US Economic Outlook for 2021
Covid-19’s impact on the economy and society
While several Covid-19 vaccines have been approved globally, we believe that their mass production and distribution will take many months and it will likely take the whole year of 2021 before most of the world population are vaccinated. There is also a risk that the current Covid-19 virus will mutate to become more deadly and/or more transmissible. Therefore, even with the Covid-19 vaccine, there is no guarantee that this pandemic will end in 2021. Coming out of a profound public health and economic crisis, we believe that the world will need to do some things a bit differently to adapt. We see an accelerating shift towards the digitalization of our personal and work life. Anything we do in the future, we should be able to do so both online and offline, not just one or the other. The next virus pandemic could happen in the real world or in cyberspace.
US economic recovery will be driven by fiscal and monetary stimulus
Due to the slow private economy and high unemployment rates in service sectors like travel, restaurant and retail, we expect the Fed to continue their monetary stimulus policies in 2021. Furthermore, we expect the new Biden’s administration and the Democratic Congress to launch a multi-year, counter-cyclical fiscal spending program focused on infrastructure, clean energy and health care to boost GDP during his term. The playbook is very similar to the Chinese government’s massive fiscal stimulus plan launched in 2008-2009 to minimize the impact of the global financial crisis. To finance these policies, the US government will try to raise corporate and personal income tax rates and continue borrow funds from the bond market at very low costs. As a leading indicator of the economic recovery, the stock market has been rising quickly in the past months to reflect the fiscal spending scenario.
US/China tech war may have a silver lining
Biden’s infrastructure plan looks quite similar to the Made in China’s 2025 plan that the Chinese government released in 2018. Key areas of US investments include information/traditional infrastructure, automobile, clean energy, transit/rail equipment, new material, and agriculture. As such, we believe the US/China battle will be shifting from trade to the technology innovation front. We see both superpowers spending hundreds of billions of dollars in research, development and capital expenditure to build up their respective scientific capabilities and domestic manufacturing capacity. This technology race will be benefit the world as we will be enjoying the fruits of their innovation and scientific advancement in the decade to come. This is similar to how the core technologies of semiconductor and the internet were developed during the 1960s US/Russia Space race.
The Information Age revolution is underway
Few people like change, but we have to admit that we are living in rapidly changing world today. Many people do not realize this, but we are currently in the early stage of a once-in-a-century industrial revolution – The Information Age Revolution. We believe its impact will be at least as significant as the first two industrial revolutions that occurred around 1800s (steam engine, railroad) and 1900s (electricity, telephone, steel, automobile). Armed with data, software and semiconductor expertise, technology companies are disrupting many traditional industries in retail, finance, manufacturing, communications, transportation, healthcare and energy. We believe that many traditional professions, industries and companies that have thrived in the past 30 years may face existential threat in the next decade. This outlook is reflected in the depressed stock prices of so many traditional retailers, banks, oil/gas, automobile and telecom firms globally.
Inflation and rates may rise earlier than expected
Recently, the 10-year US treasury bond yield rebounded from a historical low of 0.5% in August to above 1% reflecting bond market investors are also turning bullish on the economic outlook. Commodity prices like copper and steel are also rising rapidly. In the US, we are now seeing a shortage of some automobiles, consumer electronics, semiconductors, construction material and single family house inventory. Due to Covid-19, demand for single family housing and automobile jumped outstripping supply growth in 2020. We believe that inflation and interest rate may increase sooner than current expectations driven by Biden’s fiscal stimulus policies. However, we believe they will remain low by historical standard. Higher inflation and interest rates benefit heavy borrowers like the US government as it allows them to inflate their way out of their debt burden hurting lenders and bond investors’ return. Inflation and the rising prices of financial assets effectively mean the eroding purchasing power of cash.
The Bottom Line
Despite the devastating impact of the coronavirus, the US economy is poised to rebound in 2021 driven by US government monetary/fiscal stimulus policies and significant investments in technological innovations. However, we also need to prepare financially for the eroding purchasing power of the US dollar as a result of inflation and rising prices of most financial assets.
