Shawn Dubravac, PhD, Chief Evonomist, IPC

Just when you thought 2021 couldn’t possibly be worse than 2020, we start the year with an attack on the U.S. Capitol. Two days later, daily COVID deaths breach 4,000 for the first time. We are one month into the new year, and it is already abundantly clear that the next 12 months will remain challenging.

In many ways, the economy in 2020 was not nearly as bad as it could have been. And while historically mbad, our forecasts improved (became less bad) as the economy crawled its way out of the crater created by the pandemic. Early fiscal and monetary stimulus provided households with additional disposable income at the same time the pandemic hamstrung many service industries. As a result, households quarantined at home mand bought durable goods like computers. Even new vehicles, hard hit in the early months of the pandemic, staged a remarkable recovery in the final months of the year.

The positive stimulus effects appeared to be waning in the last few months of the year. The situation was made worse by rapidly rising cases of COVID that pushed renewed restrictions in the U.S., Europe, and elsewhere. In the U.S., retail sales, while strongly positive on a year-over-year basis, fell month-over-month in the final three months of 2020. Likewise, retail sales in Europe have either fallen or been weak in recent months. Retail sales fell abruptly in November. The U.S. economy shed 140,000 jobs in December, the first decline since the early months of the pandemic. Momentum was slipping, and COVID was raging.

Both the U.S. and Europe have added significantly to stimulus measures in recent months, and more still are likely to come, at least in the U.S. This will likely buoy the U.S. economy, at least in the short-run. We are not likely to see additional stimulus, at least in the near-term, in
Europe. This in turn will hinder economic activity and as a result our forecast is for muted growth. While we expect a small contraction in consumer spending in the early months of 2021, direct payments and expanded unemployment benefits should add to income and drive
consumer spending.

The pandemic’s fallout continues to be primarily isolated to the service sector, while the goods economy continues to do well. Manufacturing sentiment has hit multi-year highs in both the U.S. and Europe. Capacity utilization continues a broad recovery as demandn remains firm. While sectors like aerospace continue to reel under the burden of the pandemic, other sectors, like auto, have experienced v-shape recovers. In the U.S., manufacturers added workers in December while others were reducing their workforce. The electronics industry continues to be an economic leader in terms of both jobs and production.