By: Philip T. Powell, Indiana University Kelley School of Business Associate Dean of Academic Programs in Indianapolis and clinical associate professor of business economics and public policy, firstname.lastname@example.org
When a fighter pilot banks their jet for a steep climb, gravity exerted upon the human body suddenly multiplies. “Feeling the G’s” causes disorientation. This best describes what the 2021 economic rebound will feel like to business owners as they navigate through a period of accelerated growth and high demand in the coming months.
Business owners and managers must be proactive instead of reactive. In spite of continued lockdowns and social distancing, leaders must plan in 2021 to quickly accommodate this rapid growth and the higher expenses and constrained capacity that it generates.
Demand will suddenly return with unexpected strength. The Conference Board forecasts real GDP growth of 4.7% in Q2, 6.4% in Q3, and 4.8% in Q4 of 2021. This rate of expansion doubles and nearly triples the 2.2% growth experienced in 2019. Since recovery began in Q3 of 2020, actual growth has consistently beat predictions. Companies need to prepare for a tsunami-like return of business.
Economic activity will quickly restore full employment. As of February 2021, 8.6% of the February 2020 pre-pandemic labor force was not employed. This number was 18.9% in April 2020. As COVID-imposed restrictions loosen over the next year or so, jobs in hospitality, entertainment and travel will swiftly return. Indiana is a state less impacted by these industries. Health care, manufacturing, logistics and technology – industries that have fared well during COVID – drive the Indiana economy. As of December 2020, 5.1% of Indiana’s pre-pandemic labor force was without a job. Economists consider a jobless rate between 4% and 5% as an indicator of return to full employment. Managers must be ready for a quick return of labor shortages and talent deficits.
$3.1 trillion in 2020 federal stimulus and zero percent interest rates protected the economy. Economic policy provided cash for households and businesses and averted catastrophe in 2020. In January 2021, only 6.8% of apartment renters were delinquent with their rent, just 2.6 percentage points higher than in January 2020. Nationwide bankruptcy filings actually fell in 2020 and were the lowest in 35 years. With an economy closer to full employment, further stimulus can overshoot its intended impact. The new $1.9 trillion COVID relief bill will supercharge household and business spending.
Equities and certain assets are overvalued because of excess savings and liquidity. With less ability to spend income, private sector savings increased 33% between Q1 and Q3 of 2020. Between February 2020 and January 2021, the Federal Reserve increased cash by 49% to stimulate the economy. In search of high returns, households and businesses invested unspent income in equities and speculative assets (like Bitcoin and trading cards) and elevated their prices. As the economy reopens and households and businesses sell their investments to fund pent-up demand for goods and services, these prices will fall. The current S&P 500 Schiller Price-Earnings Ratio matches a high level last seen before collapse of the dot-com bubble in 2000. Corporate profits are not high enough to sustain current equity prices. Investors should hedge against a fall in stock and speculative asset prices.
Dramatically higher demand increases the risk of inflation. A new round of federal stimulus and a reduction in private sector savings can fuel a historic rise in household and business spending. Growth in production capacity will most likely struggle to meet growth in demand. If so, prices for goods, services and commodities will rise and generate inflation. In response, the Federal Reserve will have to reverse its current policy of zero interest rates. Rapid recovery will motivate the Federal Reserve to raise interest rates in the second half of 2021.
Companies can proactively position themselves for economic changes in 2021. Predicted shifts in the U.S. economy suggest consideration of the following business choices:
- Prepare customers for higher prices on products that will suddenly be more popular.
- Preemptively raise the wages paid to good employees to prevent turnover later in the year.
- Renegotiate vendor arrangements to become a priority buyer for whom orders are 100% filled during upcoming periods of high demand and longer lags in delivery.
- Shift debt from variable interest rate contracts to fixed interest rate contracts.
- Approve capital spending on profitable projects that were frozen during the pandemic.
The rapid climb of a fighter jet takes a pilot out of harm’s way in a threatening situation. The move, however, is sudden and the biological stress is intense. An unprepared pilot can experience a blackout, which causes the plane to stall and risks a crash. Awareness of business failure during an economic recovery is as important as it is during an economic recession.
Bureau of Economic Analysis, Gross Domestic Product, Fourth Quarter and Year 2020 (Second Estimate), 25 February 2021.
National Multifamily Housing Council Rent Payment Tracker, 6 February 2021.