Picking ourselves up
After a whirlwind year, the economy is picking itself up, dusting itself off and starting all over again
>> Quick takes:
- Economy picked itself up in 2H2020 with solid rebound
- Now dusting itself off with vaccinations and policy support
- Ready to start over again with new expansion later this year
- Challenges, though formidable, are not insurmountable
- CRE market participant should begin planning now and not wait for recovery
The fourth quarter’s GDP data concluded what we could call the “Picking Ourselves Up” phase of the economic recovery. The economy grew at an annualized rate of 4.0% during the fourth quarter, slightly below our expectations. As expected, that marked a significant deceleration from the third quarter’s unsustainable growth rate of 33.4%. Yet, the latter half of 2020 represents a noteworthy rebound from the contraction in GDP during the first and especially the second quarters. The peak-to-trough contraction in GDP of roughly 10% represented the worst performance in the economy since the demobilization effort at the end of World War II. But the rebound in the second half recaptured 75% of the contraction, leaving real GDP just 2.5% below its peak level prior to the pandemic. While we do not discount the widespread pain of the downturn, we return to a favorite theme of ours from 2020 – this time it really is different. And by that we mean the pace at which the economy stopped contracting and the strength with which it has rebounded stand apart from previous severe downturns. Typically, quick, pronounced rebounds occur during short, shallow recessions. Deeper recessions tend to last longer and rebound tentatively. But this time we picked ourselves up relatively quickly.
Quarterly GDP growth: Seasonally adjusted annual rate
Dusting ourselves off
This brings us to the “Dusting Ourselves Off” phase and another point we have repeatedly made: because of the pandemic’s impact on both the supply side and the demand side, the economy cannot self-correct until we move past the pandemic. Two things prove vital to that endeavor. First and foremost: vaccinations, which provided some slightly positive news last week. It appears that the rate of vaccination is increasing. We previously pointed out that this would need to occur to achieve our base case economic outlook. Last week the U.S. reached a new daily high watermark with roughly 1.7 million vaccines administered on January 28 and the seven-day rolling average reached roughly 1.4 million as of January 31, also a record. As of this writing, roughly 8% of the U.S. population received at least one dose of the two approved two-dose vaccines. Daily administration of 1.5 million to 2.0 million doses administered pre day roughly gets us to our base case when we factor in immunity via infection. If the U.S. can attain and maintain a rate at or above 2 million does per day, the base case could become a floor.
Second, policy support must remain in place until the economy moves past the pandemic via vaccination. This takes two main forms. The first, monetary policy, looks set to remain highly accommodative to support growth. Last week Chair Powell and the Fed reiterated their incredibly dovish stance. Powell and the Fed believe that economy remains far away from the Fed’s dual mandate of stable, but not elevated, inflation and maximum employment. He emphasized that it was not yet appropriate to discuss any future interest rate and increases or reduction in the quantitative easing program. The Fed will likely utilize forward guidance to adjust the market’s expectations well in advance of any actions, hoping to avoid something like the “taper tantrum” that occurred during the last cycle.
“…support for vaccine production, distribution and administration could prove tremendously beneficial in moving the economy out of this… phase.”
The second, continued fiscal policy support, seems within reach. We previously stated that the administration’s $1.9 trillion proposal represented more of a wish list than something achievable. We continue to believe that a package will likely get approved but at a price tag closer to $1 trillion than $2 trillion. Recent dialogue between the administration and Republicans in the Senate suggests that such a plan remains within reach. While a plan of that magnitude would cover many aspects of the economy, support for vaccine production, distribution and administration could prove tremendously beneficial in moving the economy out of this Dusting-Off phase.
“… our base case outlook: tepid growth to start the year followed by a marked acceleration once we reach herd immunity.”
Starting all over again
After dusting off, we will arrive at the “Starting All Over Again” phase and the prospect for the next expansion of the economy. We will provide a detailed view of this in our upcoming quarterly U.S. economic outlook. For now, developments over the past week provide encouragement for our base case outlook: tepid growth to start the year followed by a marked acceleration once we reach herd immunity. We are not discounting the uncertainty or the challenges that surround the dusting off period over the next six or so months. The exact path forward during that period remains clouded by a variety of non-economic factors. But recent events provide the greatest hope since the beginning of this crisis almost a year ago.
| What we are watching this week |
The ISM Manufacturing Index for January should show a slight decline. It should remain well within expansion territory, but we expect the mood to sour somewhat due to headwinds from the pandemic. We expect little change to the ISM Nonmanufacturing index, with risk to the downside due to pandemic-related factors. The employment situation for January should show little change in net job creation, with growth remaining challenged due to the pandemic. We expect little to no change in the unemployment rate, hours worked, and a modest improvement in wages.
| What it means for CRE |
For commercial real estate (CRE) events of the past week lined up on the positive side of the ledger and provide support for our outlook. While CRE continues to lag the overall economy, the better the economy tracks, the better CRE will perform as it follows in the economy’s wake. Increasingly the industry is recognizing that the prospects for recovery are brightening and it is turning its attention toward the medium term. Market participants should begin to think about strategic decisions (e.g. leasing, investing, financing), even if they are not yet ready to make those decisions. Waiting until the crisis has already abated might not prove catastrophic but could deprive participants of the best opportunities. Preparation for future decisions is advised as a minimum.
| Thought of the week |
According to a recent study by Bain, American companies will invest $10 trillion in automation between now and 2030.