U-M economists see US growth slowing until coronavirus vaccine becomes broadly available

November 19, 2020
Contact: Jeff Karoub jkaroub@umich.edu

University of Michigan economists expect a rebound in economic activity, falling unemployment and life returning to “close-to-normal” by the end of next year in the United States as the nation and world recover from the pandemic.

Gabriel Ehrlich

Gabriel Ehrlich

Still, the researchers say, the ride out of the COVID-19-induced recession affords them far less certainty than they would have been forecasting in normal times.

According to their annual U.S. Economic Outlook, real gross domestic product—the value of everything produced in a country—is forecast to rise by 4.2% in 2021. That comes after a roller coaster 2020, when real GDP is anticipated to drop 3.6% despite a partial rebound in the last half of the year. Still, real GDP returns to pre-pandemic levels only in the second half of 2021.

Daniil Manaenkov

Daniil Manaenkov

The forecast, produced four times per year by the Research Seminar in Quantitative Economics in the U-M Department of Economics since 1952, was prepared by U-M economists Jacob Burton, Gabriel Ehrlich, Daniil Manaenkov, Tereza Ranosova and Aditi Thapar.

“We’ve seen a remarkably strong recovery in the third quarter,” Manaenkov said. “Regardless of what happens in the near term with the virus, I think the recovery will be pretty vigorous once we get a wide rollout of a vaccine. So, I think our negative risks are mostly short term, and only alter the timing of the recovery. But then again, it could be our own fatigue of forecasting gloom talking.”

Aditi Thapar

Aditi Thapar

The authors say the burden of this pandemic recession has been distributed unevenly: Lower-wage, customer service workers bore the brunt of the early employment hit, while employees in many high-paying jobs transitioned to working from home. Unfortunately, many jobs in the service sector are not expected to return until 2021.

The report notes some encouraging signs, including housing doing “remarkably well,” a moderate recovery in the service sector and an accelerating industrial recovery, including brisk demand for new vehicles. However, they say the strong demand for housing and cars exposes the pandemic’s impact between haves and have-nots: The highest-income consumers who typically buy new cars and trucks have been more insulated from job and income losses and in a position to capitalize on low interest rates and an improving stock market.

Provided that recent improvements continue and aren’t “completely derailed by a winter wave of COVID-19,” researchers say in the report that they expect April 2020 to mark “the trough of the coronavirus recession.”

“We expect life to return to close-to-normal by mid-2021, because of a combination of rising prevalence of natural immunity, the expanding availability of vaccines, further developments in COVID-19 management and therapeutics, and the inevitable pandemic fatigue,” the report said.

Other key findings and trends cited in the report:

  • The unemployment rate is expected to fall slowly and steadily from 6.9% in October of this year to 5.6% by the end of next year and 5.1% by the end of 2022.
  • The economy is forecast to gain back 9.1 million payroll jobs in the second half of 2020 after shedding 18.2 million jobs in the second quarter of the year. The economy then adds 3.9 million jobs in 2021 and 3.8 million in 2022. That path translates to a 0.5% shortfall relative to the pre-pandemic job level by the end of 2022, or 800,000 jobs.
  • Real disposable income is forecast to increase by 5.6% in 2020, owing to the massive federal financial stimulus. Smaller federal support in 2021 and none in 2022 will cause disposable income to drop.
  • The 30-year conventional fixed-rate mortgage rate creeps up for most of the forecast, from 2.8% in early 2021 to 3.1% by the end of 2022.
  • Inflation is expected to remain restrained—”outweighed by the large demand shock from pandemic.” A core inflation rate that excludes food and energy is anticipated to remain at 1.8% in 2021 and 1.9% 2022, on par with 2019 and undershooting the Federal Reserve’s 2% target.
  • Investment in intellectual property is expected to remain flat in 2020, reflecting challenges related to research and artistic production. Slow growth is expected in 2021 because of depressed spending within the entertainment industry.

 

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