Beaconomics

As one of the most traumatic and disruptive years in U.S. economic history comes to a close, good news on multiple fronts suggests better times are on the not-too-distant horizon. Despite the economic pain the COVID-19 pandemic has unleashed, according to Beacon Economics‘ latest outlook for the U.S. and California, the nation’s economy is not shattered, has already seen a remarkable bounce in economic activity, and is heading into the new year with a good degree of economic momentum.

Perhaps most important to the ongoing economic recovery have been recent, highly positive developments on the vaccine front. As of this writing, the first vaccines have been administered in the United Kingdom and with over 37 groups working on vaccine development, the spread of the virus will likely be under control in the second quarter of 2021, according to the new analysis.

Beacon Economics has consistently challenged the doomsday predictions of many forecasters and continues to anticipate that U.S. GDP will grow 5% to 6% in the fourth quarter of 2020 and 4% to 5% in the first quarter of 2021. This represents a slower pace growth than in the firm’s previous forecasts due to the tragic resurgence of the virus that is now ensuing.

“It’s a tough year to get into the holiday spirit – the human consequences of this pandemic have been, and will continue to be, simply devastating,” said Christopher Thornberg, Founding Partner of Beacon Economics and one of the forecast authors. “But in terms of the economy, while we’re not back to normal of course, the U.S. has already recovered three-fourths of the output it lost between February and April – we are not in economic freefall, quite the opposite.”

As of September, the nation’s economy was only 4% below its long run growth trends, a much faster rate of recovery than most prognosticators have been anticipating throughout the crisis. While consumer spending drove the bulk of third quarter growth, there was solid expansion in every part of the U.S. economy with the exception of non-residential structures and government, according to the analysis. This same pattern is evident in industrial production, durable goods orders, retail sales, and other statistics, with record increases following the record declines.

Thornberg points out, however, that some sectors are in serious distress and any assistance should be carefully and narrowly directed at those businesses and workers. “There has been enormous disruption in leisure and hospitality, restaurants, entertainment, and many service industries, which almost certainly means some of these businesses will not reopen,” he said. “While the wave of closures should be met with an equally impressive wave of new openings, any government assistance strategies should be specifically devised to support the hardest hit sectors and workers.”

Additional Key Findings:

• In California, nonfarm employment expanded by 145,500 jobs in October (latest data available), the best performance since June and ending a worrying trend of slower job growth.
• While California’s labor market is improving, only 44% of the jobs lost during the pandemic have been recovered, with 1.5 million fewer workers employed than in February.
• The state’s housing market has not only been left unscathed by the pandemic, it’s experienced significant growth: Single-family home prices surged 13% between the third quarter of 2019 and the third quarter of 2020.
• Although much has been made of telecommuting workers fleeing expensive cities for cheaper locales, the new analysis says speculation about the demise of cities is greatly exaggerated and that urban centers will return to their former glory once the pandemic is in the rearview mirror.
• A huge share of retail spending has shifted online during the pandemic and the pace of ‘de-retailing’ in the United States will intensify.
• While many firms will downsize their floor space due to a permanent shift to working from home, it is far too soon to call an end to the office as we know it.
• Much of the massive $3 trillion Federal stimulus did little in the short run, with most of the initial disbursements to households going straight into savings. U.S. households have tucked away an amazing $2.2 trillion in savings during the 8 months of the pandemic.
• With a second stimulus package under discussion, the long run consequences of the ballooning Federal deficit are clear and hugely problematic. These are colossal debt increases at a time when the nation is already veering towards a fiscal crisis driven by retiring baby boomers and an inadequate pay-as-you-go public retirement system.