Photo by Matt Gush

Amidst rising COVID-19 numbers, strong vaccine hopes and a nation seeking to move past a contentious presidential election, Mira Farka, Cal State Fullerton associate professor of economics and co-director of the Woods Center for Economic Analysis and Forecasting, provided an update on the economic outlook on Dec. 10 at a virtual event presented by the North Orange County Chamber of Commerce.

Despite a strong upturn in the economy as the nation reopened in early May, the recovery has stagnated since mid-summer with a new wave of infections, and as the cases escalate in the fall/early winter there is a risk of another backslide. This has resulted in a paring down of economic growth projections presented in October. The pace of job formation, once the most robust on record, has slowed down dramatically, from 4.8 million in June to 250,000 in November.

Still, better times are likely ahead, with Farka anticipating a better-than-consensus outlook for the second half of 2021 and beyond, with GDP returning to pre-pandemic levels by the end of 2021 and full employment by the end of 2022. Sky-high savings rates, down from a pandemic high of 34% but still at a historic high of 13.8%, are likely to help consumers.

“The outlook is a bit of a mixed bag. We’re a bit more pessimistic in the short term, next three to four months, but more optimistic in the long-term,” said Farka. “The next few months are going to be the toughest in this recovery. But starting in the second half of 2021, we are predicting bluer skies. Once the vaccine is widely available, hopefully by the second half of 2021, we will see a surge in pent-up demand. A sort of Roaring ’20s.”

Prompting Farka’s optimism are a number of factors, including a healthy economy pre-pandemic, a strong and swift government policy response, a relatively resilient recovery, the vaccine (anticipated to be available to lower-risk individuals, including young adults, by May and June) and the election uncertainty largely behind us as we move forward into 2021.

Some sectors will fare better than others in this early post-COVID world.

“The recession is too deep, and it will take a while to reverse the losses we had. The socially distant economy will be a 90% economy, at least in the short-term, with certain sectors, especially service sectors, left behind,” said Farka.

Lockdown 2.0 is Less Widespread and Less Severe

In spring 2020, lockdowns may have helped slow the spread of COVID, but they leveled the economy, resulting in the worst quarter (in terms of GDP) in U.S. history and the third sharpest downturn on record (after the Great Depression and post-World War II demobilization), albeit the shortest recession in history due to the reopening bounce back.

“Even though we saw this strong recovery early in the cycle, it seems that momentum ebbed in mid-summer as we saw a second surge of cases in the Southwest, with fears of a bigger stall or even a backslide into recession as the number of cases rise in the winter months,” said Farka.

With a new surge, California is back under lockdown, but the orders are less severe than in the spring, and a more benign approach is being pursued in much of the rest of the U.S.

“In most states, businesses are still mostly open with very few restrictions. But a handful of states have taken a mixed approach to business closures. Some states have taken a more heavy-handed approach, including California and most of the states in the West, and some in the Midwest as well,” noted Farka.

Regarding hospitalizations – perhaps the most significant COVID metric due to impact on hospital capacity – Farka noted that California was about midrange, not as good as some states with rates below 200 per 1 million, but not as bad as hot spots, which include Nevada and Arizona, where hospitalization rates are in excess of 400 per 1 million.

However, since this forecast was presented, hospitalizations have worsened in California, and at present (Dec. 22), is now at 465 hospitalizations per million residents, at par with Pennsylvania, Missouri, Indiana, Tennessee, Mississippi, Oklahoma, Delaware, Ohio, New Jersey and Rhode Island. But the state is still doing better than Arizona (539 per million) and Nevada (648 per million), though the situation continues to worsen in California.

Fiscal Relief to the Rescue and the Post-Election Outlook

Farka scheduled her post-election update for Dec. 10, with the hopes that there would be more certainty than exists at present relating to the election results. Georgia is currently the center of the political universe, with its two U.S. Senate runoff elections scheduled for Jan. 5 determining congressional control.

“Our baseline working assumption is a divided government, with the Senate in GOP control, with the White House moving to Democrats. Gridlock is on the menu, which is not as bad as it sounds,” said Farka.

While major economic changes, such as a repeal of the 2017 tax bill or a Green New Deal, are not anticipated, Farka does anticipate a more muted response from a Biden administration through executive orders, including on student loan relief, immigration changes and deregulatory rollbacks.

While tariffs with China aren’t likely to disappear overnight, Farka expects some changes under Biden. “The main difference between a Biden and Trump approach on China is Biden would probably pursue a more multilateral approach.”

The $900 billion fiscal stimulus is likely to prevent a rash of evictions and help prop up the economy during the current slowdown, Farka anticipates. The expectation of such a stimulus, coupled with vaccine hopes, have helped the stock market stay on track for a strong V-shaped recovery.

Still, up to 25% of all businesses may not survive the COVID recession, with some sectors, such as leisure and hospitality, hardest hit. And Farka anticipates that eviction moratoria are likely to be extended for months to come.

Cal State Fullerton’s Growth During the Pandemic

CSUF President Fram Virjee opened the economic forecast by feting the university’s growth during the pandemic, including a 4% rise in enrollment that bucked national trends and progress toward a more inclusive and accessible education.

“While the pandemic prevented our students from crossing the commencement stage, it didn’t prevent them for attaining the highest GPA and graduation rates in our history, and a lowering of achievement gaps,” said Virjee.

Despite current hard times, Virjee sees better days ahead, for CSUF and the broader community.

“At the end of the dark tunnel that we’ve been walking down in the 10 months, we can see the light of the vaccine coming, and we plan to get back to primarily on-campus teaching and learning in fall 2021. A new normal with innovative hybrid courses and new efficiencies,” he said.

“Regardless of the forecast, I take comfort in that we face that future together. Please be safe as we walk toward that new normal together.”