The US Economic Outlook

The U.S. Economic Outlook Kevin L. Kliesen Business Economist and Research Officer Federal Reserve Bank of St. Louis

GIC Executive Briefing: 2021 Macroeconomic Outlook (webinar) January 14, 2021 1

Disclaimer The views I will express today are my own and do not necessarily reflect the positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System.

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The Big Picture • Two major global shocks over the past dozen years.

• The shift from pandemic dynamics to vaccine dynamics is underway. The speed of the shift seems slow.

• A new Administration with different economic policies.

• Most economists expect much stronger economic

conditions in 2021-22; some see much higher inflation.

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What’s Going on Now? • As we enter 2021, the outlook is brightening. Still, . . .

• Rising COVID case counts, hospitalizations, and fatalities have spawned renewed restrictions.

• The December employment report was jarring. A huge decline in leisure & hospitality jobs.

• Mixed signals on the consumption front. November was weak; December looked better but waiting on the data.

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What’s Going on Now? • Other parts of the economy look pretty good—in particular, manufacturing and housing.

• Additional fiscal support is likely; the Fed is probably on the sidelines for the foreseeable future.

• Euphoria: Vaccines and exuberant financial markets.

• So, there is a tug of war: Forces leading to more weakness vs. forces leading to more strength.

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Uncertainty: It’s High!

NOTE: An index value of 100 is defined to be “average.”

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The 2021 Narrative in a Nutshell • A unique recession, so a unique recovery is likely.

• Vaccine dynamics likely to spur rapid growth in output and employment over the last 6-9 months of 2021.

• Rapid growth, larger budget deficits, and the Fed’s new policy framework could spur higher inflation and raise inflation expectations. But remember Milton Friedman.

• These factors will likely raise market interest rates.

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Money to Burn Household Time and Savings Deposits Billions of dollars 12,000

If savings returns to its previous trend, then dissaving would equal about $875 billion— enough to boost consumer spending by about 6%.

11,000

10,000

9,000

8,000

2012:Q1 to 2019:Q4 Trend

7,000

6,000

2012

2013

2014

2015

2016

2017

The boost to GDP would be 3% to 4%.

2018

2019

2020

SOURCE: Haver Analytics and Board of Governors (Flow of Funds) NOTE: Value for 2020:Q4 is projected.

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FOMC: 2021-22 Looks Promising December 2020 FOMC Economic Projections Percent

10.0 8.0

6.7

6.0

5.0

4.2

4.0

3.2

2.0

2020

2021

2022

Longer run

4.2 4.1

1.8

1.2

1.8 1.9 2.0

0.0 -2.0 -4.0

-2.4 Real GDP

Unemployment Rate

PCEPI Inflation

NOTE: FOMC Projections are the median estimates of FOMC participants. The unemployment rate is the average of the fourth-quarter for the year indicated.

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The Vaccination Pace: Kind of Slow COVID-19 Vaccinations in the United States: Doses Administered per 100 People 21

At this pace, 50% of the populace will be vaccinated in early Sept.

18 15 12

Actual

Dec 19 - Jan 5

Jan. 5 - Present

9 6 3 0 12/15/2020

1/5/2021

1/26/2021

2/16/2021

3/9/2021

3/30/2021

NOTE: Total number of vaccination doses administered per 100 people in the total population. This is counted as a single dose, and may not equal the total number of people vaccinated, depending on the specific dose regime (e.g. people receive multiple doses).

SOURCE: University of Oxford/Haver Analytics and author's projections

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Inflation Expectations Are Rising WTI Spot Prices, 5-Year Breakeven Inflation Expectations and Inflation Swaps 2.5

$80

FOMC, 12/16/2020 2.0

$60

Infl. Swaps 5Y (Left) 1.5

Infl. Expectations 5Y (Left)

$40

Spot WTI (Right)

1.0

$20

0.5

0.0 Jan-19

Apr-19

Jul-19

Oct-19

NOTE: Spot WTI closed at -$36.98 on April 20, 2020.

Jan-20

Apr-20

Jul-20

Oct-20

Jan-21

$0

Source: Federal Reserve Board, Bloomberg, Haver

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QUESTIONS?

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