Return to Normalcy in 2021

Forecast 2021

Businesses can look forward to an increasingly favorable operating environment in 2021 as the economy gradually rebounds from the effects of the Covid-19 pandemic. A robust housing market should help generate activity in many business sectors, while higher corporate profits should fuel a gradual return to more aggressive capital investments. The arrival of a Covid-19 vaccine, anticipated by the middle of the year, should invigorate consumer and business confidence and elevate employment levels.

Relief is in sight. Battered by the pandemic and scrambling to shore up finances, businesses can look forward to an easing of the pain over the next 12 months. Economists anticipate a gradual but noticeable recovery fueled by a surge in corporate profits, a strong housing market, and the successful roll out of a vaccine.

“The COVID-19 recession is over, and the economy is currently in an early-cycle expansion,” says Sophia Koropeckyj, Managing Director of Industry Economics at Moody’s Analytics, a research firm based in West Chester, Pa. (

The healthier the economy, the better for business profits. And Moody’s expects the nation’s Gross Domestic Product (GDP) to increase at a 4.1% clip for 2021. That’s a welcome rebound from the previous year’s decline, expected to come in at 3.6% when figures are finally tallied. (The GDP, the total of the nation’s goods and services, is the most commonly accepted measure of economic growth.)

The Joe Biden presidential win should support an economic rebound in three areas. “Biden has proposed significantly more fiscal stimulus, which will pack a punch in the coming year as aggregate demand is still recovering from the pandemic,” says Koropeckyj. “Second, Biden would not resume Trump’s tariff wars with China, which have acted as a tax increase for consumers. Finally, Biden will liberalize international immigration, which will boost the supply of labor and in turn the economy’s potential.”
Faster economic growth, says Moody’s, should in turn help boost corporate profits by an expected 17.1% in 2021–a dramatic turnaround from the 13.8% decline of the past 12 months, and reason for optimism about a return to the aggressive capital expenditures so critical to an economic rebound.

Slow and steady

For most businesses, the return to normal should be gradual. During the first half of 2021 households will continue to self-quarantine as a wave of bankruptcies boosts the number of permanent job losses. By summer, says Koropeckyj, things should look different. “The economy will regain its stride in the second half of the year, when a vaccine or treatment is assumed to be widely available.”

Business owners seem to share Moody’s optimistic mindset. “Even though there’s still a lot of uncertainty out there, many companies have a positive outlook,” says Tom Palisin, Executive Director of The Manufacturers’ Association, a York, Pa.,-based regional employers’ group with more than 370 member companies ( “Maybe they’re being overly confident, but our members seem to feel that in six months’ time things will have turned around significantly.”

With its diverse membership in food processing, defense, fabrication, and machinery building, the Pennsylvania trade group can be viewed as a proxy for American industry. The organization’s members are reporting results that seem to position the tail end of 2020 as something of a springboard for future months. “Conditions for our members have improved, with increasing revenues, since the April and May timeframe,” reports Palisin.
Springboard or not, it’s a sure bet that few businesses will regret seeing 2020 in their rear-view mirrors. “It’s been a rough year for many manufacturers,” says Palisin. “We’re looking at pretty significant revenue declines of 30% to 40% through much of the year for many of our members, who have had to do furloughs and layoffs to maintain operations while dealing with supply chain problems.”

Palisin acknowledges that for many operations the road ahead will be rocky. That’s especially true for those with limited resources. “Smaller companies aren’t as well equipped as far as financing and cash flows to weather an economic downturn,” says Palisin. “Things have been significantly tougher for them.”

Housing surges

An important driver for the economy at large, residential construction is doing extremely well and promises more good news in 2021. “Housing demand has bounced back thanks to very low mortgage rates and the release of pent-up demand,” says Koropeckyj, who points to healthy builder confidence as the nation enters the new year.

The road ahead looks sunny indeed: “We forecast housing starts will surge by 16.8% in 2021, after slowing to a 2.9% rate in 2020 due to the initial impact lockdown orders had on construction,” says Koropeckyj. The comparable 2019 figure was a positive 3.8%.

Median prices for existing homes are also increasing at a healthy rate, expected to top 7.6% when 2020 figures are finally tallied, which would surpass the 5% increase of the previous year. One key reason: tight supply. “Housing has been a seller’s market with low inventory levels as homeowners have been reluctant to offer their residences up for sale for fear of contracting the coronavirus,” says Koropeckyj.

The industry itself has engaged in practices that have contributed to its success. “Real estate professionals have done a great job adapting to social distancing, and enabling the buying and selling of homes, appraisals, title insurance policies and closings at the same pace as before the pandemic,” says Bill Conerly, Principal of his own consulting firm in Lake Oswego, Oregon ( “With the shift to suburban living, more new homes will be built.”

Despite its recent success, the housing industry faces its own headwinds. “We expect prices to fall by 0.3% in 2021 as foreclosures mount due to an unwinding of forbearance measures by the federal government and private lenders,” says Koropeckyj. “According to the latest Senior Loan Officer Opinion Survey, banks have tightened standards across all sorts of mortgage products.”

And the housing sector faces other issues that will sound familiar to anyone who has watched the industry over the past several years. “Construction costs are rising quickly, and builders are still grumbling about the inability to find buildable lots and skilled labor,” says Koropeckyj.

As for the construction of non-residential buildings, the bag is equally mixed. “Although office and retail construction will be soft in the near future, they account for less than one-fourth of private nonresidential construction,” says Conerly. “The big categories of power production, manufacturing, health care, and warehouses should do fine in the transition to post-Covid business.”

Strong retailers

Retailing tends to reflect and invigorate the nation’s economy, and this is a sector that has registered notable gains that promise to continue. “Our current 2021 forecast is for 6.2% growth in core retail sales,” says Scott Hoyt, Senior Director of Consumer Economics for Moody’s Analytics. That forecast represents a substantial improvement over 2020, when the 2.1% increase expected when numbers are finalized represented a deceleration from the 3.9% growth clocked in 2019. (Core retail sales exclude the volatile auto and gasoline segments.)

The positive growth rate for retailers in 2020 has come about as consumers have rechanneled their purchasing away from services and toward merchandise. “While consumer spending has been hammered pretty badly, retailers have not been hit nearly as hard as service businesses,” says Hoyt. Moody’s forecasts a decline of 5.2% in services spending when 2020 numbers are in–a stark reversal from the 4.3% gain in 2019. “Because of people’s hesitancy to travel, to go to entertainment facilities, and to do things with other people, to a certain degree they’re replacing such activities with buying goods.”

The positive retail reports will come as a surprise to anyone who has encountered the long rows of shuttered storefronts in America’s cities and towns. Two reasons account for the disparity. The first is the increasing purchase of merchandise through digital channels—a long-term trend that has only been exacerbated by the stay-at-home nature of the pandemic. The second is that consumers have become highly selective, abandoning many merchandise categories in favor of a select few that are either essential to living, or which enhance the enjoyment of pandemic-enforced leisure time. Both trends have merged to create a retail environment that favors some sectors and decimates others.

Capital investment

Despite the strength of housing and retailing, the economy will face headwinds in 2021. Not least among them is the sluggish state of capital investment. Corporate decision-makers, faced with uncertainty, are reacting in a predictable way: keeping their powder dry. By the end of 2020 total real fixed investment had fallen by 27% annualized, according to Moody’s Analytics. “In uncertain times, investors hold onto cash and delay investments,” says John Manzella, a consultant on global business and economic trends, Amherst, NY ( “This undoubtedly puts downward pressure on economic growth. As a result, uncertainty has become the enemy of prosperity.”

More robust investments in commercial buildings and machinery are not expected to arrive any time soon. “Low capacity utilization and still-high uncertainty will make expansion decisions difficult, though the declining cost of corporate borrowing will provide some offset,” says Koropeckyj. “Major segments of investment will be weak, with transportation equipment and structures especially hard-hit.” Structures investment is expected to decline by more than 12.3% in the months ahead, led by the collapse in retail and reduced demand for office space.

Bank loan availability poses one barrier to a rapid return of capital investment. “While interest rates are low, many companies have taken financial hits that can affect their ability to qualify for loans,” says Palisin. “With corporate financials changed so drastically from the prior year, there is some tightening of access by lending institutions.”

Moody’s identifies technology as one bright spot in an otherwise shadowed capital investment picture. Palisin concurs with the observation, reporting an increase in spending by his members to boost efficiencies. “The pandemic will probably accelerate the trend toward more automation and robotics,” he says. “Such technology will be needed to increase manufacturers’ resiliency.”

Consumer confidence

Spending by consumers accounts for some 70 percent of economic activity and is arguably even more important than capital investment for the nation’s overall business health. Household spending, though, is driven by public psychology, and the most recent reports from Moody’s Analytics show that the nation has a lot of catching up to do: By late 2020 consumer confidence was running as low as it was in March and April during the worst days of the pandemic.

If uncertainty about the course of the pandemic and the availability of a reliable vaccine are reason enough for high anxiety, there’s a more immediate driver of consumer discontent: the noticeable drop in take home pay over the past year. “Wage and salary income, including the value of benefits, is forecast to decline 1.3% when 2020 numbers are finalized,” says Hoyt. Those numbers represent a reversal in fortune from the 4.4% increase of 2019. (Wage and salary income figures exclude government payments such as the 2020 pandemic relief checks).

Pandemic-related furloughs and business closings accounted for a major portion of wage declines. Moody’s expects the unemployment figure to come in around 8.5% when 2020 numbers are finally tallied. That’s a sharp increase from the robust 3.5% level consumers were enjoying as recently as last February.

Consumers might improve their outlook if the unemployment picture were brightening. Yet the expectations here are, once again, for only gradual improvement. The unemployment rate is expected to decline to 7.8% by the end of 2021. “The labor market will not recover all COVID-19-related job losses until the second half of 2023,” says Koropeckyj.

A brightening jobs picture should translate directly into a boost in take home pay. Moody’s anticipates 2021 wage increases to come to 2.5%—a level high enough to allow shoppers to exhale but too low to spark rapid spending. Hoyt’s expectations for improvements in the public psychology are suitably conditional: “We are assuming a slight upward trend in consumer confidence until we get a vaccine or an effective treatment, at which point it will probably move up faster.”

A high level of consumer confidence can translate into good news for the timeshare loan asset-backed securities (ABS) sector. “The underlying economic fundamentals of the consumer will continue to be a key factor in both the volume and credit quality of timeshare loans originated by sponsors which can affect contemplated ABS structures, transaction size and transaction timing,” says Hollie Reddington, Vice President, U.S. Structured Finance at DBRS Morningstar ( (For more analysis see the sidebar, “What’s Ahead for Timeshare Asset-Backed Securities?”)

Tight labor

Conditions in the labor market are also preventing a faster recovery. Not only is the unemployment level high, but employers are not finding the job applicants they need. “Companies are having problems recruiting and getting folks to apply for work,” says Palisin. “Some things going on in the labor market are probably contributing to that. First, the portion of the workforce still on furlough will probably not take another job but will return to the one they were furloughed from. Second, there are childcare issues as students go back to school online and it’s difficult for those people to get back into the labor pool. Finally, there is some level of health concern by employees going back into the workplace, especially if they are older workers or higher risk people.”

While the future of the labor market remains unsettled, the opening months of 2021 might provide clues as to whether hiring difficulties will continue. “Perhaps as we get into the new year people will start to feel more comfortable returning to the workforce, the childcare issues may be resolved, and a vaccine will be developed,” says Palisin. “But right now there seems to be a lot of hesitancy in the labor pool. People are sitting on the sidelines to see what is going to happen.”

Competition for quality workers makes the hiring process all the more difficult. “Some sectors of the manufacturing economy, such as the food and automobile industries, are hiring quite a bit,” says Palisin. “And sectors such as construction and healthcare are competing with manufacturers for workers.”

When the labor market gets tight, upward wage pressure can’t be far behind. “To remain competitive companies are restructuring their compensation packages to retain higher-end skilled workers,” says Palisin. “Retirements by the baby boomers and a decline in immigration are also putting higher pressure on wages.” Companies aren’t likely to take a wait and see while the best people go elsewhere, he adds. “Even during this period, talent is one of the top, if not the top, factor to keep a company growing.”

New deal

In the opening months of 2021, some key indicators should offer clues to how the year will turn out. Palisin feels the level of durable goods orders may signal the economy’s trajectory, as will the level of capital expenditures. “Businesses will be looking for increased certainty on matters such as market stabilization, the ability to hire, access to a qualified labor pools, and workplace safety protocols,” he says. “It would be good to have some kind of resolution around trade issues as well. All of those concerns will be front-burner ones.”

As for the view at Moody’s Analytics, Koropeckyj looks to consumer sentiment levels in early 2021 for insight into how freely shoppers will spend the rest of the year. “We will also look closely at the number of business bankruptcies,” she says. “And the core unemployment rate, which excludes temporary layoffs, will gauge how much joblessness is attributable to permanent layoffs which leave behind long-lasting scars on the labor market.”

But perhaps the best economic indicator of all will be the rate of progress toward a cure for the not-so-hidden elephant in the room: the pandemic. “Businesses will be concerned about the timeline of a vaccine,” says Koropeckyj. “The path towards some semblance of economic normality hinges upon its development and widespread distribution.”

Phillip M. Perry is an award-winning business journalist based in New York City. He covers management, employment law, finance and marketing for scores of business magazines.

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