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Near-term weakness, but a much stronger 2021

December 15, 2020

bar chart depicting Yearly Changes in Seated Diners in the U.S. May - December 2020

Source: OpenTable


The juxtaposition between the growing near-term downside risks and the building longer-term upside was on full display yesterday, as New York City prepped for a full shutdown just as the first COVID vaccines were administered in the U.S. Renewed restrictions have already been imposed to varying degrees in more than three dozen states in recent weeks, with predictable impacts on the economy. Restaurant activity, most notably, has been back on the slide since early November after steadily recovering over the prior six months. Travel has also been affected, as fewer passengers went through TSA checkpoints than in any period since late July/early August last week. Some of this is seasonal, of course, but note that the year-over-year trend has also started to recede of late. These data points hint strongly that the spike in jobless claims in early December, as outsized as it was, was driven at least as much by the fundamentals as by any statistical or seasonal quirk. And with the momentum in the labor market beginning to wane, it is a good bet that the expansion at large will continue to downshift through the end of the year. While the fourth quarter will likely still show a solid gain in real GDP, it is ending with a whimper.

But this is also a most unusual soft patch in that it has a clear-cut terminus in the not-too-distant future. The roll-out of vaccinations should soon put a dent in the new case rate, boosting confidence and eventually leading state and local governments to roll back restrictions. In fact, one popular model utilized by the CDC suggests that the pace of new infections will begin to slow almost immediately as vaccines are distributed and that herd immunity will be reached by next summer. And it is important to stress here that much of the economy will still be far from normal when society finally returns to some semblance of pre-COVID life. The savings rate will be elevated, the household debt burden will be low, and pent-up demand, especially for services, will be sky-high (note that real spending on services is still down by 6.8 percent from its February peak; at its low point at the end of the Great Recession in 2009, it was off by just 0.9 percent). In addition, monetary policy will still be overwhelmingly accommodative, as inflation is highly unlikely to take off in the interim. The scope is very much in place for a boom in the last two or three quarters of 2021 after a short-lived but deep soft patch that already looks to be underway.


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