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January Monthly Dashboard: The economic soft patch will be over soon

January 29, 2021
  • Illustration of a economic scorecard
  • Illustration of an economic scorecard

Monthly Review (Page 3)

The slowdown for the economic recovery extended into early 2021 as consumers and businesses struggled with record COVID cases and increased government restrictions. Service sector employment saw a renewed hit with significant job losses in the leisure and hospitality sector for December and rising weekly jobless claims. Small businesses owners, many of whom are in services, became much less optimistic about the outlook. Consumer activity also cooled with retail sales declining for each month of the fourth quarter, although an additional round of direct stimulus payments and expanded unemployment insurance should lift spending in the next few months. On the upside, the manufacturing sector showed its strongest growth in two years. Despite the weaker near-term conditions, equity markets continue to look ahead to a positive post-pandemic environment for corporate profits, extending gains from December into January to climb to new highs. Long-term interest rates jumped in January on expectations for faster growth, higher inflation, and larger government budget deficits.

Outlook (Page 4)

While recent economic readings have turned weaker, growth expectations for later this year and next continue to accelerate. Eventual widespread vaccine distribution drives the strong outlook as relaxed government restrictions and pent-up demand for in-person activities should lead to a surge in consumer and businesses activity — starting as soon as the second quarter. New infections are already turning downward. The December COVID relief bill will provide a bridge through the current soft patch to the post-vaccine environment and, when combined with likely further fiscal stimulus in coming months, should provide an additional boost to economic growth. We expect real GDP in 2021 to expand at the strongest pace since 1984 — leading to faster job gains, lower unemployment rates, and higher inflation than in our previous forecast. We now expect that long-term interest rates will rise sooner and by more in response to faster growth, higher inflation, and larger federal budget deficits — although remaining lower for longer. Despite the rise in rates that we project, interest rate sensitive sectors (housing, autos, etc.) are projected to climb further this year with positive fundamentals for consumer demand.

Go deeper with the full January dashboard linked below.