The economy is going to rebound from record lows in 2021, according to economists, but the pace of recovery is going to depend as much on actions taken to protect public health as it is on the monetary policy set by the Federal Reserve.
Robert Kaplan, president and CEO of the Federal Reserve of Dallas, spoke to members of the San Antonio Chamber of Commerce on Thursday and said that growth in the gross domestic product (GDP) is going to increase by about 5 to 10 percent in the fourth quarter.
To keep it going in the right direction and bring the economy back to full strength, the Federal Reserve released a policy statement in September stating that officials plan to keep interest rates near zero through at least 2023.
“We’re growing out of this deep hole that happened in the second quarter,” Kaplan said. And despite the pandemic, by year’s end, the U.S. economy will have contracted by only 2.5 percent overall.
That’s due in part to the federal CARES Act that provided relief funding to individuals, businesses, and local governments, Kaplan said. Unlike other downturns, this one is marked by strong household incomes and consumer spending propped up by fiscal relief. That could change, however, if Congress doesn’t approve another coronavirus relief package.
Negotiations between Democrats and the White House over such a relief package continued into Thursday with both sides differing over who should benefit and how much to spend.
Kaplan said the economic impact of the pandemic has varied widely, disproportionately affecting different groups.
“I don’t need to tell you if you’re a small business or a business in a person-to-person contact industry, this has been a very difficult period because consumer engagement has dropped dramatically,” he said.
The other groups hit hard are those without a college education, he said, people working in the service sectors who could not work remotely, and the Hispanic and Black populations in Texas.
“It means coming out of this pandemic, investments in beefing up skills training, investments improving early childhood literacy, investments improving secondary education [that] I think were critical going into the pandemic – they’re even more critical now,” he said.
In September, the board of the San Antonio Chamber threw its support behind local initiatives that will appear on the November ballot, including one that reauthorizes a one-eighth-cent sales tax to fund Pre-K 4 SA and allocates another one-eighth-cent to fund a workforce development program.
Kaplan also said during the virtual forum that he sees a quick rebound for many industries hit hard by the pandemic, such as hospitality and air travel, and even the energy industry, but only if a coronavirus vaccine is developed and widely distributed.
And the need for face masks and social distancing will continue at least through next year, he said.
“The No. 1 economic policy tool we have, besides fiscal and monetary policy, is wearing a mask,” he said. “Epidemiologists have been advising me since March, if we all wore masks, we would mute the transmission of this disease; consumers would be more likely to be reengaged in the economy, including getting on airplanes, and it will cost us less money from a fiscal point of view.”
Kaplan said the U.S. has done a good job of managing the pandemic, but not as good as other countries, which have spent less on fiscal policy than the U.S. “And we’re now having to spend more because of the path of the virus, fears of resurgence, and we’ve still got an elevated level of unemployment,” he said.
But Kaplan believes extending fiscal relief from the federal government is critical as long as unemployment remains high.
“The Fed can ease financial conditions [but] we can’t replace lost income,” he said. “If we don’t get some extension of fiscal relief, you might actually see household income and consumer spending get weaker.”