Forecast 2021: Never has an annual economic outlook been so unpredictable
- December 1, 2020: Vol. 7, Number 11

Forecast 2021: Never has an annual economic outlook been so unpredictable

by Sheila Hopkins

Last year, I led off the 2020 prediction feature with a sentence that succinctly summed up the mood of the economic world: “If you liked 2019, then settle back and enjoy 2020.”

Well, that didn’t age well. By April, the United States’ economy hadn’t just run out of steam; it had run smack into the side of a mountain. Within a matter of weeks, the unemployment rate had whipsawed from historic low levels to historic high levels. GDP had fallen off the cliff, and industrial activity had slowed to a crawl. In the blink of an eye, the COVID-19 pandemic had dropped an anvil on the longest period of U.S. economic expansion in history.

As we are slowly climbing out of the depths of the pandemic-
induced recession, investors are beginning to look forward and wonder what 2021 will bring. The view is hazy, given that 2020 smashed the crystal ball, but three things seem to be dominating: uncertainty, a dispersion of impacts and an acceleration of trends already in play.


We are in uncharted waters. The pandemic and the recession are two distinct events in 2020, but they are inexorably intertwined. We won’t get back to sustained growth until people feel safe gathering together again. However, the recovery, to this point, has been almost as fast as the downturn. Over the summer, unemployment fell much more quickly than expected, disposable income has increased (remote work has allowed people to save on commuting costs, clothing and eating out, as well as move to lower cost of living areas), while the stock market continued its upward climb. However, it appears the recovery has reached a plateau well below the pre-COVID level. So, will 2021 see the economy reaching pre-COVID levels? Or are we going to drift along at the current level? Or are we going to slip into a longer-term recession? At this stage, a coin flip — if a coin had three sides — would be as accurate as trying to come to a conclusion by looking at traditional indicators because we are not in a traditional time. But that doesn’t mean we aren’t going to try.

If you still put any faith in polls, a recent one consisting of more than 30 economists conducted by the Initiative on Global Markets at the University of Chicago Booth School of Business in partnership with FiveThirty-
Eight, found that 25 percent of respondents think we’ll be completely back sometime in the second half of 2021, while 46 percent of the respondents don’t expect a return to pre-COVID levels until 2022, and an additional 20 percent are looking at 2023 or later.

It is stating the obvious, but there is a huge amount of uncertainty to the economic outlook now, with the speed of a recovery hinging on two key drivers: getting COVID under control so that the economy can fully reopen, and hitting on the correct amount of fiscal stimulus in the upcoming months.

“As of the end of October, it appears to us that if there is sufficient fiscal stimulus to sustain the economy [without taking a view on what that might be] and we are able to get COVID contained in 2021, the economy is positioned for a robust recovery,” says Allan Swaringen, president and CEO of JLL Income Property Trust.

In light of the current COVID spike along with delayed fiscal stimulus, the beginning of that robust recovery is uncertain. But there are some indications it might not be as far in the distance as some people think.

“Consumer confidence has been unbelievably resilient in the face of record job loss and an economy falling over 30 percent,” says Lara Rhame, chief economist and managing director at FS Investments. “That has been an enormous positive.”

Consumer confidence fell in second quarter 2020 when the economy was closed down and consumer spending dropped 33.2 percent. Since that time, however, it has made a partial recovery. What is uncertain is whether this confidence can be maintained as the pandemic drags on and unemployment settles in at just below 7 percent.

A corollary to consumer confidence is investor confidence. While the stock market and economy aren’t the same, the fact that the stock market barely took a breath in its run to new heights is an indication that investors see the current downturn as relatively short term. They see no reason to sell assets if things are going to be back to normal in a year or so. In fact, they appear to believe that the economy will rebound stronger than ever, and now is the time to buy companies that are benefiting from the current safer-at-home reality.

But how justified is this confidence? Although some indicators are looking good, others are saying, “not so fast.”

“Although this recession started in an extraordinary way, it increasingly looks like it could turn into a more normal recession,” says Rhame. “2021 could be much more challenging than most people are prepared for, as the stimulus money is no longer available for people to use for rent, mortgages and other necessities.”

One of the reasons it’s looking like it might morph into a run-of-the-mill recession is the unemployment rate. Unemployment is typically a lagging indicator, but in this case, a record number of people were thrown out of work when COVID-19 sent everyone home. That percentage has decreased in the past few months, but it is still around 7 percent, which is a large amount of people out of work. The stimulus has managed to mitigate the impact of this unemployed cohort by increasing the amount of unemployment benefits, as well as helping companies stay in business, but with future payments in doubt, we could easily be seeing a longer, more persistent downturn.

The unemployment rate could remain stubbornly high because the job market has changed over the past couple of decades.

“In the past, when the economy was more manufacturing based, workers could be laid off at the beginning of a recession and brought back to the same job at the same company as things improved,” explains Adam Lotterman, co-CIO and lead economist at Bluerock Fund Advisor. “A service-based economy doesn’t recover in quite the same way. These recoveries can potentially take longer because workers often need to be retrained for different jobs or find new employment at a different company. This trend has been amplified in the current market by rapid changes in consumer behavior and preferences.”

How long the current economy takes to get back to pre-COVID levels depends on a healthcare-type solution, which includes a combination of testing, tracing and therapeutics — and eventually a vaccine — so people are comfortable returning to group situations. Those are things a recovery has never required before, so uncertainty prevails.

“Forecasting the amount of growth for next year is really hard,” says Rhame. “You end up saying something like ‘3 percent, plus or minus 5 percent.’ That’s a pretty wide confidence interval.”


Many of the trends that are expected to influence the economy next year have been growing for quite some time, but they are being accelerated by the pandemic. For example, consumption of goods and services makes up around 70 percent of GDP. The “services” part has taken a real hit as people stay home, but the “goods” part has remained relatively strong as consumers doubled down on their online shopping.

Remote work has also gone into overdrive. People have adopted and become comfortable with technology that they hadn’t used before, though it had been available. Results of this massive experiment have been mixed. Many companies have found that their employees really don’t need to be in the office. But probably just as many have seen a fall off in performance. And even if performance isn’t suffering employees might be. People are social by nature and Zoom doesn’t make up for the natural interaction found in an office environment. This probably means that we will see significantly more remote employees than we have in the past, but the death of the office has been greatly exaggerated.


The thing that really sets this recession apart and makes any forecast so uncertain is the dispersion of impacts. Unlike the global financial crisis, when everything crashed, the pandemic has affected some industries more than others. In fact, some companies are reporting record returns while others have been pushed into bankruptcy.

“Even before the pandemic-driven recession, we were observing a wide dispersion in performance across real estate sectors, a trend that increased over the past few quarters,” says Lotterman. “Where retail and office sectors have been lagging, the industrial and life science sectors are generally experiencing a positive impact from the current environment.”

For example, office workers are returning to work in places like Dallas, where they can drive, but continuing to avoid the office in places such as New York, where they rely on public transportation. The industrial sector is outperforming while brick-and-mortar retail is struggling. In this environment, it is hard to make predictions because the data is so scattered.

“I would caution against taking observations made over the past few months during a global pandemic, and applying a straight-line forecast to those observations,” says Lotterman. “There is still uncertainty surrounding what the ‘new normal’ will look like post-COVID and how our interactions with the built environment will evolve.”


Despite the uncertainty, real assets, particularly real estate, should have a pretty good year. However, the dispersion of impacts noted earlier will also affect real estate.

“High-quality assets are liquid,” says Lotterman. “Assets in growth markets are liquid. There is significant capital available for equity and debt financing, particularly for multifamily, life science and industrial assets.”

Because of this dispersion, the pandemic has divided real estate sectors into loved and unloved sectors.

“We are seeing stress in real estate sectors oriented toward bringing people together,” says Swaringen. “This includes retail, especially service-oriented retail like gyms, restaurants and movie theaters. It includes hotels, especially business- or convention-oriented hotels that are about people coming together to meet. And it includes offices. Real estate property types that are not about people connecting are doing just fine, and in some cases better than fine. This includes warehouses, apartments and single-family rentals. Medical office and life sciences are also doing well as these are critical places for people to go, even during a pandemic.”

The key question for the challenged sectors is how will they perform in the post-pandemic period. JLL expects service-oriented retail to be among the most likely to see a strong rebound as people will be eager to dine-out, exercise in groups, get their hair and nails done, etc., when it is safe to do so again.

“This means it could be among the first sectors to transition from unloved by real estate investors to being loved again,” says Swaringen.

Even during a pandemic, real estate should perform better on a risk/return basis when compared to other investment sectors, particularly stocks and bonds. Low interest rates will continue to boost real estate returns while hindering bonds. Stock market values have increased through 2020, which might be justified, but is not a signal of relative value in that asset class. “For all these reasons we expect investors will recognize the relative value real estate offers and drive solid capital flows to real estate in the coming year,” predicts Swaringen.


Though 2021 is sure to be a year of uncertainty, investors who lean into that uncertainty, make decisions based on incomplete data and hold on for the ride, will likely come out ahead at the end of the year.


Sheila Hopkins is a freelance writer in Auburn, Ala.


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