The U.S economy will grow at a robust pace of about 4% over the four quarters of 2021, the strongest growth in nearly two decades after the deepest recession since the Great Depression, according to the latest forecast of the American Bankers Association’s Economic Advisory Committee. However, the economy remains in the grip of the pandemic and growth is expected to decelerate in the current quarter.
“The painful toll from COVID-19 continues to add up,” said Beata Caranci, senior vice president and chief economist at TD Bank Group and the current EAC chair. “In addition to rising hospitalizations and deaths, the pandemic is weighing on the U.S. economy as social distancing and business shutdowns in many states have slowed commerce considerably.”
After a slow start to the year, growth will accelerate into the second quarter and beyond, according to the group. Committee members agree that the outlook will brighten considerably as mass vaccinations across the nation bring many consumers out of isolation and back to stores, restaurants, movie theaters and travel. States will likely ease business restrictions when the most vulnerable individuals are inoculated and hospitals are no longer at capacity. Moreover, $900 billion of additional federal support will bolster the recovery, with the potential for more to come from the new Congress providing another shot in the arm for the economy.
“As the balance shifts from hospitalizations to vaccinations, growth should accelerate,” Caranci said.
While all committee members expect economic momentum to build in the spring, there is divergence in views on timing and speed. Those forecasting less of a boost this year anticipate a stronger 2022. Moreover, the pace of recovery will vary across states.
The bank economists expect that the labor market will heal more slowly than the overall economy. The nation lost over 22 million jobs last March and April and overall employment remains nearly 10 million short of preCOVID levels. While committee members forecast close to 5 million additional jobs this year, a return to full employment remains two or three years away. The committee expects the unemployment rate to decline from 6.7% last month to 5.4% by the end of 2021.
“The speed of the labor market recovery normally trails the economic recovery,” said Caranci. “Many businesses will be cautious in rehiring until they see concrete signs of sustained demand and a reduction in slack.”
The EAC noted further that many jobs will remain lost to business shutdowns and failures, and that many surviving firms have learned to be more efficient and operate with fewer workers.
More broadly, great uncertainty about the outlook is restraining business investment. The committee also sees significant downside risk in any delays with the distribution, administering and broad acceptance of the vaccines. Any widespread resistance to taking the vaccine as well as a reluctance of the vaccinated to re-engage in their normal activities would greatly affect the outlook.
Conversely, if widespread vaccinations contain the virus and any further mutations to the point that states relax business restrictions and people are ready to return to previous activities, a surge in consumer spending and inventory rebuilding would certainly revive the economy faster, according to the EAC.
The committee remains cautious about the outlook for external demand given the uneven recovery among the nation’s major trading partners.
“International tourism also is likely to remain restrained as countries reopen at different paces,” Caranci said.
The EAC forecasts price gains to pick up this year as the economy recovers, but barely meet the Federal Reserve’s inflation goal of somewhat above 2%. Accordingly, the committee anticipates that the Federal Reserve will not change the target range for the federal funds rate in the foreseeable future. Consequently, the committee sees little change for short-term interest rates this year, and projects rates on longer-term U.S. Treasury securities and mortgage rates to rise modestly.
The American Bankers Association is the voice of the nation’s $21.2 trillion banking industry, which is composed of small, regional and large banks that together employ more than 2 million people, safeguard $17 trillion in deposits and extend nearly $11 trillion in loans.
