A year ago, the world changed when the COVID-19 virus spread across the world and countries implemented harsh economic shutdowns. At the one-year mark, we will discuss where the US economy stands today and our views on where we think the economy may go through the end of 2021.
In this blog, you’ll learn:
- The state of COVID-19 one year after the economic shutdown
- Falling unemployment, increased savings, and record money market levels point to a positive future
- US existing home sales remain strong
- US GDP continues to rebound
- Federal Reserve remains highly supportive of the economy
- Key features of the American Rescue Plan Act of 2021
- Economic outlook for the remainder of 2021
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The One Year Anniversary of COVID-19
We remember this vividly. It was Thursday, March 12, 2020 and Financial Journey Partner Advisors' Elaine and Scott were planning to get on a flight the next day to fly to Miami to start a cruise on Saturday, March 14. Isn’t Friday the 13th supposed to be bad luck?
On Wednesday, March 11, Princess Cruise lines had cancelled all cruises worldwide. We were concerned we would fly to Miami only to get off the plane and have our cruise cancelled. So, on Thursday we cancelled our flights, hotel, and cruise.
The next day our worries were confirmed as Royal Caribbean cancelled our cruise and all cruises worldwide. All the other cruise lines followed suit and cancelled all of their cruises around the world. We never imagined that a year later, cruises would still be cancelled, with no clear end in sight.
In mid-March 2020, states began implementing severe economic shutdowns to slow the spread of the virus. In Silicon Valley, in Northern California, we got a text mid-day on Monday, March 16, 2020, announcing that the county would go into a strict lockdown the following day.
At Financial Journey Partners, we were ready. We spent the rest of Monday implementing our work-from-home plan and by the end of the day, we had everything in place. Elaine and Scott decided to have one last dinner at a restaurant before they all closed, and they went to The Cheesecake Factory for dinner. It was empty.
The next morning, we all woke up to a new world and began working from home. We had no idea that a year later our county would still be mandating that people work from home whenever possible, let alone that so many lives would be lost, businesses shuttered, in-person schools closed indefinitely and everyone’s personal way of life impacted by COVID-19.
The good news is that a lot of positive things have happened in the past year. Tests for COVID-19 are now widely available for people who think they may have the virus, or who may need a test to be able to travel. Therapeutic treatments have improved significantly to reduce the deaths of people that become seriously ill from the virus and are hospitalized. Three vaccines have proven to be very effective against the virus and there are currently massive efforts to get people across the country vaccinated as quickly as possible.
Now that it is one year later, we wanted to share our views on the state of the economy. We will also talk about where we think things will go through the end of this year.
COVID-19 Status Update
One year later, the good news is that with the help of the availability of testing and the rollout of the vaccines, the COVID-19 cases in the U.S. are falling rapidly.
President Biden has said that he expects all adults in the US to be able to get the vaccine by the end of May. As the number of people in the US who test positive for COVID-19 falls, and with the distribution of vaccines from three manufacturers, some experts are beginning to think that the US could reach herd immunity by late summer or fall.
We are optimistic that if we see a continuing reduction in cases in the US through the rest of the year, this will enable the economy to continue to reopen and move closer to pre-pandemic levels.
US Economy Continues to Improve
With the number of COVID-19 cases falling, we see many factors that are positive in the economy.
Unemployment and Job Growth
The US Bureau of Labor Statistics reported the February 2021 nonfarm payroll employment rose by 379,000 in February with the unemployment rate at 6.2%1.
Source: U.S. Bureau of Labor Statistics (BLS) February Nonfarm Payroll Unemployment
While the U.S. Bureau of Labor Statistics reports the unemployment rate at 6.2%, Federal Reserve and Treasury officials say it is closer to 10%2.
We expect that unemployment will continue to fall through the rest of this year as the number of virus cases also falls and businesses continue to reopen.
US Disposable Income vs Consumer Spending
Over the past year, we observed a sharp drop in spending and a sharp increase in saving. Stimulus checks added to the income last year for many Americans. We think that as the economy reopens, Americans will start spending some of their additional savings and it will add more fuel to strengthen the economy.
Source: BlackRock Investment Institute, Bureau of Economic Analysis, US Treasury Department
Record Money Market Fund Levels
In addition to excess savings from the past year, there are record assets in Money Market funds sitting on the sidelines that could provide fuel to move the economy and stock market higher in the next year.
Source: BlackRock, Morningstar as of 1/31/2021
Travel Industry Readiness
Hotel occupancy rates remain low, but they are improving.
Source: STR, CoStar.com, Doubleline
Air travel in the U.S. is still significantly below pre-pandemic levels, but airlines are expecting travel to increase by summer as more people are vaccinated. The airlines were set for another round of layoffs, but they cancelled the layoffs after receiving aid in the newest stimulus bill.
Source: TSA, U.S. Global Investors, Advisor Perspectives3
As the virus cases drop and the economy reopens, hard hit areas of the economy that will likely improve are in the BEACH categories (Bookings, Entertainment, Airlines, Cruise lines and Hotels).
Since the start of 2021, we’ve seen gasoline prices rising, about an extra $1/gallon in Northern California. Demand for gasoline is expected to increase as people are most likely to take more driving vacations this summer.
Existing Home Sales
A bright spot in the economy the past year has been existing home sales. The Federal Reserve driving down interest rates resulted in mortgage rates nearing an all-time low which has made it more affordable for home buyers. There have also been people leaving large cities to buy homes in less-densely populated areas.
Source: National Association of Realtors, CNBC4
US GDP Growing
After a sharp drop in Q2 2020, the GDP has been steadily rebounding, reaching quarter-over-quarter growth of 4.1% in Q4 2020.
Source: US Commerce Department
US GDP is still significantly below the growth line before the pandemic, but it is recovering.
Source: Federal Reserve Bank of St. Louis (FRED)
Most analysts we follow have been increasing their estimate for GDP growth for 2021, with the assumption that the vaccine will continue to rollout smoothly.
Federal Reserve Balancing Act
The US Federal Reserve continues their position to be very supportive of businesses and the economy. The Federal Reserve balance sheet has grown from $4.2 trillion in March 2020 to $7.6 trillion today. They have added over $3 trillion to their balance sheet with the purchase of Treasury Bonds from the US government and corporate bonds.
These actions have enabled the US government to continue the trillions of dollars of deficit spending. The Fed has also provided the corporate bond market with the liquidity to reduce business bankruptcies and ensure that US businesses have access to capital when needed.
We do not anticipate any significant changes in the policies of the US Federal Reserve through 2022.
American Rescue Plan Act of 2021
Last week, Congress and President Biden passed the American Rescue Plan (ARP), at a cost of $1.9 trillion. To understand the order of magnitude of this spending, on an inflation-adjusted basis, consider that:
- America spent the modern-day equivalent of $4.8 trillion fighting World War II
- Including ARP, America will spend $5.5 trillion to battle the pandemic and rescue the economy5
- The American Rescue Plan Act is the equivalent of 27% of the US GDP
The ARP goes far beyond direct relief to Americans for the pandemic, as it includes changes to a wide range of government programs and regulations. History may look back at this bill and see it being as transformational as legislation during the terms of Lyndon B. Johnson or Franklin D. Roosevelt. Let’s start by reviewing some of the major provisions of the bill.
ARP includes direct payments to Americans. Treasury Secretary, Janet Yellen, announced that the US Treasury Department began immediately sending out stimulus checks last week to qualifying Americans.
Source: Tax Foundation6
The ARP extends the three federal employment insurance expansions, first created by the CARES Act, through September 6, 2021. It increases the total number of weeks of benefits available to individuals who cannot return to work from 50-79 weeks. The law maintains the federal supplement at its current level of $300 a week beginning after March 14 and before September 6, 2021.
Child Tax Credit
The ARP expands the Child Tax Credit by providing direct government payments to families under $150,000 who have children. Some are calling this “Social Security for children” as parents with children under 6, will receive payments of $300 monthly, starting around July. Parents with kids ages 7-17 will receive $250/month. These payments are paid per child.
According to CNBC, funding in 124 corporate pension plans (nearly 10% of the total) are in critical and declining shape and are projected to have insufficient funds to pay full retirement benefits within the next 20 years. The Pension Benefit Guaranty Corporation program that serves as a financial backstop is also nearly insolvent.
The ARP will provide $86 billion in grants to failing multi-employer pension plans over the next three decades, to help pay benefits to union workers7. This includes union workers in industries such as construction, manufacturing, mining, retail transportation and entertainment.
Major Provisions Included in the American Rescue Plan:8
- $20 billion for COVID-19 vaccine manufacturing and distribution, along with roughly $50 billion for testing and contact tracing
- $25 billion in rental and utility assistance and about $10 billion for mortgage aid
- $350 billion in relief to state, local and tribal governments
- $120 billion to K-12 schools
- 30 billion in aid to restaurants
- $15 billion for airlines and airline contractors
- $8 billion for airports and concessionaires
- Increases the Supplemental Nutrition Assistance Program (SNAP) benefit by 15% through September
- Expands subsidies and other provisions to help Americans afford health insurance
- Expands an employee retention tax credit designed to allow companies to keep workers on payroll
President Biden and Treasury Secretary, Janet Yellen, said the plan for this bill was “to go big” with stimulus. Some analysts are concerned that the stimulus bill could be too big and overheat the economy. We will follow the impact of this major bill very closely.
Our Economic Outlook for the Remainder of 2021
The vaccines continue to rollout in the US with increasing numbers each week. If, as President Biden predicts, vaccines are available for all adults in the US by the end of May, we expect to see the cases of COVID-19 continue to drop throughout the year as our baseline.
With these falling virus cases, the massive stimulus from the American Rescue Act, increases to personal saving accounts and with record money market levels, we expect all of this to propel the US economy and strengthen it through most of the year.
We hope to see travel increase, live entertainment to resume, the restart of cruising and professional sports with fans in the stands, as well as indoor and outdoor dining before year end.
It has been a challenging year, but we see light at the end of the tunnel. We are optimistic for the rest of 2021 and believe the economy will continue to improve.
In our next blog, we will discuss all the economic factors that could impact the stock market for the remainder of 2021.
Financial Journey Partners is Here to Help You
Our Financial Journey Partners office is based in San Jose, California. We have clients that live in many states across the country. If you have questions about your investments or financial situation, call us to schedule time to talk about your specific situation.
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1 US Department of Labor, BLS – The Employment Situation – February 2021
2 New York Times – Coronavirus Cases in the USA Daily Change
3 Advisor Perspectives – This Summer Could Be the Start of a New Roaring Twenties
5 TradeSmith Daily – March 12, 2021