The National Economy
U.S. Economic indicators point to robust growth for 2021, as the nation emerges from the COVID-19 crisis, and consumers satisfy their pent-up demands for goods, services, and recreation. After roughly 15 months of restrictions and economic setbacks, the economy is booming. With that, however, has come supply chain bottlenecks, inflation and labor shortages, leaving business leaders energized by robust demand but frazzled in their attempts to meet orders and maintain margins.
A notable difference between the COVID-19-related recession and most others, is that this recession was entirely caused by external forces, rather than a more organic and broad economic downturn. As a result, the recovery is likely to be swift and complete, rather than a prolonged climb back as we experienced from the “Great Recession” of 2008-09. In fact, the recovery is already proving to be too swift for many supply chains to handle. Just as businesses faced a severe demand shock (downward) in the early days of COVID-19 shutdowns, they are now experiencing an opposite shock of equal magnitude as the economy recovers.
While some economic data remains below pre-pandemic levels, most notably employment, overall economic growth has outpaced even the most bullish expectations. In addition to the factors cited in the preceding paragraph there are a number of other reasons as well:
- Many businesses have sufficient cash and liquidity. In most recessions, businesses take a major hit to their finances, and have to recover slowly. They are often left less credit-worthy, and wary of extending themselves by investing or taking on additional debt. This time around, a combination of rapid cost shedding early in the shutdowns, coupled with swift and significant government intervention has left many businesses ready to spend and capitalize on new opportunities. It should be noted this is not the case of all businesses. Many businesses, particularly smaller businesses, struggled or even closed, but others have managed to strengthen their balance sheets during the pandemic.
- Consumers, particularly those in higher income brackets, are sitting on savings and are eager to get out and spend. By some estimates, there is more than $2.8 trillion in excess savings that households built up during the pandemic.1 Many consumers spent less during the pandemic than they normally would, strengthening their personal balance sheets, and have pent-up demands that they are now getting ready to satisfy. This is in contrast to a more typical post-recession scenario where consumers are often slow to resume their spending habits.
- Government spending has and likely will continue to support the economy. While some COVID-19 relief spending was controversial, the net result was trillions of dollars pumped into the U.S. economy over a short time, helping the nation avoid a more severe downturn. This has left the economy in much better shape than it otherwise would be and poised for rapid growth as restrictions are lifted. If a significant infrastructure spending is passed, this could have two beneficial effects: a significant short-term boost from the spending itself, for construction and related sectors, and; improvements to transportation, the electrical grid, and cyber infrastructure, which should support longer-term economic growth.
While the surging recovery is likely to be “bumpy” and uneven, with some sectors faring better than others, overall GDP growth should be remarkably strong through at least the end of the year and likely through 2022. Forecasts suggest that we will see U.S. GDP growth anywhere from 6.3 to 7.0% for 2021, softening to a still-robust 3.9-4.4% in 2022.2
The downside of this rapid economic expansion is that it has severely strained supply chains, contributed to rising input costs, and made it extremely hard to find (and keep) good employees. These impacts have been felt across the entire economy but have been particularly noticeable in the construction sector. Project managers report building materials costing twice (or more) what they did in 2019, if they can get them at all. Raw materials for businesses, ranging from supplies like cardboard, plastics, glass and metal, have also become scarce and increasingly expensive.
Total U.S. employment remains substantially below pre-pandemic levels (146 million workers were on U.S. nonfarm payrolls in June 2021, compared to 153 million in February 2020), suggesting that there should be some slack in the labor market, but the rapid pace of hiring (850,000 jobs added in June)3, coupled with several other factors, has created fierce competition among employers for workers. Large numbers of businesses report that they are struggling to hire enough workers to meet their customers’ demands. CDL truck drivers are particularly scarce, but worker shortages extend across all skill and experience categories, and nearly all industries.
Inflation is becoming a greater concern as prices rise at both the producer and consumer levels. The consumer price index (CPI) rose at an annual rate of 4.2% in April, and 5.0% in May, the highest level since August 2008.4 Overall prices jumped at a 9.7% annualized rate for the three months from March-May. Significant components of overall inflation include volatile food and energy costs, but even so-called “core inflation”, which excludes those categories, rose 3.8% in May, the highest level going back to 1992, indicating that price increases are being felt broadly across all spending categories.
Whether this rate of price increases will be sustained is a topic of debate among analysts. Some suggest that we are seeing an overheating economy, which may lead to an extended period of high inflation. Others, including most notably, the Federal Reserve’s Jerome Powell, feel that the current inflation surge is more likely transient, and will subside once temporary supply imbalances resolve.5 Their outlook is particularly important because it will guide their approach to managing short-term interest rates. In the early days of the pandemic, the Fed acted swiftly to lower interest rates to near-zero, while simultaneously purchasing billions of dollars worth of bonds. How quickly the Fed acts to return to more normal monetary policy will significantly affect the cost of borrowing, and in turn, the broader economy. At their June meeting, Fed officials moved forward their expected timing of rate increases, suggesting that while they are likely to stay the course in 2021, we will see moderate rate increases by 2023, and possibly late in 2022. Whether inflation subsides, as they predict, or continues at its current pace, will be a key determinant.
As with the general U.S. economy, international trade, including agricultural exports, has surged so far this year. USDA forecasts agricultural exports for FY 2021 at a record $164 billion. If realized, this would represent an increase of $28.3 billion from FY 2020, and an increase of $20.6 billion form the recent peak of $143.4 billion in 2018.
The big driver of this increase has been China which is on pace to more than double its purchases of U.S. farm goods this year, increasing from $17.0 billion in FY 2020, to $35.0 billion in FY 2021. Leading export categories include grains and feeds at $41.2 billion, and oilseeds and related products at $40.6 billion. Other categories are seeing increases as well, including horticultural products (mainly fruits, vegetables, and nuts) at $34.1 billion, and livestock, dairy, and poultry at $34.2 billion. Most categories are seeing increases in both volume and unit value of exports.
U.S. Seafood exports are slightly lower in 2021, y-o-y (-6%). Forest product exports are 24% higher for the year through May, with both volume and value showing increases. Container availability and port bottlenecks continue to frustrate and limit U.S. exporters.
1 Deloitte Insights, June 14, 2021
2 Forecasts from Deloitte, Bank of America, The World Bank, and Goldman Sachs
3 U.S. Bureau of Labor Statistics
5 Bloomberg, "Powell Renews Forecast for Inflation Subsiding Toward Fed's Goal," June 21, 2021