February 25, 2021


.The government’s response to the corona virus stopped the economy dead in its tracks.  It started to fall precipitously in March and then collapsed in April.  As a result, GDP declined 31.4% in the second quarter.  However, it began to turn upwards in May and the rebound gathered momentum in June, July and August.   At the same time, $3.0 trillion of fiscal stimulus checks were disbursed and the Fed bought $3.0 trillion of U.S. Treasury securities.  As a result, the economy rebounded by 33.4% in the third quarter. And then in the fourth quarter GDP grew 4.1% as the economy continued to rebound from the slump in the second quarter of last year, but growth was held in check by the fact that new restrictions and closures in some parts of the country.  As a result, for 2020 as a whole GDP declined 2.4%.

The $900 billion of fiscal stimulus bill approved in late December bolstered growth in January and should stimulate growth in February as well.  And then the $1.9 trillion stimulus plan (exact amount to be determined) should bolster growth in the second half of the year.  And if that is not enough, the virus is rapidly getting under control and some epidemiologists expect herd immunity to be achieved by April.  Given all of that, we have boosted our projected GDP growth rate for the first quarter to 8.2%, and for 2021 to 7.5% followed by 4.8% GDP growth in 2022.

If that path is correct GDP will get back to its pre-pandemic level in the second quarter.  The Fed seems to be comparing it to some projected growth path that it would have presumably attained if the recession had never occurred.  On that basis, GDP will completely erase the impact of the recession in Q4 of this year.

Given the GDP forecast above, we expect the unemployment rate to decline to 4.3% by the end of this year, and to 3.6% by the end of 2022.

Given the recent rapid increase in money supply growth, he core inflation rate should rise from 1.6% last year to 2.5% in 2021 and 3.0% in 2022.

The Fed has pledged to keep the funds rate at 0% through 2023.  A moderate pickup in the core CPI should  boost the 10-year note rate from 1.5% currently to 1.8% by the end of 2021 and 2.3% by the end of 2022.

Stephen Slifer


Charleston, SC