The Year in Review
Weekly Update - January 4, 2021
The Year in Brief
The global pandemic disrupted economies, financial markets, and daily life in 2020. Households and businesses were put to the test during the toughest and grimmest years in decades. The winter brought a resolution to the U.S.-China tariff dispute, the Brexit referendum, and the first U.S. appearance of the novel coronavirus. As spring started, abrupt stay-at-home orders in response to COVID-19 curtailed business activity, which dampened consumer spending. The federal government responded, arranging stimulus payments for millions of Americans.
Wall Street bounced back from its March downturn, but the economy limped along. The pandemic entered its worst phase in fall, but two highly promising vaccines were announced in November, and as winter started, they began to roll out to the public. On the cusp of 2021, Congress approved a second national economic stimulus, and the European Union and United Kingdom signed off on a post-Brexit trade deal.
There are many unanswered questions as we enter 2021. Will mass vaccination happen as quickly as we anticipate? Will a successful vaccination program lead to more hiring, more travel, more in-store shopping, and more confidence? The financial markets will be watching progress on this effort.
The U.S. Economy
The pandemic sent the U.S. economy into an abnormal phase, and so our fundamental economic indicators displayed atypical readings.
The Department of Labor's main jobless rate, 3.5% in February, hit 14.7% by April. Headline unemployment declined for the next seven months, to 6.7% by November. The U-6 unemployment rate, measuring unemployment and underemployment, peaked at 22.8% in April.
As people stayed home, consumer spending trended lower, falling 6.9% in March and 12.6% in April.
The federal government moved to boost economic activity. As March ended, a $2 trillion economic stimulus bill became law, featuring cash payments to households, temporary increases in federal unemployment benefits, and a Small Business Administration program pledging to offer distressed companies funds equivalent to 8 weeks of payroll costs. The aid began rolling out in April, and in May, the White House unveiled Operation Warp Speed, a public-private partnership intended to produce COVID-19 vaccines in record time. Two vaccines were approved by the Food and Drug Administration by fall.
The Federal Reserve took the benchmark federal funds interest rate down to a target range of 0-0.25%, and revived emergency loan programs first introduced in 2008. It collaborated with the Department of the Treasury on efforts to buy corporate bonds and encourage business loans. In a monetary policy shift, the central bank said in August that it would accept average inflation of 2% for the near term, and was willing to tolerate a little more inflation in the economy while pursuing the goal of full employment.
As stay-at-home orders lifted, the economy rebounded. Gross domestic product, which the Bureau of Economic Analysis said had contracted 31.4% in the second quarter, grew 33.4% in Q3. The BEA also recorded a 41.0% Q3 climb for consumer spending. Stay-at-home orders returned in Q4, however, prompting another federal economic stimulus in December.
The housing market stayed strong. By November, existing home sales were up 25.8% year-over-year, according to the National Association of Realtors; Census Bureau data showed a 20.8% annualized improvement for new home buying.
The U.S.-China tariff dispute eased throughout the year. In the January 2020 trade talks, the U.S. promised to lessen import taxes on Chinese goods, and China agreed to buy more American exports.
The Global Economy
The International Monetary Fund expects the world economy will contract 4.4% in 2020. If that estimate holds, 2020 will be the worst year for global growth since the 1930s. The U.S. economy shrank 4.3% in 2020, according to the IMF's forecast. That is better than the 8.3% setback estimated for the eurozone. The IMF projects that China's economy grew 1.9% last year. As for 2021, it sees GDP advances of 8.2% for China, 5.2% for the eurozone, and 3.1% for the U.S.
The European Union and United Kingdom agreed to a post-Brexit trade deal on December 24. This completed the Brexit process, which began with the 2016 leave vote and included the U.K.'s formal exit from the E.U. last January. Businesses and financial firms based in the U.K. now face new trade rules and costs, even with the new pact in place.
Looking at stock benchmarks around the world, there were more ups than downs. South Korea's Kospi Composite stood out with a 30.75% 2020 gain. Argentina's MERVAL climbed 22.93%, Taiwan's TWII 22.80%. Two other notable 2020 advances: Japan's Nikkei 225 added 16.01%, and China's Shanghai Composite rose 13.87%. There were also notable retreats: Indonesia's IDX Composite lost 5.09%, France's CAC 40 7.14%, Russia's RTS 10.42%, and Spain's IBEX 15.45%. The MSCI EAFE index, a broad benchmark tracking developed-economy stock market performance in Europe and Asia, rose 5.43%.
We join all Americans in happily drawing the curtain on 2020. Though it was a challenging and tragic year for so many, there are good reasons to believe that 2021 will be a year of progress in returning to our pre-pandemic normal. We wish you and your family a healthy and happy new year!
THIS WEEK: KEY ECONOMIC DATA
Tuesday: Institute for Supply Management (ISM) Manufacturing PMI (Purchasing Managers Index).
Wednesday: Automated Data Processing (ADP) Employment Change, Factory Orders.
Thursday: Initial Jobless Claims, ISM Non-Manufacturing PMI.
Friday: Employment Report.
Source: Econoday, December 31, 2020
The Econoday economic calendar lists upcoming U.S. economic data releases (including key economic indicators), Federal Reserve policy meetings, and speaking engagements of Federal Reserve officials. The content is developed from sources believed to be providing accurate information. The forecasts or forward-looking statements are based on assumptions and may not materialize. The forecasts also are subject to revision.
THIS WEEK: COMPANIES REPORTING EARNINGS
Thursday: Micron Technologies (MU), Constellation Brands (STZ), Walgreens Boots (WBA), Conagra Brands (CAG)