Economic Outlook - January 2021
- The U.S. economy expanded again in November, according to a survey of leading indicators, but growth fell to the slowest pace in five months amid a record surge in coronavirus cases. The leading index was pushed higher by a fall in jobless claims, higher manufacturing orders and rising stock prices. Yet jobless claims have surged again in December and other key segments of the economy have softened, which could lead to a decline in the leading index in December for the first time since May. Many cities and states have re-imposed business restrictions and people are going out less to avoid catching the virus, especially now with the vaccine rollout just ahead. The current estimates for GDP growth in 2021 are a bit above trend at 3.6%. We are likely to see this rebound in the spring as more are immunized, but the next few months could be challenging.
- Construction spending rose 0.9% last month, a bit above forecasts, as builders raced to erect new homes. A surge in demand is coming from buyers taking advantage of ultra-low interest rates and a push to leave cities for suburbs. The increase was the fifth in six months since the economy reopened in May. Spending on new homes has shot up 16.2% in the past year, a surprising development that points to rapidly shifting attitudes toward home ownership during a pandemic. One thing that could slow the market: rising prices. The cost of buying a home climbed to the highest level in six years. A measure by Case-Shiller that covers the entire country, showed a large 8.4% increase in home prices over the past year, the fastest clip since 2014.
- The Chicago PMI edged up to 59.5 from 58.2, marking the first increase in three months bucking a trend in other parts of the country where growth has slowed in the face of a record coronavirus outbreak. Readings above 50 indicate an expanding economy. Measures of employment and production both improved, but the growth in new orders slipped a bit. Looking ahead, 45% of the business executives surveyed expect sales to grow less than 5% in
2021. In addition, 43% see growth ranging from 5% to 10%. Most companies said they are unsure if they will adjust their spending plans next year because of the rollout of the coronavirus vaccines. That indicates they are taking a wait-and-see attitude.
- The Federal Reserve must aim monetary policy to deliver inflation around a 2.5% annual rate if the central bank is serious about having inflation average 2%, says Chicago Fed President Charles Evans. He argued that Fed officials should not settle for just getting inflation slightly above 2%. Under the Fed’s new policy framework, the central bank is seeking to achieve inflation that averages 2% over time and has recognized that the appropriate policy will likely aim to achieve inflation “moderately above” 2% for some time. It likely will take years to get average inflation up to 2%, which means monetary policy will be accommodative for a long time, Evans said.
- Move over, black swans. Green swans are moving in. For years, financial regulators have feared black swans — the metaphor used to describe unpredictable, disruptive events that blow up financial markets. Now researchers have pointed out that unpredictable climate-change events also pose important risks to financial stability, and the Federal Reserve is
Sources: Bloomberg LLC, FactSet, U.S. Department of Labor, Dow Jones
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