US Economic Outlook for 2021 and Beyond
Experts Are Cautiously Optimistic
The U.S. economy is improving after the destruction caused by the COVID-19 pandemic. This cautiously positive outlook is based on experts' reviews of the key economic indicators, including gross domestic product (GDP), unemployment, and inflation. Analysts also have taken a hard look at interest rates, oil and gas prices, jobs, and the impact of climate change.
The most critical economic indicator is GDP, which measures the nation's production of goods and services.
What's the U.S. Economy Like Right Now?
The economy recovered in the third quarter (Q3) of this year, expanding by 33.1%. Although a record, it was not enough to offset earlier losses, including the 5% decline in real GDP at an annual rate in the first quarter, signaling the onset of the 2020 recession.
The March recession ended 128 months of expansion, the longest in U.S. history. In Q2, the economy contracted by a record 31.4%. Quarterly GDP had never experienced a drop greater than 10% since record-keeping began in 1947.
In April, retail sales were down 14.7% as governors closed nonessential businesses, but by May sales recovered, increasing by 18.3% as shops and restaurants slowly reopened safely. As the pandemic hit the second wave in the fall, though, sales started falling again, declining by 1.1% in November.
Also in April, the unemployment rate skyrocketed to 14.7% as companies furloughed workers. It remained in the double digits until August, when it steadily declined. In the week ending Dec. 12, though, claims rose sharply to 853,000, marking the largest increase in claims filed since mid-September.
According to the most recent forecast released at the Federal Open Market Committee (FOMC) meeting on Dec. 16, 2020, U.S. GDP growth is expected to contract by 2.4% in 2020. It is estimated to then rebound up to a 4.2% growth rate in 2021, and slow to 3.2% in 2022, and 2.4% in 2023.
The FOMC estimates that the unemployment rate will be 6.7% for the year of 2020. It will gradually decline in the following years, down to to 5% in 2021, 4.2% in 2022, and 3.7% in 2023. The rate peaked at 14.7% in April 2020 as workers were let go from their jobs in response to the pandemic.
The real unemployment rate includes the underemployed, the marginally attached, and discouraged workers. For that reason, it is around double the widely-reported data you typically see in news articles.
The Bureau of Labor Statistics (BLS) publishes an occupational outlook each year that goes into great detail about each industry and occupation. Overall, the BLS expects total employment to increase by 6 million jobs between 2019 and 2029.
The BLS 2019 through 2029 projections do not include impacts of the coronavirus pandemic and response efforts, as the historical data was finalized in spring 2020.
Positions in health care and social assistance are projected to grow to 3.1 million jobs over the course of the decade, reaching 23.5 million come 2029. Computer and math occupations, and those based on alternative energy production, will also grow rapidly. For example, the BLS predicts jobs for wind turbine service technicians to increase by 60.7% from 2019 to 2029.
On the other hand, manufacturing and retail industries will continue shedding jobs, while e-commerce continues to grow. That same shift could increase jobs in transportation and warehousing. Other declines will occur in the postal service, agriculture, and some information-related industries.
The core inflation rate is predicted to be 1.4% in 2020, and slowly rise to 1.8% in 2021, 1.9% in 2022, and 2% in 2023. The Fed's target inflation rate is 2%. The core inflation rate—the Fed's preferred rate when setting monetary policy—strips out volatile gas and food prices.
In March 2020, the FOMC held an emergency meeting to address the economic impact of the COVID-19 pandemic, which lowered the fed funds rate to a range of 0% and 0.25%.
And on Sept. 16, 2020, the FOMC announced it would keep the benchmark rate at its current level of .1% until inflation reached 2% over a long period of time. The Fed's Dec. 16 forecast said that wouldn't occur until at least 2023.
The Fed is also working on keeping long-term rates low in an effort to make borrowing money cheaper, and in turn encourage consumer and business spending. It restarted its quantitative easing (QE) program, and soon expanded QE purchases to an unlimited amount. In March, the Federal Reserve announced it would purchase $500 billion in U.S. Treasuries and $200 billion in mortgage-backed securities, too. By June 2020, its balance sheet had grown to a record of $7.2 trillion, and six months later by mid-December, that number had reached $7.3 trillion.
By buying bank securities, the Fed reduces supply in the Treasury market, which increases the prices and lowers the return (or yield) on these long-term notes. Those yields set the benchmark for long-term fixed-rate mortgages and corporate bonds.
Treasury yields also depend on the demand for the dollar. Demand is high right now, so that also puts downward pressure on yields. Once the global economy recovers, investors may demand less of this ultra-safe investment, increasing yields and interest rates.
Oil and Gas Prices
The U.S. Energy Information Administration (EIA) provides an outlook on oil and gas prices from 2020 to 2050. It predicts crude oil prices will average $43 per barrel in the fourth quarter of 2020, and $49 per barrel in 2021 for Brent global. U.S. oil prices will also rise in 2021.
The EIA's energy outlook through 2050 predicts rising oil prices. According to the data, the average Brent oil price could increase to $183 per barrel in 2050, adjusted for inflation to 2019 dollars. By then, the cheap sources of oil will have been exhausted, making crude oil production more expensive. This forecast does not take into account government efforts to increase renewable energy production in an effort to stop global warming. The forecast also does not factor in the pandemic's impact on oil prices.
The Federal Reserve is concerned about how climate change will affect the economy. Research from the Richmond Fed estimates that, if the country continues to produce emissions at a high rate, climate change could reduce the annual GDP growth rate by up to a third of the historical average.
In 2020, the U.S. experienced damage from both hurricanes and wildfires, as it has in past years. Global damage from natural disasters associated with climate change, such as hurricanes, floods, and wildfires, was $150 billion in 2019, down from $186 billion in 2018.
Insurance companies paid out $52 billion in 2019 and $86 billion in 2018 in damage claims, which have become worse and more frequent due to global warming. There were 820 natural disasters in 2019, compared to less than 600 a year between 1980 and 2006.