The arrival of December often signals a time to take a hard look at the closing year’s activity, consider key events and issues, and offer thoughts on the prospects for the year ahead. But this year writing this sentence is a lot easier than following through. Indeed, the year now ending, beset as it was and is by the devastating coronavirus that turned the tables on the economy and an extremely contentious presidential election, almost defies being summarized in a somewhat straightforward way.
2020 was a roller-coaster year, and the ride has not ended. The year began at a time of relative strength. Although due to trade wars, low growth in productivity and the labor force, GDP growth was weakening as the year was closing. Even so, the national 3.5 percent unemployment rate for December 2019 defined a post-1953 low point. We entered 2020 from a position of strength. But then as the coronavirus invasion expanded worldwide, shutdowns came, life was disrupted, and millions were taken ill in the United States, and hundreds of thousands died. Global GDP growth collapsed. Along the way, first quarter GDP, which was just beginning to show coronavirus effects, came in with a negative annual growth rate of 5 percent. Setting a new loss record, second quarter growth fell at an annual rate of 31.4 percent. Then, hang on to your hat, the roller coaster economy zoomed the other way.
The first estimate for 2020’s third quarter, which arrived on October 29, showed GDP growth accelerating at an annual rate of 33.1 percent. According to the BEA, consumer spending—boosted by the vast number of dollar transfers provided by federal programs—was the growth driver. Now, the coronavirus is again surging, and states and municipalities are taking steps to shut down parts of their economies. At the same time, news about the availability of effective vaccines offers strong prospects for a better coronavirus situation as 2021 unrolls.
A quick look at key economic data tells us that consumer spending—retail sales—is driving economic growth. Construction activity is the second key driver, and manufacturing is third. Residential, industrial and large public construction projects should continue to move to a stronger level. Meanwhile interest rates will remain relatively low and prices of construction inputs, other than wood products, should be tame. GDP growth in 2021 should look a lot better than what we will see when 2020’s books are closed. This year will likely show negative 5 percent GDP growth. 2021 should show something close to positive 4 percent. With political uncertainty falling, we should see an accelerated infrastructure program developing in the coming year. On the darker side of the picture, we should not expect to see meaningful 2021 recovery for travel, tourism, and crowd-generating activities.
When considering the 50 states and their prospects, the Carolinas, Georgia and Florida look strong. Indeed, the southeast is the strongest region east of the Mississippi. While thinking about the prospects for 2021, we should not forget that we will still be riding a roller-coaster economy driven significantly by the coronavirus and reactions to it. Even so, the view ahead looks a lot better than what we see in the rearview mirror.
Bruce Yandle is Dean Emeritus, College of Business & Behavioral Science, Clemson University. His quarterly Economic Situation Report is posted on George Mason University’s web site, https://www.mercatus.org/scholars/bruce-yandle.