April Monthly Insight – It’s the Economy…

Posted By T. Lee Sherbakoff, CPA/PFS, CFP® on Apr 1, 2021


“Optimism is essential to achievement and it is also the foundation of courage and true progress.”
– Nicholas M. Butler, American philosopher, diplomat, and educator.

Technically, the economy is still in a recession. The contraction started in March 2020 just after the February peak. The National Bureau of Economic Research (NBER), the arbiter of recessions and economic recoveries, has yet to declare the recession is over. When it does, it will likely backdate the end of the recession, as it has done in the past. Regardless, key economic reports would suggest the low point for the economy occurred in April 2020. This data includes employment, consumer spending, and manufacturing production.

Whenever the NBER makes its pronouncement, this economic recovery has been far from what might be considered a normal recovery. The pandemic that led to the steepest slide in quarterly GDP on record has also shaped one of the most lopsided recoveries we’ve ever experienced. Look no further than service-based industries that require personal interactions to thrive, which is something we took for granted pre-Covid. Social distancing restrictions and fear of contracting the virus have severely impacted airlines, hotels, travel, restaurants, concerts, and movie theaters. These industries and more have struggled to adapt to the new normal.

Even healthcare has suffered. According to data from the U.S. Bureau of Economic Analysis, spending on healthcare is down 12% versus one year ago. Healthcare spending accounted for over 10% of GDP in the final three months of last year. Yet, the COVID-19 recession is the first recession since 1980 during which health spending decreased.

Yet other industries have adapted. For example, housing relies heavily on the personal touch. But record-low interest rates have spurred strong demand for housing. Essential retailers, home improvement, auto sales, and grocery stores have experienced robust numbers. Consequently, manufacturers were caught off guard by the resurgence in sales. In addition, reopening various sectors of the economy has helped, and generous jobless benefits and three rounds of stimulus checks have left many with extra cash to spend.

But here lies the problem. Government restrictions prevent most of us from attending sporting events, museums, and the theater. Even where local governments have eased public heath mandates, many people are not fully comfortable traveling on airplanes, spending a night in a hotel, or enjoying eating indoors at a restaurant. And, to the extent extra government support has helped fuel growth much of the stimulus has been funneled into other “COVID friendly” industries (think Amazon and Netflix) or into household savings.

You might consider your own circumstances. Have you noticed smaller balances on your monthly credit card statements? Have you noticed a different mix in your outlays versus pre-pandemic? Are you streaming more movies rather than going out to dinner or enjoying the theater? Has your choice of recreation been altered?

What might help the struggling industries that have suffered under today’s restrictions? For starters, a continued successful rollout of effective vaccines that will bring us to herd immunity. Experts have estimated that 70 to 90 percent of people will need to be vaccinated to achieve herd immunity. How fast we get to that point will depend on how quickly vaccines are manufactured, delivered, and administered.

But we don’t want to sound too gloomy. It’s been a difficult year with plenty of uncertainty, but prospects look bright. One closely followed GDP-tracking model, the Federal Reserve Bank of Atlanta’s GDPNow, places the first quarter of 2021’s growth between 4% and 5%. A survey of economists by CNBC/Moody Analytics suggests GDP growth this year could top 6%.

Economic forecasting, never easy, is even more difficult in today’s environment. Still, forecasters are sounding an optimistic tone. And, we at The Nalls Sherbakoff Group have a steady, rational long-term optimism and believe that such rational optimism based on historical trends remains the only long-term realism.