Economists Predict Sharp Slowdown Before Outlook Brightens Considerably

January 14, 2021 Updated: January 14, 2021

WASHINGTON—Economists are forecasting a strong recovery this year but warn of a sharp drop in economic activity in the first quarter before it builds momentum following the winter.

The U.S. economy will grow at 3.9 percent over the four quarters of 2021, according to the latest estimates by the American Bankers Association’s Economic Advisory Committee. That would mark the fastest growth in nearly two decades, the committee, comprised of 20 chief economists from leading financial institutions, stated in a press release on Jan. 14.

The economy, however, “remains in the grip of the pandemic” with a new round of business lockdowns starting to weigh on the recovery.

“The painful toll from COVID-19 continues to add up,” according to Beata Caranci, chief economist at TD Bank Group and chair of the Economic Advisory Committee.

“In addition to rising hospitalizations and deaths, the pandemic is weighing on the U.S. economy as social distancing and business shutdowns in many states have slowed commerce considerably,” she said in the statement.

In the first quarter, the chief economists predict that the U.S. economy will grow at a 1.9 percent annual rate, a sharp slowdown from their expectation of 4.7 percent growth in the fourth quarter last year and a 33.4 percent annualized growth recorded in the third quarter.

After an initial slowdown, economic growth will accelerate into the second quarter and beyond. The group expects the gross domestic product (GDP) to expand by 4.1 percent at an annualized rate in the second quarter of 2021 and 5.0 percent in the third quarter.

“Committee members agree that the outlook will brighten considerably as mass vaccinations across the nation bring many consumers out of isolation and back to stores, restaurants, movie theaters, and travel,” the press release says.

While all committee members expect strong recovery this year, there is a divergence of views on the timing and speed of rebound. The fast spread of new coronavirus variants, delays with the vaccine distribution, and business shutdowns and failures create great uncertainty about the outlook.

The majority of forecasters have included the impact of a $900 billion coronavirus relief bill in their estimations, according to Caranci. However, they haven’t incorporated the potential for more fiscal stimulus.

Since Democrats took both seats in Georgia run-offs, giving them the control of the Senate, the odds for an additional fiscal package have risen. An extra stimulus would boost the economic growth forecast for this year, according to the committee members.

While the economy is expected to rebound after winter, businesses will continue to be cautious in expanding their workforce. Bank economists believe the labor market will heal slower than the overall economy.

The employers will add nearly 5 million jobs this year and the unemployment rate will drop to 5.4 percent by the end of the year, from 6.7 percent last month, the committee estimates.

The nation has recovered roughly half of the 22 million jobs lost between February and April 2020. The economists said the economy could return to full employment in 2 to 3 years.

“Many businesses will be cautious in rehiring until they see concrete signs of sustained demand and a reduction in slack,” Caranci said.

Initial jobless claims surged to 965,000 in the week ended Jan. 9, much higher than the consensus forecast of 789,000 and the highest level since late August 2020.

“This is the largest weekly increase in initial claims since the last week in March as renewed business restrictions and closures to slow the spread of the coronavirus are inflicting serious damage on the U.S. labor market,” Scott Anderson, chief economist of the Bank of the West, said in a note to clients.

He added that the $900 billion coronavirus relief bill that recently passed and additional fiscal aid that may come from the Biden administration would provide further support to consumers and businesses.

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