- COVID-19 conditions will remain a dominant economic influence to start the year.
- Economic activity could surge mid-year if virus conditions diminish and consumers release pent-up demand.
- Recent vaccine news has been encouraging, but uncertainty remains high.
Virus conditions remain dominant over the near term, at least
The U.S. economy entered the fourth quarter of 2020 with strong momentum. Despite surging COVID-19 infection rates during the period, economic activity appears to have remained generally positive, in our view.
The U.S. Department of Commerce will release on Jan. 28 its first estimate of fourth quarter 2020 gross domestic product (GDP), the most comprehensive measure of overall economic activity. Currently, we forecast U.S. real GDP to have expanded at a strong annualized pace of 5.5% in the fourth quarter, leaving the full-year contraction for 2020 at 3.5%.
Since its pandemic lows in April 2020, the economy has recovered at a better-than-expected pace, in our view. The continued surge in COVID-19 infection rates and hospitalizations, however, could temporarily stall or reverse some of these gains over the near term, but we believe growing vaccine availability could re-invigorate economic activity as we head into summer.
A light at the end of the tunnel?
In the months ahead, the economy could see a modest surge if virus conditions ease and consumers feel comfortable enough to take vacations, dine in restaurants, attend concerts or go to movie theaters.
Consumers appear to have the financial resources for added discretionary spending. Over the first 11 months of 2020, consumers saved 16.4% of their disposable income, according to the Commerce Department. This is the highest level for any year since the rate was introduced in 1959.
Uncertainty remains high, but we’re optimistic
We forecast U.S. real GDP to expand by a healthy 3.8% in 2021 and for the unemployment rate to end the year at 5.2% (versus 6.7% in November 2020). Uncertainty, however, remains high and is very dependent on unpredictable virus conditions.
Inflation is also likely to accelerate in the first half of 2021. Currently, we forecast the Consumer Price Index to peak at 3.4% in May, primarily because price levels at the time will be compared against the depressed prices of the pandemic-induced economic shutdown in the spring of 2020.
Higher inflation rates could be viewed with concern in financial markets, but we believe Federal Reserve officials are likely to view the elevated rates as transitory, as we believe they will be. Inflation measures should start to ease in the second half of 2021 as comparisons normalize, and we project the CPI to end 2021 at 2.5%, before easing further in 2022.
Vaccines offer promise but no guarantees
Financial markets appear to have a very favorable outlook factored in, which could result in another bout of volatility if virus conditions do not improve as anticipated. Speak with your Ameriprise financial advisor to make sure your portfolio is well-diversified so that you can weather lingering uncertainty yet potentially benefit from a possible recovery.
Sources: Factset, Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.