Illinois Bank & Trust
2021 Economic Outlook Webinar

Believe it or not, I’m not that worried about the dollar’s standing in the world. In my mind, it is still the best house in a really bad neighborhood. The yen is supported by an economy that barely expands and a nation losing population. The eurozone is economically weaker than American, and its demographics are not as good. Many global banks are reluctant to hold reserves in renminbi because of the direct control exerted by Chinese authorities. There aren’t enough Swiss francs, Canadian dollars, or British pounds in circulation to serve as the global reserve currency. Accordingly, while the dollar was weakening during the early days of 2021, there is plenty of reason to believe that it will continue to be in demand and will play a major role in global commerce.

The hot markets this year will be in East Asia and the United States. Much of East Asia expanded last year and will benefit from ongoing growth in demand for manufactured goods. Vaccination is proceeding much faster in the U.S. than in much of the balance of the world, including Europe, which will position America for rapid economic growth later this year.

The increase in savings rate is likely temporary. This is a pandemic phenomenon. As consumer confidence rebounds later this year, savings will decline, translating into an upward push in retail and other consumer activity and another inventory replenishment cycle.

Big push in clean energy and substantial re-regulation of fossil fuels. There will also be significant federal intervention in health insurance markets and some effort to edge federal tax rates higher. There will be a concerted effort to drive the Federal minimum wage higher from its current level of $7.25/hour.

The answer really depends upon the segment. In general, additional stimulus should help small business in the short-term, but there will be exceptions. Small businesses that operate in the context of coal, natural gas, and oil will not be benefitted by federal policymaking over the next several years. By contrast, alternative energy gets a big push forward.

With so much stimulus still in the pipeline, my guess is that inflation is going to be more apparent later this year and in 2022.  That will help drive up rates, though I don’t think rates will rise massively in 2021.

I think the pandemic will limit efforts to ramp up tax rates. However, there will be increased regulation. The most obvious candidates for stepped up regulation pertain to fossil fuels, but one can imagine more regulation impacting banks, auto manufacturers, health insurers, social media and other online platforms.

Commercial construction will be one of the weakest segments of the economy over the next several years. Hotel, retail, and office market fundamentals have been shattered. Leading indicators like the Architecture Billings Index and ABC’s Construction Backlog Indicator suggest more pain ahead. On the other hand, there will be lots of demand for data and fulfillment center construction.

My prediction is that leisure travel will come back with a vengeance later this year, but that business travel will be weak for quite some time.

A phoenix will rise from the ashes. That would have been better if the question was asked by someone from Arizona, but the point is that there will be a lot of restaurant startup activity in the post-pandemic world. There is considerable pent-up demand to dine out, and the household savings rate is high. 

Even before the pandemic, e-commerce was gaining market-share rapidly. The pandemic accelerated those gains by 5-10 years. Brick and mortar retail isn’t going away, but there will be fewer malls going forward and many main streets will struggle. Macy’s continues to close stores by the dozens, and they didn’t even go bankrupt (Brooks Brothers, J. Crew, JC Penney, True Religion, Francesca’s, and many others did). 

The answer depends upon the segment. Small businesses operating in areas such as cyber-security, accounting, home remodeling, home construction, should fare reasonably well. I think many brick and mortar retailers will struggle as delivery services become increasingly ubiquitous and efficient. 

It seems pretty clear that the impact of stimulus generally lasts a few months. We tend to send out cash, and it tends to get spent over the course of months. If we put more money into infrastructure, the impacts would be more long-lived.

I must be old-fashioned. I think deficits matter, though one wouldn’t know that given the experience of the past four decades.  I was taught that there is no free lunch in economics. I still believe that. At some point, the bond vigilantes will come back in force, but I don’t think that’s a 2021 story.

Not deeply concerned, but I think inflationary pressures will be more apparent later this year, setting the stage for rising interest rates. In such a leveraged environment, even small increases in interest rates can produce softer economic conditions. That could be something to watch out for in 2022 or 2023 when the post-pandemic euphoria is over.

Yes, there is risk of inflation in 2021. As the global economy comes racing back later this year, supply capacity may not be there, helping to drive up key commodity and other prices.