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Business Outlook 2021: Pandemic is Greatest Obstacle to Recovery

Published Tuesday, November 17, 2020

Economists from IU’s Kelley School of Business and IU South Bend’s Leighton School of Business delivered their 2021 Business Outlook. Here are the highlights.

 

Global

  • Original forecast of 3% global output growth, but pandemic has put world in a global recession of a magnitude not seen since World War II. It is estimated that by the end of 2020, the global economy will have shrunk by 4.4%.
  • Outlook: The IU economists estimate a 5% global recovery in 2021.

 

U.S.

  • April-June 2020: 9.5% year-over-year decline in GDP (In contrast, Q2 2009 at height of financial crisis saw GDP contract by 3.9%).
  • April 2020 Unemployment: Record 14.7% (Feb. 2020 unemployment 3.5%).
  • There is a need for greater and more coordinated interaction between monetary policy and fiscal policy to try and minimize economic harm.
  • Outlook: The IU economists estimate growth in the U.S. to be above 3% in 2021, factoring in the country’s structural potential, flexibility of the economy, and the world appetite for the dollar.

 

Financial Markets

  • Gainers in 2020: IT, consumer discretionary (i.e. Amazon), consumer staples, health. Losers in 2020: energy, finance, industrials (i.e. airlines).
  • Tech companies like Apple, Amazon, Microsoft, Facebook and Alphabet have been driving the overall market return for much of 2020. Take those five companies out of the mix, and the stock market would have been negative at the end of October 2020. 
  • Outlook: Economists expect positive returns in 2021, but below historical averages. Positive Factors: Continued federal reserve support with low interest/mortgage rates; some type of stimulus package; adaptability of businesses and innovation; low inflation; acceleration of vaccine development. Risks: Possible lockdowns; very high valuations; credit risks; regulatory and tax policy uncertainty.

 

State

  • Indiana is a cyclical state, so the negative effect is more pronounced but its recovery is much quicker.
  • Loss of 70,000 jobs since the beginning of the pandemic (cumulative job loss 100,000).
  • Outlook: The economists estimate a challenging Q1, but believe in the second half of the year there is enough optimism to think there will be good output.

 

Local

  • Overall, in the first eight months of the year, the labor force dropped by 3,200 in South Bend-Mishawaka, with heavy losses in private educational and health services, manufacturing and leisure/hospitality. New home construction is down, 16% lower than in 2019, a second consecutive year of decline. Sales of existing homes remained unchanged and, the median sales price increased by 6.9%.
  • Nonfarm employment grew by 3.8% in Q3 with more businesses reopening. Labor force is still down by 5,100, while nonfarm employment is 13,400 less.
  • The underlying conclusion is that the local economy is recovering, but there is still a long way to go to reach pre-pandemic levels.
  • Outlook: Consumers will still exercise caution, focusing on the essentials in regard to personal consumption, including caution to frequent restaurants, hotels, bars, and other facilities in-person. St. Joseph County will see fewer new home constructions and existing home sales will soften (median sales price will increase but at a smaller pace). And as long as COVID-19 exists, consumer demand in leisure/hospitality, personal services, retail and even manufacturing will continue to lag.         Softened business investment and the government budget reduction will hinder the labor market recovery. It is estimated that the unemployment rate will range between 7 and 8%. Personal income will stay stagnant.