Economic Commentary: Economy Remains Uncertain Amid Pandemic

Oct 13, 2020 Share This 

 

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When it comes to financial markets, all eyes are on the latest happenings tied to the COVID-19 pandemic. Whether it’s weekly jobless claims, corporate earnings reports, global trade, fiscal policies or the potential for a vaccine, markets respond in stride.

Following unprecedented losses and the worst three-month decline on record in the second quarter, the U.S. economy rebounded at an estimated 25% growth rate in the third quarter, the fastest quarterly growth rate on record.

Sound promising? Unfortunately, a close examination of the data toward the end of May and the first two weeks of June reveals an enlarged growth rate and, in reality, the economy experienced sluggish growth from the middle of June until the end of September.

So, what might the economic outlook be in the coming months? In this edition of Economic Commentary, Robert F. DeLucia, CFA and Consulting Economist for MEMBERS Capital Advisors, Inc., provides insights into today’s economic landscape and an outlook for the coming year and beyond. Here are some highlights:

  • Following steep declines in May and June, initial unemployment claims plateaued since the week of August 7 at a level slightly below the one million mark. The rise in employment in recent months has come mainly from increased hiring of temporary furloughed workers. Meanwhile, permanent employment continues to decline and layoffs remain elevated as extreme caution regarding the direction of the economy and business revenues prevails.
  • If a second COVID-19 wave emerges in the fall and winter, businesses and households will once again pull back from commercial endeavors, causing the domestic economy to weaken further.
  • The future path of the COVID-19 pandemic remains the greatest wild card in the economic outlook. The economy will likely remain vulnerable until there is a decisive scientific solution to the pandemic, implying potentially sluggish GDP growth for the next three quarters. Mass distribution of a vaccine could be the catalyst for a sharp acceleration in economic growth, most likely by the middle of next year. 
  • In the short term, the Federal Reserve will likely provide whatever policy support necessary for the economy to avoid another economic downturn, holding its main policy rate at zero for an extended period.  
  • Inflation could move significantly higher in the years beyond 2022. A combination of steadily rising inflation and sluggish growth could lead to stagflation, similar to the disastrous experience of the 1970s.
  • There is unanimity among economists that the economy needs another relief package to sustain growth, but Congress has been unable to reach an agreement.
  • Real GDP could potentially expand at a 4% to 5% annual rate during the eight quarters beginning in mid-2021, assuming a vaccine is made available, as pent-up demand is unleashed, and the service economy is restored to normal.
  • A big surprise has been the sharp rebound in global trade in recent months, a much faster pace of recovery than during the 2008 recession. China is leading the way, with merchandise exports nearly 10% higher than one year ago.
  • The major risk to the long-term outlook is a sustained rise in the cost of living emanating from policy measures recently announced by the Federal Reserve to achieve a higher rate of inflation over a full business cycle.   

CLICK TO READ THE FULL COMMENTARY WITH ROBERT DELUCIA >

All opinions and commentaries expressed are those of the writer, Robert F. DeLucia, and do not necessarily reflect the opinions of CUNA Mutual Group, CBSI, or its management.

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Topics: Economic Commentary