Where do we start?

• New administration aims to improve vaccination program
• 4Q GDP data will show how far we have come
• Fed unlikely to change policy stance
• Busy week with many important releases
• CRE market participants starting to look past data

More than just a hypothetical question, the events of this week and last provide some sense of our starting point for 2021 as we move past the pandemic. Of course, the change in administration last week provides the clearest example of that. The new administration got to work quickly, issuing a flurry of executive orders. While some hold more direct implications for the economy than others, the first and foremost priority remains getting the population vaccinated and past the pandemic. That provides the only path to full recovery for the economy. And unfortunately, that effort has faltered somewhat in recent weeks. The new administration aims to change course and issued executive orders imposing a new mask requirement for public transportation and federal buildings, significantly improving testing, and accelerating the rate of vaccination, with the initial goal of 100 million vaccinations in the administration’s first 100 days. Yet, with current vaccines requiring two doses, that would inoculate only 50 million people. If this rate remains constant, it will require roughly 10-11 months from today to vaccinate 70% of the U.S. adult population, which would fall well behind the assumption embedded in our base case outlook. Therefore, the administration must accelerate the pace of vaccinations even further if they hope to mostly or fully reopen the economy by midyear. Reiterating our mantra that the pandemic is the recession, without widespread vaccination the economy will continue to struggle. For both the health of society and the recovery of the economy this effort must improve. We continue to believe that it will (e.g. with additional approved vaccines) but right now risk to the pace of vaccination clearly lies to the downside.

Fourth quarter 2020 real GDP growth will provide the other key starting point we will receive. Although the GDP will almost certainly face revision in subsequent periods, the first look will still give us a sense of the full extent of the damage from 2020 and where the economy stands at the beginning of 2021. We expect a marked slowdown from the torrid and unsustainable growth rate from the third quarter when the economy began to recover. While our estimates vary by scenario, we generally anticipate growth in the mid-single-digit range, centered around 5% on an annualized basis. That means the economy should sit roughly 2%-2.5% below its level from the end of 2019. 

We remain confident that the economy can enter a phase of growth in excess of capacity on the other side of the pandemic, but we must get to that point first. Given where we are starting from and the issues with vaccination (which is the only way out of this crisis) we continue to believe (objectively and apolitically) that fiscal support will remain crucial for some time. If the vaccination timeline meets or exceeds our expectations and the economy gets back online fully by midyear, less stimulus should occur. If the vaccination timeline fails to meet our expectations and the economy remains below potential into the third quarter, more fiscal support should get passed. Therefore, the interaction between the vaccination program and fiscal stimulus will predominantly determine the path of the economy this year. Our proprietary scenario modeling projects positive growth for the economy in 2021 across scenarios, ranging from roughly 2% in our downside case to roughly 6% in our upside case. But the magnitude remains unclear and dependent upon key, noneconomic factors. We will provide a more detailed view in our quarterly economic outlook next month. 

Fed speak this week

The Fed is holding its first open market committee meeting this week. We expect little change in the policy stance, remaining incredibly accommodative. Any language should reflect our long-held view that growth decelerated as the pandemic worsened and that risk remains concentrated in roughly the first six months of the year (in our base case) until widespread vaccination occurs. It will likely express its concern over slowing growth, but it seems unlikely to change policy without any serious sign of faltering.

|  What else we are watching this week  |

This is a busy week for data releases. Consumer confidence and consumer sentiment for January should both show relatively little change, reflecting both positive and negative news over the last month. Initial jobless claims should remain at elevated levels, reflecting recent increased disruption to the labor market. We expect new home sales for December to increase slightly versus November’s reading. Personal income and spending for December both likely declined in the face of rising concern over the pandemic and the fading of fiscal support. Underlying inflation should remain muted as well. 

| What it means for CRE |

For commercial real estate (CRE), we have reached an important juncture where it appears sentiment is starting to turn before the data. Because CRE lags the overall economy, we still expect some deterioration in space market fundamentals in 2021. But sentiment has noticeably improved in recent weeks. While that seems inconsistent with the short-run outlook, market participants are looking past the next 6-12 months to the bigger picture. Even those who are delaying making CRE decisions right now should begin thinking about those decisions. Leasing, investing, and financing decisions require significant time, thought and analysis. Market participants in the vanguard are beginning to seriously consider what moves they will make in coming quarters and will be prepared to act to capitalize on opportunities. Those who remain paralyzed by current uncertainty could find themselves missing the best opportunities, be that cheaper rents, lower prices or a better financing option. As the reality of an improved outlook sets in and uncertainty abates, more will follow suit, but forward-thinking participants are already thinking about the recovery. 

| Thought of the week |

Roughly 55% of American workers do not use all of their allotted vacation allowance.