Ending A Year That No One Expected

Tutterow’s presentation was titled “On The Economic, Political and Business Climate.”

By Dr. Roger Tutterow

The national economy entered 2020 with good momentum in growth. The economy had expanded by 126 months through December 2019, the longest expansion of the post-World War II era. The nation’s gross domestic product (GDP) had grown at 2.25 percent during 2019 and was expected to rise, admittedly at a modestly slower pace, in 2020. However, there were some risks on the horizon.

First, concerns remained that trade tensions in tariff wars could pose a threat for the manufacturing and trade sectors. Second, there was growing concern that a virus in China was spreading and could potentially become a global pandemic. Both of these outcomes were seen as risk to the economic expansion in 2020. While the former concerns were not realized, the latter risk proved to be the catalyst for the first truly exogenous recession in recent decades.

As the pandemic, now identified with COVID-19, spread into the United States, economic activity plummeted in March of this year. For the first quarter, the nation’s gross domestic product contracted at a 5 percent annualized rate. The National Bureau of Economic Research identified February as being the peak of the last economic expansion. However, the first quarter GDP contraction was negligible when compared with the 31.4 percent drop in the second quarter.

Not surprisingly, 70 percent of the drop in the second quarter GDP was due to a pullback in consumer spending. Some of this reduction was due to households voluntarily reducing activity in response to lower consumer confidence and a softening of labor markets. However, the effects of the pandemic were magnified by government-mandated closures that were particularly onerous in the retail and hospitality industries — where sales dropped by over 22 percent between January and April.

With the reduction of retail activity, so too consumption of motor vehicles fell sharply. After finishing 2019 with sales in excess of 17 million units, domestic motor vehicle sales fell to just over 9 million in the Spring. This level matched that recorded during the “great recession” of 2008-09. However, sale surge back in the summer months and 2020 will likely end up with domestic sales averaging a bit under 15 million units for the year.

In line with the contraction in output, employment dropped as well. Between February and April 2020, nonfarm employment fell by 14.5 percent — most of it in April when payroll employment fell by over 20.7 million jobs. By November, over half of the employment reduction had been recovered with payrolls down by a more moderate 6.6 percent. However, the pace of employment recovery will soften as it will likely take until at least late 2021 to recoup the remainder of the job losses.

While the downward trajectory of the economy during the first half of the year is well known, several open questions remain about the pace and duration of recovery.

First, it is important to acknowledge that the economics of the pandemic are subordinated to the epidemiology of the virus. In past pandemics, populations have endured several waves of infection. Indeed, it appears that another of infection is in force in the fourth quarter 2020. However, there is significant good news on this front. Several pharmaceutical companies reported very promising clinical trials results in November. Moreover, many medical experts believe the Covid-19 virus to be relatively stable, reducing the likelihood that the virus would mutate in a manner that reduces efficacy of vaccines and therapeutics.

Second, while there has been significant discussion regarding the merits and effects of government-mandated shutdowns, it is also worth noting that there are a variety of households and businesses who have voluntarily restricted activity throughout the year.

Third, there remain open questions regarding how the economy will perform as it wrestles with two “cliffs” — fiscal and forbearance.

In response to the pandemic recession, substantial fiscal and monetary stimulus was provided. Beginning in March, the Federal Reserve cut short-term interest rates to zero and launched a variety of credit facilities designed to inject liquidity into virtually every corner of the negotiable debt markets.  The “Fed” has been clear that it plans to keep monetary policy accommodative throughout 2021 and likely beyond. While that translates into lower cost for debt, economic uncertainties will still weigh upon access to credit.

On the fiscal side, a variety of stimulus programs were offered. These included PPP loans, enhanced unemployment benefits and other CARES Act provisions including the “carry back” of 2020 net operating losses to recoup corporate taxes paid in previous years.
These programs clearly contributed to the strong recovery in the third quarter where GDP rose by 33.1 percent. However, much of this fiscal stimulus has been fading away and is unlikely to be replaced until after Inauguration Day.

In addition, creditors have extended forbearance arrangements to debtors through much of 2020. At the federal level, debt obligations associated with student debt and many mortgages were eligible for deferment. Equally important, financial institutions and the owners of commercial real estate extended forbearance to their debtors as well. As we move into 2021, it remains a bit of an open question as to how well debtors will be able to service existing obligations when forbearance agreements expire.

Economic policy is rarely independent of the political climate — 2020 and 2021 are no different. The apparent election of Joe Biden as the 46th president will shift economic policy — and not only in terms of the response to the pandemic. It seems highly likely that a President Biden will revisit trade deals executed during President Trump’s tenure. In addition, we will likely see reversals in regulatory policy, particularly as it relates to environmental issues and regulation of financial institutions.

During the 2020 campaign, candidate Biden signaled that he expected changes in the tax code that would increase the highest marginal tax rates on both corporate and individual income. The increase in the corporate tax rate, if implemented, would reverse a reduction from 35 percent to 21 percent under the Trump presidency. It is also likely that individual income tax rates, including those on capital gains, will be under review.

When foreshadowing likely policy shifts under President Biden, it will be important to monitor the background of those nominated for senior policy posts. Early appointments may be signaling a preference for more seasoned (and perhaps more moderate) candidates over that of self-identified progressives. However, in building out his team, Biden will likely offer “nods” to a variety of Democratic constituencies.

The appointment of Janet Yellen to Treasury may signal a more moderate approach to tax reform than some candidates had advocated. However, the selection of John Kerry to serve as Special Envoy for Climate, signals a likely reentry into the Paris Accord and potentially other environmental policies that could have significant impact on the manufacturing sector. As off this writing, the top posts at Labor and Commerce remain unclear, the later playing an important role in trade policy.

Finally, despite the apparent victory by Joe Biden in the presidential race, a “blue wave” never materialized and the Democrats lost seats in the U.S. House. Further, poll-defying victories by Susan Collins (ME), Joni Ernst (IA) and Thom Tillis (NC), ensured that the Republican control at least half the seats in the Senate. While the outcome of two runoff elections in Georgia will play a pivotal role, it is also likely that several moderate Democrats could cross party line on legislation seen as too aggressive.

As 2020 moves toward an end, the development of several vaccines and the resolution of the presidential elections paves the path for more economic clarity in 2021. Such clarity is necessary if the corporate sector is to deploy capital and rebuild payrolls to pre-pandemic levels.

Editor’s Notes: This article appears on TextileWorld.com courtesy of the Synthetic Yarn And Fabric Association (SYFA) and was shared with SYFA members as one in a series of articles designed to keep its members informed during a time period when in-person interactions have been severely limited and conferences cancelled.

SYFA is a non-profit organization comprised of individuals affiliated with the synthetic yarn and fiber industry. SYFA members represent a wide variety of organizations including fiber producers, texturizers, staple yarn manufacturers, fabric producers for the apparel, automotive, upholstery, and industrial markets; raw material suppliers, equipment manufacturers, universities, and service providers related to the industry.

Dr. Roger Tutterow, is a professor of Economics at Kennesaw State University where he holds the Henssler Financial Endowed Chair. He has served as a consultant to a variety of businesses and is a frequent speaker at SYFA events.

March 19, 2021