Positive developments on the vaccine front at year-end fueled optimism in economic and market circles that the proverbial light at the end of the tunnel was in sight. While the 2021 economic outlook is more upbeat, the first quarter presents greater uncertainty. Vaccines are expected to become widely available to the general public by June, if everything goes according to initial plans.
These plans rely on operational and administrative efforts by federal, state, and local government officials, and vaccine distribution has, thus far, underperformed expectations. For example, Operation Warp Speed predicted 20 million Americans would be inoculated by the end of December 2020. However, as of January 2, 2021, less than 5 million had received the first dose, according to CDC data. The combination of the resurgent virus outbreak, subsequent lockdowns, and slower vaccine rollout casts a shadow over the recovery to start the year. The $900+ billion COVID aid package passed by Congress before year end helps somewhat, but it’s far less than the $2.2 trillion CARES Act that buoyed Q3 2020 GDP growth. Congress could decide on another round of aid with support from the new administration following the inauguration later this month.
- While vaccine success has brightened the 2021 economic outlook, the first quarter is less certain amid surging cases and renewed lockdowns.
- The labor market has recovered approximately 60% of lost jobs since the pandemic began, and a potential rise in year-over-year inflation metrics in March/April is unlikely to impact Fed decision making.
- If vaccine distribution boosts 2021 economic growth as expected, we believe the first likely response from the Fed is a reduction in asset purchases at some point this year.
Strong job growth from May through November bolstered the labor market recovery from the initial COVID-related fallout, but there is still much more job growth needed to get to pre-pandemic employment levels. On a percentage basis, the recovery to date represents 55-65% of jobs lost in March and April (with December data to be released January 8). As is typical with most deep recessions, there is some level of structural employment that may persist for a prolonged period. In other words, the labor force participation rate could hold below pre-COVID levels for some time. There is much debate as to whether the headline unemployment rate will be able to reach a sub-4% level anytime soon.
This market overview is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions. Read more from ALM First about the latest economic data releases and overall market trends at Trustcu.com.