THE MACRO OUTLOOK FOR 2021: WHERE ARE WE NOW, AND HOW DID WE GET HERE? James A. Kahn Chair, Economics Department Yeshiva University January 14, 2021 GIC Executive Briefing
1
The Economy Pre-COVID • Through
2019, a record 126-month expansion • Fed had been gradually tightening • contracted • reduced • raised
• A brief
bank reserves
the Fed Funds rate target
storm in September 2019
• liquidity • yield
its balance sheet
problems in repo market after Fed
curve inversion, which often signals trouble ahead
2
Passing Storm in 2019 Yield curve inversion
Source: Federal Reserve Bank of St Louis
3
The Economy Pre-COVID • Through
2019, a record 126-month expansion • Fed had been gradually tightening • contracted • reduced • raised
• A brief
its balance sheet
bank reserves
the Fed Funds rate target
storm in September 2019
• liquidity
problems in repo market after Fed • yield curve inversion, which often signals trouble ahead • Fed
reversed course 4
Fed Reverses Course in Fall 2019
QE3 QE2
QE1
Begins to expand balance sheet after nearly two years of very gradually shrinking it 5
Fed Reverses Course in Fall 2019
Reduces Fed Funds rate target after four years of increases 6
Economic Picture is Rosy Heading into 2020 • Brief
storm passed, solid growth continued into February • Job
growth averaging over 200,000 per month • 2019 GDP growth of 2.3% • Unemployment rate fell over 2019 from 4.0 to 3.5%
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Rosy Economic Picture Heading into 2020 Yield curve reverts
Source: Federal Reserve Bank of St Louis
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Rosy Economic Picture Heading into 2020
Credit risk spreads remain narrow
Source: Federal Reserve Bank of St Louis
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Rosy Economic Picture Heading into 2020 • Storm
passed, solid growth continued into February • Job
growth averaging over 200,000 per month • 2019 GDP growth of 2.3% • Unemployment rate fell over 2019 from 4.0 to 3.5% • Then…
10
Pandemic Impact on Employment and Output Output and Hours (2020Q1 = 100) 105
100
Output
95
Hours Trend
90
85
Labor hours
Output
•
•
fell almost 15% in first half of 2020
fell 12.3% in first half
11
Pandemic Impact on Employment and Output Output and Hours (2020Q1 = 100) 105
100
Output
95
Hours Trend
90
85
Labor hours
Output
• •
• •
fell almost 15% in first half of 2020 with recovery in Q3, cumulative decline was 4%
fell 12.3% in first half down 7.4% through Q3 12
Pandemic Impact on Employment and Output Output and Hours (2020Q1 = 100) 105
100
95
Output Hours
90
Trend
85
• Productivity (output/hour) increased, but not how we want it to! • Output has only recovered about 60% of where it was trending pre-COVID 13
Strong Fiscal and Monetary Response • Fiscal
Stimulus
• Direct
payments to individuals • Loans to businesses • Direct aid to specific industries (health, airlines) • Monetary Stimulus • Massive expansion of Fed Balance sheet through asset purchases • Unprecedented intervention in bond markets • Near zero interest rates (again)
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Fed Asset Purchases Expand Balance Sheet
• Comparable proportionally to 2008, but much larger in absolute terms: A $3 trillion expansion • Effectively a $3 trillion lending program
15
Immediate Cut in Fed Funds Target
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Larger Expansion of the Money Supply vs 2008
This time the Fed and legislated lending programs have encouraged banks to lend out money 17
What was the intent of these policies? • Not
primarily to increase GDP in 2020
• Economic
activity was held down by fiat • But impact was very uneven • “V-shaped” recovery mainly result of reopening, not monetary/fiscal policies • Policies
only make sense as means of keeping individuals and businesses from “failing” • fundamentally
solvent businesses going bankrupt through no fault of their own • individual bankruptcies, foreclosures
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What was the intent of these policies? • Like
eminent domain: Condemn a property for a public purpose, compensate owner • Idea is to help speed the recovery once activity is allowed to start up again businesses can just “turn on the lights” • Individuals will still have their homes, credit scores • Pre-existing
• Nonetheless,
many failures have occurred, programs are uneven and haphazard • Recovery may be slow • Inflation is more of a risk now than after 2008 19
Pandemic Impact on Employment and Output Output and Hours (2020Q1 = 100) 105
100
95
Output Hours
90
Trend
85
20
Pandemic Impact on Employment and Output Output and Hours (2020Q1 = 100) 105
100
95
Output Hours
90
Trend
85
Recovery likely slowed in Q4 and will continue to slow in Q1: • “Low hanging fruit” has already been taken • Winter resurgence of virus and lockdowns • Room for sustained recovery with Q2/Q3 reopening • Market optimism: Stock market high, yield curve upwardsloping
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The End