” Martin wrote, but also said inflation could potentially stay low.
There will likely be a tax return as well.
As of the middle of the fiscal year, the government is running a budget deficit of $ 1.7 trillion, as total national debt recently exceeded $ 28 trillion. The public share of this debt is about $ 22 trillion, or 102% of GDP.
Heading for mid-term elections next year, Congress may want to look more fiscally responsible and thus curb spending on freewheels that will bring the economy this year to what is likely its strongest annual performance since 1984.
Zandi sees a change in policy as perhaps the greatest threat to the longer-term economic perspective.
“If the economy does not embark on a self-sustaining expansion, it is a political mistake,” he said. “We have to do something wrong. Either the Fed is applying the brakes too hard or the fiscal policy makers are not giving up any further support.”
That support is essential as the country tries to avoid a recovery that leaves too many behind, Zandi added.
“The risks are considerable. It involves a K-shaped recovery, income and wealth inequality, racial inequality issues and climate change,” he said. “These are deeply ingrained problems that I believe cannot be addressed without a very violent policy response.”
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