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Chicago Fed Insights

Economic Outlook Symposium, Part 1: Setting the Stage for 2021

December 21, 2020

The Chicago Fed hosted the 34th Annual Economic Outlook Symposium (EOS) virtually on December 4. Chief economists and senior executives from the banking, auto, steel, and machinery industries provided their perspectives on the economy and the long road to recovery from the pandemic. This blog post summarizes the morning sessions, which focused on participants’ economic outlooks for 2021 and beyond and the monetary policy environment. A second post will summarize the two afternoon panels on the economic prospects of various industry and business sectors.

Anna Paulson, executive vice president, director of research, Federal Reserve Bank of Chicago, opened the program by saying we’re all eager to put 2020 behind us. Paulson noted huge swings in the economy, pointing out that 2020 saw both the best and worst quarters of GDP growth since consistent measurement began in 1947. Joblessness, hunger, and other measures of economic deprivation and subdued economic activity, especially in those areas that require human contact, are of concern to Paulson. “The future of the economy depends on the future of the Covid-19 virus,” she added.

Clearly the pandemic was on no one’s radar when the participants in the 2019 EOS predicted what would occur in 2020, said Thomas Walstrum, senior business economist, Federal Reserve Bank of Chicago. In reviewing the consensus economic outlook presented last year, he noted that only two of 31 forecasters in the 2019 Economic Outlook Survey predicted a decline in GDP from 2019:Q3 to 2020:Q3.

Walstrum went on to describe what individuals who submitted forecasts for the 2020 EOS predicted for 2021. Predictions call for a solid recovery in GDP in 2021, with an expected recovery to 2019:Q4 levels by 2021:Q4. However, unemployment is expected to stay elevated into 2022. The predictions for unemployment were consistent with continued slack in the economy even to the end of 2021, Walstrum said.

Submitted forecasts suggested clear evidence of a slowdown in growth. Industrial production is not anticipated to be where it was at end of 2012, which was a high point. Forecasters expect at most a small increase in overall demand, Walstrum said. By contrast, EOS participants predict that housing starts will be a bright spot, said Walstrum, with 2021 numbers expected to be the highest since 2006. Participants also predict that oil prices will remain low in 2021.

Walstrum also presented results from the recent Survey of Business Conditions. Respondents suggest a return to a pre-pandemic economic activity level won’t occur until January–June 2022.

Monetary policy environment

Next, Daniel Sullivan, executive vice president, Federal Reserve Bank of Chicago, discussed how monetary policy has responded to changes in the U.S. economy. He noted that the Federal Reserve System periodically adjusts its strategy to achieve the mandated goals of the central bank, that is, to foster economic conditions that achieve both stable prices and maximum sustainable employment. After a number of “Fed Listens” sessions and much analytical work, the Fed developed a new framework for monetary policy.

Sullivan explained the importance and relevance of the new strategy in this complex economic environment. “A new economic environment requires a new strategy to achieve the same goals,” Sullivan said. He highlighted three features of the new strategy statement—an acknowledgment of the risks posed by lower interest rates; a focus on “shortfalls of employment from its maximum level” rather than the previous “deviations from its maximum level” and the use of a wide and inclusive range of indicators to assess maximum employment; and the need to anchor longer-term inflation expectations at 2%.

Sullivan went on to explain what this new strategy might mean for the conduct of monetary policy. He said the Federal Open Market Committee (FOMC) likely would not be concerned with what might look like very tight labor markets, so long as they were not generating unwanted inflation or other risks. He also explained how flexible average inflation targeting (FAIT) might help to anchor inflation expectations: Following a period when inflation is persistently below 2%, monetary policy will seek to achieve inflation moderately above 2% to achieve inflation averaging 2% over time.

The September and November FOMC statements reflect the principles of the new strategy. The committee will aim to achieve inflation moderately above 2% for some time, so that inflation averages 2% over time, and longer-term inflation expectations remain well anchored at 2%.

Sullivan said that while the new framework moved expectations about policy in the desired direction, achieving 2% average inflation is likely still a while off. A more comprehensive look at the new monetary policy strategy is available online.

Long road to recovery

The final morning speaker was Carl Tannenbaum, executive vice president and chief economist, Northern Trust Corporation, Chicago. Tannenbaum said the virus has “created another set of behaviors, and it will take a while before we’re comfortable doing what we used to. Societies will have to learn to live with the virus for a while longer.”

Despite the challenging logistics surrounding vaccination and the considerable time to manufacture enough doses to cover populations, vaccination could prove to be a kind of economic passport,” Tannenbaum said.

Momentum has slowed, and some industries remain deeply depressed, for example, travel, hospitality, and entertainment. With business activity still well below levels of last December, it’s clear that more fiscal support will almost certainly be required, Tannenbaum said.

Although the U.S. has regained about two-thirds of the jobs lost at the peak of the pandemic, labor force participation remains depressed, and Tannenbaum noted that some lasting “scarring” is likely. “About nine million Americans who were working in January aren’t today,” he said.

Interest rates around the world are expected to be low/negative for a long time, said Tannenbaum. While lending and liquidity programs are good at stabilizing markets, they are limited, he added, in promoting economic growth.

State and local governments face significant revenue shortfalls, particularly in states with economically sensitive revenues weighted to sales taxes on activities like entertainment, tourism, and restaurants. Further, pressure from underfunded pensions in some states have been exacerbated. In addition, government accounts for one in eight U.S. jobs and 13% of U.S. GDP.

Tannenbaum concluded with thoughts on the impact of the presidential election, noting that government is likely to remain divided. As a result, little in the way of major legislative movement is likely. In terms of fiscal policy, structural forces will add substantially to the debt over time, and debt levels were escalating rapidly prior to the pandemic.

Globalization is in retreat, he said, as economic security is leading a push to shorter supply chains. “The pandemic not a friend to free trade,” said Tannenbaum.

Tannenbaum ended his presentation by sharing his economic outlook. He predicted that output won’t fully recover until the middle of next year, and that employment will take much longer, striking a similar note to the consensus outlook from symposium participants. Large sectors of the economy, such as entertainment, travel, and office real estate, may never return to former norms, he said.

Some of the long-term consequences of Covid-19 may include increased remote work arrangements, possibly triggering more migration from cities. The pandemic will almost certainly cause paradigm shifts, Tannenbaum said.

To end on a more positive note, he added, “If the vaccine works, we all have pent-up spending to do.”


The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.

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