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There are ‘a lot of question marks’ for the economy going into 2021: Economist

KPMG Chief Economist Constance Hunter joins Yahoo Finance Live to discuss the economic outlook heading into 2021.

Video Transcript

CONSTANCE HUNTER: But the thing that this chart shows is that an aggregate income did not fall for the economy as a whole because of the CARES Act. Now, of course, there were individuals who've seen significant declines in their income and the increased unemployment insurance benefits, or the augmented unemployment insurance for people who are self-employed did not give them enough cover. But it gave enough that we didn't see a big decline in income due to the COVID recession.

And maintaining that is really key to making sure that once we actually get a handle on the virus, once we have people vaccinated, we can have the capacity to bounce back. Of course, this has gone on much longer than anybody anticipated. And one of the striking things to me in this bill is the sort of implicit assumptions that by March, by the middle of April, everything will be fine and we'll be able to go back to normal.

And what we see and I think one of the reasons the market is down today is that this virus is very pernicious. We have this potential mutated strain in the UK, and I think this has people very, very nervous that we don't have a demarcation line when we know we're going to be able to get a handle on this by having everybody necessarily vaccinated because we now don't know, are these new strains somehow more resistant to vaccines?

So a lot of question marks that I think has the market very concerned.

EMILY MCCORMICK: Constance, this is Emily. On the point of stimulus, the enhanced unemployment benefits and direct checks that are coming through with this package, should we expect to see more discretionary spending happening among consumers? You know, are people going to be buying more clothes and electronics in a way that might meaningfully buoy consumption and those retail sales figures? Or are these payments really just going to fill in necessities like rent and medical bills or go back into savings like we saw in the spring?

CONSTANCE HUNTER: Yeah, great question. So one of the themes that we've been talking about is the impact of what we call-- what economists call loss aversion and what we've termed FOGO, fear of going out. So normally, a lot of our consumption is motivated by FOMO, fear of missing out, right? We don't want to miss the concert or the baseball game or the birthday party or even the work conference, right?

So that motivates us to do a lot of our spending. And what's happened during the current recession is that we've been confined to our homes, we have this fear of going out, and so we want to consume things that make that experience of being at home a little more enjoyable. And one of the things that economists are concerned about is, you know, there's only so many fire pits and Pelotons that you're going to buy, right?

So a lot of this goods consumption, brought forward consumption, we don't expect that to continue at the same pace into the second half of this year or the beginning of 2021. And you bring up a good point. This is likely going to go to more necessities because part of the economy is open. But understand that a big part of this savings increase is because we just can't consume things that we used to consume.

They're not available to consume, and that's a lot of the services sector. So to pull it back to your question, I don't see a parallel consumption going up until we can go back out and do things, for example.

BRIAN CHEUNG: Constance, Brian Cheung here, great to speak with you. I want to ask about broadly what we might expect for Fed policy. We got a third estimate on third quarter GDP this morning, 33.4% on a quarter-over-quarter annualized basis. That's a slight revision up from the 33.1% that we saw in the second read.

But I guess just broadly speaking, we had expected that to be a pretty big rebound. It's really the fourth quarter that's going to tell us where we're going from here. So as we look into 2021, the Fed's got zero rates right now, it's been offering a little bit more forward guidance on quantitative easing. But what do you think is going to be the biggest story for the Federal Reserve as we kind of hit this inflection point where the virus case is really surging, but that vaccine on the horizon?

CONSTANCE HUNTER: Yeah, so I'd say there's sort of two scenarios. If we can get to a place where we reach herd immunity, where we can start going back to our normal activities, where FOMO activities can really resume in force and you see a big part of that services consumption come back, that's going to bring back jobs. It's going to be a positive virtuous circle.

And we might actually get some of the reflation that the Fed has been hoping to create as a result of their policies. And if that can really happen and really take hold and if the recovery can be broad-based, and this is a really important shift for the Fed, the Fed really realized that had they been slower to raise rates coming out of the global financial crisis, we would have seen a broader based recovery sooner. And so it's that broad-based recovery that the Fed is really looking for.

Many have termed this a K-shaped recovery. So those that can work from home are continuing to be employed at a much higher rate than those that have to work at their job site. Obviously, we still are 3.8 million leisure and hospitality workers below where we were in February. And those people really don't have jobs to go back to until we get a handle on the virus.

So a lot of this depends on how broad-based the recovery is, but assuming we can get some reflation going, then that would mean they might start jawboning down some of the-- or they might start changing their language and changing their asset purchases so that we can have slightly tighter monetary conditions going into 2022. But I would not look for a base rate hike, really, for another year, year and a half.

EMILY MCCORMICK: And Constance, to that point about the broad-based economic recovery, there have been clear areas that have already rebounded faster than others, like housing has been especially strong and manufacturing has been stronger than services. Do you think there's going to need to be some moderation in these stronger areas in order to lift up the services sector and other parts of the economy just as a function of redirecting wallet share? Or do you think some of these stronger areas are going to continue outperforming for a while now?

CONSTANCE HUNTER: So if we look at something like housing, for example, housing is traditionally a leading economic indicator and the global financial crisis that wasn't so much. But normally, housing falls before a recession, a leading indicator that a recession is coming. And then the Fed cuts rates.

We see it's a very interest rate sensitive sector, and it usually starts rebounding before the recession is over. And what it does is it creates a positive virtuous circle of spending. So if you're buying a new house, for example, you're buying new furniture, you're buying new services for that house. And so it causes other spending within the economy and it helps the economy grow.

And so we expect that to be a significant part of the virtuous circle that can get ignited once we get a handle on the virus. But of course, we've had such an extreme rebound that it does make us wonder if we brought some future consumption into the present, and so we'll see slower housing growth as the recovery ages.

But of course, again, that's normal, right? Housing helps get us out of a recession. But then the housing rebound slows as the recovery ages, and it goes on for a longer period of time. But and then--

SEANA SMITH: All right, Constance Hunter. Go ahead.

CONSTANCE HUNTER: With regard to-- with regard to services, we do think that services consumption is going to come back as we have more of the economy open. And of course, that will mean less consumption on certain goods.

EMILY MCCORMICK: All right, Constance Hunter, great to have you on the show, chief economist at KPMG. And also our thanks to our reporter, Emily McCormick.