U.S. Economy Isn’t Out of Danger Zone Yet; Expect Problems in 2021 Lombardi Letter 2021-01-25 04:35:48 us economy economic slowdown The U.S. economy may not be out of the danger zone just yet. Problems persist, and the growth in 2021 may not be as rosy as predicted. This could be a big risk for the stock market. U.S. Economy

U.S. Economy Isn’t Out of Danger Zone Yet; Expect Problems in 2021

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U.S. Economy Is Fragile & the Slowdown Is Far From Over

The U.S. economy remains frail. Don’t for a second think that the economic slowdown that began in 2020 is finished yet. The reality is that it’s far from over, and there could be a lot of trouble in 2021. Don’t let the stock market performance fool you into believing everything is great.

Let’s look at the basics.


How did the U.S. economy enter a severe economic slowdown in 2020? This shouldn’t be new information to anyone at this point, but it’s worth mentioning as a refresher. In early 2020, the COVID-19 pandemic began, and something had to be done before it become an outright health-care crisis. Governments and health officials went into panic mode, implementing restrictions and lockdowns across the country.

Businesses were told to shut down and there were massive job cuts. In April 2020, the U.S. unemployment rate soared to 14.8%. (Source: “Labor Force Statistics from the Current Population Survey,” U.S. Bureau of Labor Statistics, last accessed January 22, 2021.)

Consumer spending came to a halt. Factories stopped operating. Travel was frowned upon. In April, U.S. airlines had 96% fewer passengers year-over-year. (Source: “Preliminary Air Traffic Data, April 2020: 96% Reduction in U.S. Airline Passengers from 2019,” Bureau of Transportation Statistics, June 10, 2020.)

And the list goes on.

This triggered a severe slowdown in the U.S. economy. Mind you, this was the case globally as well.

Forecast for 2021

So what’s going on in 2021?

The pandemic isn’t over and there are still restrictions. Surely, there aren’t as many restrictions as there were in early 2020, and there’s some light at the end of the tunnel, given that vaccinations have begun.

But don’t let your guard down. The vaccination rollout is going to be a long process. The pandemic may not be over anytime soon; it could be early 2022 by the time a sufficient amount of the population is vaccinated.

You also have to keep in mind that, since the pandemic started, consumer sentiment has been really hurting in the U.S. economy. Americans haven’t been going out and shopping as much as they would normally. Either they’ve been concerned about their health or, simply, wherever they’ve wanted to spend their money has been closed due to restrictions. Or they’ve just been nervous about what’s ahead for them financially. Will they still have a job?

Don’t forget, consumer spending is hands down one of the biggest forces that effect the U.S. economy.

What Happens if Growth Isn’t as Expected?

Thanks to the U.S. government spending rigorously, and the Federal Reserve keeping interest rates low, the economic problems have just been kicked down the road, not eliminated.

In the coming quarters, I suspect that the U.S. economy will slow down a bit. Currently, the Federal Reserve expects gross domestic product (GDP) to grow by 4.2% in 2021. (Source: “December 16, 2020: FOMC Projections Materials, Accessible Version,” Federal Reserve, December 16, 2020.)

This may be a slightly optimistic projection.

What happens if the economic growth is lower than expected? Investors have bought into the idea that the U.S. economy is fine and that everything is great. If it’s not as rosy as expected, don’t be shocked to see investors sell their stocks.

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