KeyBank's Q4 Economic Outlook Report explores the prospect of economic recovery in 2021 and how the pandemic will influence consumer spending, business performance, and global growth.
With the COVID-19 vaccine slowly but surely rolling out across the U.S., the nation is finally preparing to move beyond the pandemic and some of the other issues that made 2020 such a difficult year. Despite rising caseloads and new state restrictions, the economy seems primed to continue its recovery. But how quickly will recovery come, and what might be holding it back?
On the positive side, consumers have more economic reserves than initially expected, with more personal income and lower spending than economists predicted. This could very well lead to increased spending once the threat of the pandemic has waned.
However, CEOs are not feeling wholly optimistic. According to a recent study by KeyBank – a full-service commercial, corporate and investment bank with nationwide branches – executive leaders feel uncertain about what economic policies the incoming administration will enact, as Joe Biden's campaign promised higher taxes for the wealthy and increased regulation.
In KeyBank's Q4 2020 Economic Outlook Report, Bruce McCain, Ph.D., CFA and former chief investment strategist at KeyBank, explores the current state of the economy and the pandemic's potential effect on consumers, businesses, and global trade.
The impact of COVID-19 on consumer income and spending in Q4
The economic toll of the pandemic has largely been driven by stay-at-home orders and business closures, which have subsequently led to high unemployment and reduced spending. However, consumers seem ready to spend again, as soon as it's safe to do so.
"The economy will be heavily determined by the course of the virus," McCain said. "As we conquer that threat, consumer reserves and pent-up demand should fuel strong spending growth."
Here are a few factors that have played into the current state of personal income and spending among Americans.
Unemployment has fallen, but new job gains will be slow.
At the start of the year, unemployment was low – just 3.5% in February. When the coronavirus surged across the United States weeks later, that number skyrocketed. In April, unemployment hit a peak of nearly 15%. That percentage has fallen to 6.9% as of October 2020, which is strong progress in just seven months.
Over that period, 12 million jobs have been added, though that is still 10 million fewer jobs than there were in February. Additionally, with inconsistent state restrictions for controlling the recent rise in COVID-19 cases, the employment situation could worsen in the coming months.
Personal income has risen, but spending has declined.
Despite the harsh economy, there has not been as steep a decline in income as many anticipated. Wages and salaries have increased by 1.5% so far this year, while total personal income has increased by 5.9%. This is due in part to unemployment assistance, stimulus packages and other government support payments.
Typically, an increase in income growth correlates with an increase in spending. However, throughout the first 10 months of the pandemic, consumption has declined 1.3%. People are cautious about their spending because of the uncertainty surrounding the virus, and they may remain that way until the pandemic is over.
Consumers are ready to 'get out and enjoy themselves.'
Because people are spending more time at home, their spending habits have changed. As most consumers are currently focused on supporting local businesses, retail trade has increased by 9.8% this year, and the consumption of goods has risen 9.5%.
Spending on services such as housing, utilities, and financial services has increased as people continue to stay home and work remotely. Simultaneously, these trends have put a damper on sales in gasoline, food and beverages, and overall service consumption – but consumers are itching for that to change.
"'Virus fatigue' demonstrates people are ready to get out and enjoy themselves," McCain said. "They apparently have money to do so. Armed with the right antibodies, we should be able to replace surging virus cases with surging consumer demand."
Why business leaders are wary of the economy heading into 2021
The economy has made significant progress since the deep recession from the darkest days of the coronavirus pandemic. With vaccines being distributed, spending and business activity should swiftly recover. However, KeyBank's research found that CEOs' confidence in the economy fell significantly during Q4. The following factors have played a role in this less-than-optimistic business outlook:
CEOs are more concerned about government policy than COVID-19.
While some of this was due to the increasing coronavirus cases and lack of a federal lockdown, CEOs largely felt this way because of potential changes in government policy.
Biden's incoming administration, paired with the Democrats' potential Senate majority through the Georgia senatorial runoff elections, has many CEOs worried. Democrats being in control of the legislative and executive branches of governments gives them the ability to implement significant change from what businesses have become accustomed to under President Donald Trump.
The Biden campaign ran on tax increases and new regulatory actions. What exactly these policies look like – or whether they'll pass – is currently unknown, but in the meantime, business leaders are cautious.
The state of production in the U.S. remains uncertain.
In recent years, the United States has opened more operational facilities and increased domestic production from overseas as locations became more cost-competitive. When the pandemic hit, supply chains were disrupted, creating doubt in sustainable, U.S.-based production.
Manufacturers are wondering how much production will be in the U.S. versus a low-cost area of the world, such as Vietnam, when the pandemic is over. Companies are currently evaluating production costs, taxes and regulatory policy to consider how to reshape their supply chains in a post-COVID world.
Investment spending has been mixed.
Throughout the coronavirus pandemic, business investment spending has had areas of both increase and decrease. Commercial and healthcare structures have seen a 2% decline in spending throughout the first three quarters of the year. Spending on physical structures and new buildings makes less sense with less of a workforce and no one to occupy these spaces.
Experts expect investment in structures to increase again in the coming years. On the other hand, technology investment has gone up overall. Computers and equipment have seen a 20.8% increase in investment, and software has seen a 1.9% increase.
How domestic and international growth will catch up
The coronavirus vaccine promises a light at the end of the tunnel for the international economic challenges of 2020. How strongly and swiftly the global economy rebounds will depend on how each region responded (and continues to respond) to the virus.
Domestic trade trends
The pandemic has severely crippled the U.S. trade market. Exports of U.S. goods and services are down by a 19.7% annualized rate over the first three quarters of the year, while the total amount of goods and services the U.S. imported fell to a 9% annualized rate. This left the country with a negative GDP growth for 2020. Once major countries have contained the virus, the trade contribution for the U.S. and its partners should be more positive in 2021.
Economic recovery abroad
The United Kingdom and the European Union have been bringing the virus under control after a second wave of cases. Travel between the U.K. and EU caused this spike in cases, leading to new restrictions that dampened economic activity.
After the second quarter of 2020, the United Kingdom's real economy stood 0.8% below where it was a year ago. This may indicate a lower potential for growth in 2021. The eurozone economy is 4.4% below where it was in 2019, with economic growth expected to exceed the 1% real growth from the previous year.
Japan has done an excellent job of containing the coronavirus, having one of the lowest per capita infection and death rates in the industrial world. It provided more monetary and fiscal stimulus to its citizens than other major countries. This sets Japan up for more economic flexibility once recovery starts. All of these factors mean its economy should be able to recover more quickly. Estimates predict potential growth to exceed 1% in the long term.
There is skepticism as to the validity of China's economic reports. The country has seemingly handled the pandemic well, achieving a positive year-over-year growth. In the coming year, it may not drive up as much growth but should have roughly 5% more growth than other major countries.
The recovery outlook for 2021
As we kick off the new year, only time will tell how consumer, business and international economic trends will play out. Much of it hinges on the pace of COVID-19 recovery and vaccination, but McCain is confident that these interconnected areas will begin to bolster each other as the pandemic subsides.
"If consumer spending recovers sharply, business activity should strengthen," he said. "The potential for improved global trends adds even more to the positive outlook."
Download KeyBank's full Q4 2020 Economic Outlook Report here.
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