By Chris Kuehl
Managing Director, Armada Corporate Intelligence
There is not much about 2020 that has followed any kind of traditional script. The arrival of the pandemic and the subsequent economic lockdown plunged the country into a very unique recession that has defied all the traditional remedies. It has also upset the usual rhythm of an election year. What makes this one unique is that the most important issue will be the same after the election as was the case before. The White House, Congress and every other government jurisdiction will be faced with the pandemic and the lockdowns that will still be in place.
In many respects the economy has performed better than expected towards the end of 2020. The expectation had been that recovery would be underway by May but that didn’t pan out. The assumption was that the economy would decline through the summer but that was not the case either. There has been some significant bounceback in the third quarter but not in all areas. The retail community saw better than expected growth and so did much of manufacturing. Construction was driven by demand for warehouses and distribution facilities but demand for office buildings crashed. Medical sector activity has been up but anything connected to the hospitality or entertainment sector suffered along with travel and tourism. The service sector as a whole was down.
Key Assumptions for Future Growth and Recovery
The 2021 expectations are similarly all over the place but there appear to be three key assumptions as far as future growth and recovery. The first and most important is the pace of the pandemic. There will be no real economic rebound for the bulk of the service sector until the lockdowns can be lifted. The efforts to isolate and quarantine have been spotty and somewhat ineffective and that has placed the burden of control on vaccine development. At this point there is not even a vaccine available, but it is anticipated to be ready by early in 2021 and then there will be a race to distribute. The faster that happens the sooner the real rebound.
The second assumption is tied to the first. How soon will consumers be willing to resume old patterns. They have shown a willingness to consume again as retail numbers have been acceptable, but the service sector is another matter. Prior to the lockdown the consumer spent about 65% of their disposable income on services and entertainment. These are the sectors most affected by the shutdown. Will they come back? Will consumers feel confident enough to start attending events again? Will consumers substitute goods purchasing at the expense of those service expenditures?
The third assumption revolves around the patterns that have already changed. Will these new patterns emerge as dominant or will business and the consumer go back to old ways? The population has shifted dramatically to the work-at-home model but the enthusiasm for the shift varies. Many are content to keep working this way and others are demanding a return to the workplace. The shift from brick and mortar retail was already taking place but the lockdown accelerated that transition. At the start of the year around 10% of retail sales were online and by the end of June that percentage was up to 18%. Will that keep increasing? The global supply chain altered as companies sought to diversify their suppliers and there was a great deal less faith in the Just-In-Time system. Warehousing and inventory are popular again but how long does that last?
The Bottom Line
The bottom line is that 2021 will be an improvement over 2020 (it almost couldn’t help but be). How much better will depend on managing the changes that have taken place.
Chris Kuehl, PhD is the NACM Economic Advisor and Managing Director of Armada Corporate Intelligence. In addition to providing the Credit Manager's Index, Chris often contributes articles to NACM National and NACM Heartland.