“For last year’s words belong to last year’s language And next year’s words await another voice” -T.S. Eliot
We wrote a lot of words last year. Words about COVID and lost jobs and recession. Hopefully most of those will be words left in last year. If we had to make one prediction about 2021, it would be that more real estate will be used. After a year of uncertainties, we feel comfortable saying that, and it should be just that: a comfort. We’ll take the easy shots so we can get on the board.
More utilization of real estate is a pretty low bar. At year-end, restaurants were seeing 70% less traffic than a year ago and office usage was only a little better at 20% capacity.
We’ll avoid hemming and hawing about societal implications around working from home, increased gig economy reliance and other trends that have been accelerated by the pandemic. But simply put, capacity utilization is important to the structure of the U.S. economy. Using all our resources to the fullest again, in a safe manner, is hope No. 1 for the new year.
When exactly we’ll all feel comfortable enough to do so depends on the efficacy of the vaccine rollout, a prediction we’ll leave for others. But it can’t come soon enough: After a slowing of cases in the third quarter of 2020, hospitalizations and deaths surged to close the year. The effect on the economy is clear. As of the second week in December, an astounding 5-plus% of the nonretired population wasn’t able to work due to either having COVID, fears of getting it or caring for someone who has it (the red line below). The number of people who can’t work due to weak business conditions or other changes not necessarily related to the virus (the blue line) is also creeping higher.
This surge in cases has impacted consumer expectations for how the rest of the recovery will play out, even in spite of an accelerated vaccine timeline — more recent delays in rollout notwithstanding. We called 2020’s downturn “The Most Hopeful Recession” on June 1. Comparing the current recession to the previous four, from March through September, consumer expectations for the recovery were much better than at the same point in any of these prior downturns. Unfortunately, it has not stayed that way.
In the fourth quarter, with cases roaring back, optimism was unable to bounce back as we’ve seen in previous recoveries. While the level of optimism is higher than 2008, the sideways, downward-tilting trend through 2020 resembles that most recent prior recession.
A consumer expectations index provided by the Conference Board correlates strongly with future spending patterns. It’s perhaps no surprise either that optimism faded as Coronavirus Aid, Relief, & Economic Security Act stimulus waned, providing next to zero boost by November 2020 as income growth has been falling since September.
The chart below is one we’ve been tracking for some time showing how personal income has been helped tremendously by the CARES Act. You can see that personal income growth moved back to positive year-over-year growth even without the CARES Act as the economy reopened during the summer and fall. But the pace of growth is certainly slowing.
The passage of new stimulus, albeit smaller than the CARES Act, will provide a significant boost to the economy entering 2021. We’ve been concerned for months about the expiration of CARES Act jobless claims programs, such as the Pandemic Unemployment Assistance, or PUA, for self-employed and gig workers, Pandemic Emergency Unemployment Compensation, or PEUC program for those who have seen claim eligibility expire, and the Federal Pandemic Unemployment Compensation boost to unemployment. The former two represented a staggering 13.5 million unemployment claims as of the last week in 2020, almost double the number of traditional jobless claims for the same period. The expiration of FPUC by August, unofficially extended for 1.5 months by the Lost Wages Assistance program, meant a loss of significant income for unemployed families.
Taking it a step further, the gradual withdrawal of stimulus throughout the year likely motivated some to take risks they didn’t need to by the end of 2020 as income stalled, in turn making it more difficult to contain the virus. New fiscal support should not only mean more income for households but more facility for managing the unexpected toils of the virus. The continuation of these programs, all renewed in the new package to some extent, along with $600 checks and another round of Payroll Protection Program funding could mean a return of the optimism that made this “the most hopeful recession.”
That’s certainly what this economy needs. As it stands, 57.3% of the U.S. population is employed as of November, still at a low not seen since the 1970s and 1980s, when less the half of the female population participated in the labor force.
The hiring slowdown we saw in November is likely to be followed by an even worse December. New stimulus is clearly good, but it is late. There are likely more months of labor market weakness ahead as it kicks in, an unpleasant reminder of the lost year we just left behind.
We have high hopes for 2021. Last year got off to a pretty good start before everything fell apart in March. Let’s hope this year does the opposite.
The Week Ahead …
The first full week of 2021 catches us up with quite a bit of economic data. The highlight is the December 2020 employment report to be released on Friday, facing downside risks as cases hit record highs in the month. The pace of hiring clearly slowed into the winter months with heightened COVID risks as people moved activities indoors as the cold set in and holiday spending appears to have lagged.
We’ll get insight into how firms viewed trends to close the year in the Institute for Supply Management reports, covering manufacturing sector insights on Tuesday, service sector on Thursday.
The Federal Reserve releases its minutes for their December meeting on Wednesday, describing in more detail their thought process behind expanding their quantitative easing guidance at that juncture. Fed members appear excited to get out their thoughts for the new year: Atlanta Fed President Raphael Bostic, Chicago Fed President Charles Evans, Cleveland Fed President Loretta Mester, New York Fed President John Williams, Philadelphia Fed President Patrick Harker and St. Louis Fed President James Bullard will all be giving speeches over the week.