2021 signals step toward economic recovery

The economy for 2021 is shaping up to be a better year than COVID-19–impacted 2020, according to Rob Kaplan, the president and CEO of the Federal Reserve Bank of Dallas, Texas.

Reviewing 2020 is painful yet necessary to help understand the pandemic’s grip on the economy. Kaplan spoke during a virtual town hall meeting on Jan. 11. Because of lockdowns associated with COVID a severe contraction in the second quarter caused gross domestic product to decline about 33%.

“It was a brief contraction,” Kaplan said, as the economy began to reopen in April the third quarter GDP on an annualized basis grew by about 32% to 33%.

The fourth quarter GDP was positive but in the full year the GDP contracted by 2.25% to 2.5%. The final months of 2020 were tied to surges in the coronavirus and that slowed growth and is continuing into early 2021. Kaplan represents the Eleventh Federal Reserve District on the Federal Open Market Committee in the formulation of the U.S. monetary policy.

“People have been resilient and adapted,” Kaplan said. “When you normally have (an economic) contraction household income and spending usually drop.”

Fiscal policy and technology did shift and household income stayed strong and consumers shifted their spending habits to a remote-based economy.

Kaplan said that was only a partial story. Industries dependent upon person-to-person contact, including restaurants, hospitality and travel had a difficult 2020.

2021 outlook

At the Dallas Fed, Kaplan said he believes this winter will continue to challenge the economy because of the resurgence of COVID as hospital capacities and intensive care units are at full capacity, and those who work in health care are feeling the brunt. However, the GDP in the first quarter should start to moderate and there is a potential for an annual growth of 5%.

“A lot of the growth will be weighted toward the latter part of the year,” Kaplan said. “That assumes we continue to vaccinate people and vaccine is more widely distributed as we go throughout the spring.”

A realistic goal of 2021 is not a return to economic normalcy but working toward a return to normalcy. The unemployment picture is skewed because it only measures those who have recently lost jobs. Many jobs were unfortunately lost in the early part of the pandemic and workers are still struggling to find full-time employment. Some also returned to workplaces with reduced hours.

Kaplan said if the GDP grows at 5% it has the possibility of taking the unemployment rate below 5%. He is also concerned though about how the pandemic disproportionately singled out workers. During the Great Recession, now over a decade ago, the pain stung all economic groups.

The coronavirus impact has shown workers with only a high school education or less were more likely to have lost a job and need public assistance, he said.

Those with a college degree were more likely to have kept their job and if they could transition to remote platforms, they may not have experienced any financial impact.

Also telling, Kaplan said, is that for people with a bachelor’s degree the unemployment rate was about 3.8%; it was 6.3% for those with some college training,7.8% for those with a high school diploma and 9.8% for those with less than a high school diploma.

“That is a big divergence,” Kaplan said. “Related to that, if you are woman with children it is far more likely in this downturn than in Great Recession that you left the work force.”

Even women with college degrees had to deal with more factors including if they had families and if they were integral in their children’s education.

The statistics from the Dallas Fed region indicate much work remains, including the need for more access to childcare and more skills training for workers. If that occurs, plus an increase in the need for workers to resume full-time careers, it will help the long-term economy to rebound.

Other thoughts

• The Fed has been buying $80 billion of treasuries and $40 billion of mortgage-backed securities every month, he said, and that will likely remain in place until economy signifies it is ready for a change in policy.

He did not see a scenario of negative interest rates in the U.S. “I’m not convinced they help growth and in addition it negatively impacts savers and affects financial intermediaries.”

• He believes Texas’ potential recovery will be similar to the rest of the country. Like other regions of the country the pandemic has taken hold in pockets of the state and that will delay rebounds in those areas.

The story of Texas of the many years is the diversity of the economy and migration of people to the state. The migration into his state has actually increased since the pandemic.

“The prospects are very bright in Texas,” he said, although it presents a worry for regions that lost those companies.

• The oil and gas industry hit a headwind before the pandemic struck, he said. In the first half of 2020 the energy economy had a supply and demand shock. Russia, Saudi Arabia and OPEC could not reach a production agreement and Saudi Arabia dramatically increased oil output at a time when usage began to contract.

In the U.S., drilling declined and producing wells were shut down, Kaplan said.

In 2020, the U.S. started the year producing 12.8 million barrels a day and ended the year at 10.8 million barrels a day.

“We don’t think it will be early 2022 before global supply and demand will be in balance,” he said.

The industry is also capital starved. Even with a recent increase in prices of crude oil (West Texas crude was hovering in the lower $50s per barrel in mid-January) there is a commitment by companies to pay shareholders.

“Production growth will stay flat and would not surprise me to see prices (stay) firm,” he said.

Companies recognize they will need to be more and more disciplined on spending. He remains bullish long term on the global usage of fossil fuels but companies also understand there will be other alternative energy sources that will continue to grow and expand.

• Texas in many ways is at the center of discussions when trade policies are discussed and under President Donald Trump it was a bumpy ride at the beginning of his administration. However, the new United States-Mexico-Canada agreement will improve relations with Mexico and Canada and in particular with Mexico because of how the two countries are dependent on each other.

“We are glad the USMCA is done,” Kaplan said, noting the USMCA creates a North America trade bloc that will help it compete against other global regions.

Trade with China is a different story. “I would expect continued tensions,” he said.

Tensions surround the definition of a level playing field, protecting intellectual property rights and other headwinds that will not go away.

His advice was to pursue areas where the two countries can agree and U.S. has to stand its ground on other hot-button issues.

“The challenge will be a dual track,” Kaplan said.

• Pandemic has reinforced the need for continued need for education and training particularly for minorities and gender. Education reform should include early childhood literacy, pre-kindergarten programs, daycare programs with an emphasis on literacy skills.

• The new administration won’t effect monetary policy decisions as it looks to improve the economy with a fiscal stimulus, whether infrastructure or other spending priorities.

“In near term while we are in the teeth of the pandemic we need to do everything we can do to fuel a rebound and recovery,” he said.

Once the economy shows it has weathered the pandemic, which could happen later this year, Kaplan said, there maybe a shift in Fed fiscal policies. He is also concerned about the level of the federal debt and how it could constrain future growth.

The forum was moderated by Alfreda Norman, senior vice president, who oversees the Dallas Fed’s communications and public outreach programs.

Dave Bergmeier can be reached at 620-227-1822 or [email protected].