Diane Swonk, Grant Thornton Chief Economist, joined Yahoo Finance Live to discuss her 2021 economic outlook and the biggest risks facing the economy.
- It's good to have you here, Diane, and I think a lot of people, you know, Christmas on Friday, let's look into 2021. And in your latest note you tell your clients that the base case scenario for GDP growth next year is going to be that we hit the previous peak in the US economy in the fourth quarter of 2021. What could derail that?
DIANE SWONK: Well, what's interesting about that is that is with the assumed stimulus that we got. It's a little shy of what we actually-- we didn't put all of what we got in there, so we'll be boosting that a little bit. But still, the timing is late in the second half of 2021.
And what's important about it is a couple of things. First of all, the good news is there is a vaccine out there. There's a timeline on the vaccine. Give or take a little bit, that will mean, at some point in time, we will be able to unleash the pent-up demand that we've had that is barring, of course, any mutations that render the vaccine useless. Hopefully that doesn't happen. We're not looking on the downside. I'm just trying to stay focused on the light at the end of the tunnel right now.
But I think it's important to remember that once we hit that previous peak from the fourth quarter of 2019, that's two years after we hit that previous peak, and that is something that I think many people don't realize is we're that far behind from where we were, even as we unleash pent-up demand. And then from there on, what matters is the pace of growth. Can we recoup not only what was and what we lost to the crisis, but also what could have been?
By February we will have lost 2.3 million jobs that we would have been generating if we had not had the COVID crisis, and that's often lost in translation, that we don't need to just regain the 9.8 million jobs that we've lost as of November-- and those are only the ones that are on payrolls not self-employed-- but also we need to replenish and get on a trajectory of growth that re-establishes where we were prior to the crisis. And that's a much harder and heavier lift.
JULIA LA ROCHE: Diane, it's Julia La Roche, and you're talking about the need to reestablish growth here and also that the stimulus here was shy of what was needed. I guess maybe a better way to characterize is more relief that rather than stimulus, so let's talk about what is needed to get us back on growth, what is needed to really stimulate the economy. How do you think we can get there?
DIANE SWONK: Well the one thing that was encouraging in the package-- there were several encouraging things and we are glad there was relief, and you're absolutely right, it's really more relief than stimulus. But there also was funding for schools, both K through 12 and higher education, some $80 billion in funding for schools. And that's really important because students-- one in four students don't have access or the ability to get online education, and the online education that they were getting was not as good a quality.
We know that from testing already, from what we've already been through, the online schooling wasn't as good as what they had in-person. And so they're actually losing educational attainment. There's going to need to be catch up courses over the summer. What's good about this is that there is some funding to the states through those means, that we could rehire a lot of teachers that we've lost, or hire up where teachers have resigned and not gone back into the classroom, they've taken early retirement, or the retirement that they were due because of fears in going back into a classroom in a COVID environment. So I think that's important.
But going forward, after we unleash pent-up demand, we know that we've got a headwind from state and local governments, and that's a minimum of $200 to $400 billion, between $200 and $400 billion alone, from state and local governments. And they're one of the largest hiring employers out there, and to see that absent as we're getting into a more sustained recovery, that could really set us back. And that's what we're worried about at this stage of the game.
- And a second part to Julia's question, which-- what we're not saying here is kind of the income inequality of this pandemic. That the rich have gotten richer and the middle class and poor, in some cases, have gotten poorer. You even point out that the pace of the rebound depends on how much consumers are willing to deplete what has been, what, $1.4 trillion in savings, and you're worried-- if that's the right adjective-- on big-ticket spending and house renovations slowing down. Why should we share your concern?
DIANE SWONK: Well, what we've seen is a lot of that movement was spending on goods, on everything from cars, luxury cars, to boats, to second homes, vacation homes, and upgrading homes for people to work from home. That's already occurred, and as we move back into the workplace, although work from home will likely become a more permanent part of it, it won't be the only place we will-- we're human beings, after all. We want to congregate again. And so that will shift spending away from some of these areas we've seen spending strength from high-income households.
But also, as you mentioned the break between the unevenness, COVID has exposed and exacerbated inequality in a way that's very important, because we know that more unequal growth means the overall economic pie, the whole, the sum of its parts is not as great as it could be. It's not just, you know, if the haves do better than the have-nots and leave the have-nots behind the haves are just fine. Everyone does better when we grow the overall economic pie more evenly, and I think that gets lost in translation a lot.
And that's something we're very concerned about, and we've already seen how many low- and middle-income households have really been hit very hard by this crisis. Well, people who were able to sustain their incomes and continue spending, they'll be shifting into other areas of spending, but they alone are rising tide. The spending they do on discretionary services cannot lift all boats.
JULIA LA ROCHE: Diane, I want to broaden the conversation out and talk about global growth, trade, and the impact there. And of course, the conversation just over a year ago, it seems-- it's amazing how fast time goes-- was about trade and trade tensions between the US and China, and as we have a new administration taking shape now, what do you think that outlook looks like?
DIANE SWONK: Well, I think we're going to see more collaborative approach to trade, with the exception of China. I'm not sure that we'll see a lot of light between administrations in terms of China. I think tensions with China are going to remain extremely heightened, and what we've seen as some pivot of trade to Vietnam. Not coming back to the US soil, but just changing which country we actually see trade coming from. Large companies were able to pivot to Vietnam. Other companies have pivoted towards Mexico, where we do have a trade agreement.
I do think from the incoming administration, we're going to see more effort to collaborate with our allies in trade, and actually try to isolate China more. That's originally what the Trans-Pacific Trade Pact way back when, which was thrown out by this administration, was designed to do, was isolate China and use the peer pressure of the rest of the world to get China to play more by the rules of the rest of the world, especially the developed world. And I think you're going to see more collaborative efforts on that front.
That said, let's face it, the first reaction, the first recoil to COVID was to exacerbate the idea of pulling in rather than pushing out on globalization. As people talked about regionalising supply chains, that doesn't mean a supply chain is necessarily safe in the US relative to some place abroad because, of course, we know as we locked down in the spring it was occurring in different parts of the US at different times.
But I think it's also important to understand that regionalising doesn't necessarily mean bringing it back to production in the US either, nor to Europe. And those are both of the themes we're seeing played out. That trade tensions are going to remain with us for some time to come, and they become a catch all rather than really dealing with the shortfall in education, the shortfall in training, which have all been exacerbated by COVID, race and gender inequalities, all of those things that have been exacerbated by COVID and we could use COVID as a catalyst to deal with those inequalities. Rather than just, sort of, keep turning on a blame game and looking external, we need to look at ourselves in the mirror and find out what we're doing wrong.
- Diane Swonk is the Chief Economist at Grant Thornton. All the best to you and your team. Happy holidays, and a happy, healthy new year to everyone there. Thank you.