We can all be excused for feeling déjà vu — 2021 does feel a little like 2009, the last time a new administration came into the White House with the votes to move legislation through both the House and Senate. Both years represent periods of economic uncertainty, and a national health crisis, although the coronavirus pandemic is much more serious than the swine flu turned out to be.
President Joe Biden takes over for the Trump administration with a stressed economy utterly dependent upon federal stimulus. Still, many factors offer hope for meaningful growth in 2021 and solid performance beyond.
Charles Evans, president of the Federal Reserve Bank of Chicago, projected 4 percent GDP growth in 2021. Speaking in a virtual forum hosted by the Wisconsin Bankers Association on Jan. 7, he said, by the end of the year, he expects the unemployment rate to drop to 5 percent, down from its current level at 6.7 percent. He said he doesn’t expect inflation to ramp up sufficiently to warrant an interest rate hike until 2024. He said he doesn’t expect the Fed to raise its Fed Funds rate from the current 0-25 basis points until inflation exceeds 2 percent.
Evans said the banking industry entered the pandemic on solid footing, with capital at robust levels. “Banks have been a source of strength through the pandemic,” he said. Banks in the Midwest face a challenging environment but he said community banks are finding good loans, despite going up against the largest banks, which he said have competitive advantages.
Evans said he worries about the economy “going through a period of austerity as we did in 2011,” although he said that is perhaps less likely with the new administration and the change in control of the Senate.
KC Mathews, chief investment officer at UMB Financial in Kansas City, Mo., also expects solid GDP growth this year. “In 2021, we expect robust economic growth — specifically, 4.1 percent in real GDP, which is better than average. The average real GDP growth rate after the Great Recession, from 2009 to 2019, was 1.8 percent,” Mathews said. Among the reasons Mathews believes 2021 will be better:
This may be the year “the world beat the COVID-19 virus,” Mathews writes in a 2021 forecast. “Even though we will enter the year with spiking cases and new restrictions on activity, vaccines are being broadly distributed. Pent-up demand along with a high savings rate will boost consumption beginning in the second quarter of 2021.”
Stimulus will continue to drive economic activity, he said. The CARES Act, passed in March 2020, gave the economy a $2.2 trillion crutch. Now, the economy will benefit from a $900 billion stimulus bill passed in December, and consumers will eventually spend the $1.3 trillion they have saved over the last 10 months not going to movies or plays or taking vacations, Mathews said.
“Much of the economic momentum that was building in the second half of 2020 will continue into 2021. Economic growth will remain above average as we return to a state of normalcy,” Mathews said. Even if the sizzling stock market were to correct in the coming months, Mathews said that would be a healthy sign more than a cause for alarm.
Analysts at Wells Fargo also seemed hopeful. Darrell L. Cronk, president of Wells Fargo Investment Institute, writes that “Record fixed income supply, historic monetary policies, and additional government deficit spending are likely to continue through at least the first half of 2021. … While we expect volatility to remain elevated, we anticipate that policymakers will ensure that ample liquidity remains accessible to help markets weather this unique environment… .
“We see no Fed rate hikes through year-end 2021; our federal funds rate target is unchanged from the current level of 0 percent to 0.25 percent. Despite significant new Treasury issuance, we see only modestly higher rates in longer maturities as Fed buying and global demand help keep longer-term rates contained. Our year-end 2021 target for the 10-year Treasury is 1.00 percent to 1.50 percent while our 30-year target is 1.75 percent to 2.25 percent, modest increases from today’s levels.”
An article published by news service Reuters in early January cited financial experts who expect federal stimulus to play a major role in the economy this year. “We assume an additional $1 trillion of stimulus in the next few months,” reporter Howard Schneider wrote, citing analysts from a New York investment company called Jefferies Financial Group. Another group interviewed by Schneider, Evercore ISI, said they expect $2 trillion in new proposals now, divided between legislation providing immediate coronavirus relief “followed by a more medium-range investment bill emphasizing infrastructure and greening” the economy.
In fact, days before the inauguration, the Biden administration announced a $1.9 trillion plan to address the virus and ailing economy.
Schneider cited an economist from the University of Chicago Booth School of Business who said the U.S. economy needs fiscal support at a pace of about $1 trillion every six months until the virus is controlled.
Near-term challenges likely
Changes in the way people work, however, are likely to have an impact on the economy even after the pandemic lifts. Marcus Scott, executive vice president and chief investment officer at Towers Wealth Managers, a subsidiary of Country Club Trust Company in Kansas City, Mo., cited the change in commuting patterns.
“My expectation would be that U.S. demand for energy does not return to its pre-virus levels for several years. I believe businesses and individuals will be more accepting of working from home moving forward, which will result in less miles driven into the office on a daily basis,” Scott said. “Less miles driven into the office and the continued growth of electric vehicles likely puts a damper on energy demand.”
It’s also a new ballgame for corporate travel, Scott commented. “In 2019, I went on five or six business trips. In 2020, this fell to zero. I would expect the same trend in 2021 (likely zero). Customer-facing businesses are adjusting to the new climate with the adoption of Zoom and similar services. It would be my expectation that many businesses will reassess their business travel line moving forward. The ramifications of this obviously snowballs across several of these industry sectors (less air travel, less hotel demand, even locally dining out with clients and personally less).”
Analysts at Piper Sandler agree that the future is mixed. “The longer-term economic environment for financials continued to brighten while in the short term there are remaining shifting sands,” commented Robert Albertson, principal and chief strategist, and Weison Ding, director, in a written analysis. “The ultimate positive is the likelihood of ongoing stimulus and, more importantly, the possibility of infrastructure spending. These also argue for rising interest rates, partly from growing yet moderate inflation, which will reduce net interest margin pressure. The primary negative is stricter regulatory pressure under a Democratic government.”
But they caution: “The nearer-term environment, certainly for the first half of 2021, is less sanguine. The chief impediment is the lack of organic credit demand and latent credit risks lurking beneath an ongoing flow of stimulus. Features of the current underlying economy are largely unknowable or invisible while artificial stimulus is prevalent and likely to continue.”
“Many corners of the banking industry are concerned that low rates, slower loan origination, and excess liquidity trends are here to stay for the foreseeable future, and have begun the search for loan surrogates,” observed Scott Hildenbrand of Piper Sandler. “Allowing these banks to extend the duration of their liability portfolio, at a scalable level, opens the door to more asset purchase strategies.
“We have seen two specific asset strategies gain momentum: Exploring community and regional bank subordinated debt as an investment option, and analyzing how to invest in municipals without ruining their interest rate plan,” Hildenbrand continued. “As an alternative to extending the liability portfolio, some institutions have swapped fixed-rate municipals to floating, thus obtaining an attractive yield with reduced duration risk, and protecting Tangible Common Equity. Exploring risk/reward profiles of earning assets is nothing new to balance sheet managers, but the environment has certainly evolved since the start of 2020.”