Some of that went into investments, but many households have a lot more cash on hand now than they normally would want. How much of that will they spend as the pandemic impact wanes? One possibility is that many consumers will remain cautious and hold on to those savings even as they are able to get out and spend. Another possibility: a spending frenzy and, potentially, even a negative savings rate as people finally get the chance to travel, go to restaurants and theaters, and generally cut loose this summer.
But spending could be even stronger if households decide to cash in more of those savings. The pandemic sparked a remarkable change in consumer spending patterns. Households substituted bicycles, gym equipment, and electronics for restaurants, entertainment, and travel. Once households can again purchase services, will they begin buying fewer goods?
Services spending in early is up, but durable goods spending has also continued to grow. Our forecast assumes that, over the next few years, durables spending slows substantially as consumers acquire the durable goods they need, and the share of consumer spending on services grows quickly.
The Delta variant may slow this process, but unless we see a complete return of the pandemic, consumer spending on durable goods is likely to weaken for some time into the future. In the longer term, we expect the pandemic to exacerbate some existing problems. The pandemic has thrown the problem of inequality into sharp relief, straining the budgets and living situations of millions of lower-income households. These are the very people who are less likely to have health insurance—especially after layoffs—and more likely to have health conditions that complicate recovery from infection.
And retirement remains a significant issue: Even before the crisis, fewer than four in 10 nonretired adults described their retirement as on track, with one-quarter of nonretired adults saying they had no retirement savings. A host of factors combined to boost housing demand over the past year:.
Residential investment weakened in Q2 but remains elevated and could receive a further boost in the short term. Homebuilder confidence remains above pre—COVID levels, even if it has moderated from its peak at the end of The spread of the Delta variant could keep mortgage rates lower for longer and potentially strengthen the case for remote work, therefore boosting housing demand. Additionally, data indicates that more vacant developed lots of land could be available for homebuilding over the next couple of quarters, driving an uptick in short-term housing supply.
Deloitte expects demand to cool due to reduced affordability in the medium term. Nominal home price increases are likely to more than offset the impact of low mortgage rates on demand. And interest rates are set to rise in the forecast as the recovery eventually gathers speed. Despite the slowdown, demand is likely to exceed supply in the medium term as builders continue to grapple with rising lumber prices and land-use restrictions. The Deloitte baseline forecast expects house prices to rise faster than inflation through the forecast horizon.
Long-run fundamentals suggest that housing is not likely to become a key driver of economic growth in the foreseeable future. The baseline forecast assumes that housing starts will gradually fall over the five-year horizon to 1. Faster medium-term growth would require faster population growth, most likely from immigration. Otherwise, the current heightened demand for housing is likely to be a short-term phenomenon. By the second quarter of , business investment was slightly 1. The overall number, however, concealed some dramatic changes in specific types of capital investment.
More likely, the business case for office buildings and retail space collapsed with online shopping and the shift toward working at home. Mining structures also took a big hit because of the decline in oil prices. While mining structures mainly oil drilling rigs may recover, the overall recovery of the sector is likely to be limited by the continued reduced demand for office and retail space.
In contrast, investment in equipment was up 5. Just about all categories of equipment investment were up. This is beginning to reverse—which is likely to keep this sector growing quickly in the next few years.
Meanwhile, demand for information processing equipment to support telework is likely to remain strong. Information processing investment accelerated during the pandemic after dropping in the first quarter of We expect this category to remain strong over the next few years as businesses continue to require software to accompany their investments in information processing equipment.
Financing investment will remain easy. Nonfinancial businesses are sitting on a pile of cash, and interest rates are low. In our baseline forecast, the year Treasury yield rises to a relatively low by historical standards 3. Even adding in the potential for a corporate tax hike, the cost of capital is likely to remain very low.
That will give businesses plenty of ability to pay for all those new computers and servers, not to mention the software to run them. But even with such easy financing terms, office and retail space will be unable to generate sufficient returns to entice businesses to increase capacity.
Over the past few years, many analysts have begun to face the possibility of deglobalization. All this suggested that the policies that fostered globalization may likely change in the future. COVID may have accelerated this trend. Although the pandemic is a global phenomenon, leaders have made major decisions about how to fight it—in both health and economic policy—on a country-by-country basis.
The most striking examples of this are the US withdrawal from cooperation in the World Health Organization—although President Biden rescinded the move on his first day in office—and the unilateral decisions of both China and Russia to deploy their own vaccines before completion of phase 3 trials. Countries with vaccine manufacturing facilities are rushing to vaccinate their own citizens rather than cooperating on a global vaccination plan.
On top of this, the United States-China trade conflict continues. The White House has shown some interest in returning to a multilateral approach to trade—for example, by supporting Ngozi Okonjo-Iweala for World Trade Organization director general. One important question is whether businesses will rebuild their supply chains to create more resilience in the face of unexpected events such as the pandemic and changes in US trade policy.
American companies are expected to continue to source from China in the coming years. But companies will likely accelerate attempts to reduce their dependence on China a process they had begun before the pandemic.
Building more robust supply chains may mean moving production back to the United States, or it may mean a portfolio of suppliers rather than a single source—even if the single source is the cheapest.
Reengineering supply chains will inevitably mean a rise in overall costs. Meanwhile, short-term trade flows are hostage to the virus. Port shutdowns, container shortages, and other supply chain woes will continue to increase month-to-month volatility in trade—and perhaps provide business executives more reason to find more robust and more expensive alternatives. This reflects optimism about the global economy after the pandemic, and some marginal reshoring of production to the United States.
The US current account deficit falls from 3. Two debates are likely to happen simultaneously. One debate will involve Democrats negotiating over the precise terms of the reconciliation bill. The second debate will revolve around the continuing resolution and debt ceiling, and may, in fact, have a material impact on short-term financial market outcomes around the end of September. Our forecast assumes that the infrastructure plan passes, but that the budget reconciliation bill is more modest than the current proposal.
Our five-year horizon is not long enough to capture the impact on longer-term productivity. And, of course, the Fed will likely intervene if it sees a wage price inflation spiral developing.
The answer is that it can—until investors lose confidence. At this point, most investors show no sign of concern about US debt. In fact, very low interest rates on US government debt indicate the world wants more, not less, American debt. We anticipate no problem over the forecast horizon. But the government will face a crisis if it does not eventually find ways to reduce the deficit and consequent borrowing. The crisis may be many years away, and current conditions argue for waiting.
It would, however, be a bad idea to wait too long once those conditions lift. The conversation about labor markets has switched—and fast. Not long ago, employment was about 10 million below the prepandemic level and the main question was how difficult it would be to get all those workers back on the job. Now business commentary is full of talk about labor shortages and stories about employers struggling to find workers.
That seems a bit odd since employment is still down over 5 million after the July jobs report. The Institute for Supply Management manufacturing survey jumped to Hyman added Evercore's tech index is at a decade high. The tech index is based on a biweekly survey of sales activity at five tech companies that manufacture equipment and software. Diane Swonk, chief economist at Grant Thornton, said she expects 's growth rate to be 6. She expects a pace of 4. Swonk said she has not yet added any infrastructure spending proposed by President Joe Biden , as it has not been approved and its impact may not show up for awhile.
But the other stimulus has already made some impact on the economy, and economists have already boosted the growth forecasts for this year and next.
You don't fall off a cliff even though the money was already allocated," she said. Swonk noted there is some question about whether expanded unemployment benefits are keeping some workers from returning to work. We do have a high reservation wage. There is a debate [about it ] that I don't think is unreasonable," she said. Swonk said the spread of variants of Covid is a risk to the economy, and it is specificially hitting individuals in the to year-old group, a key part of the workforce.
Another risk to the recovery could be the potential for a tightening of Fed policy , which for now looks unlikely to change. But as the economy booms, the Fed could worry about overheating and inflation. The producer price index sent a worrisome sign Friday. Fed Chairman Jerome Powell has gone out of his way to stress that the central bank will keep policy low, and that he expects a transient jump in inflation in the spring. The personal consumption expenditures price index, watched by the Fed, was up 1.
Powell has said higher inflation should show up this spring because of the base effect, compared with last year's weak numbers. The report suggests that the authorities should address the social consequences of the COVID crisis by improving the depth and effectiveness of social protection programs. They should also watch out for rising risks in the financial sector, with particular attention to non-performing loans.
Greater attention should be given to fiscal policy since policymakers will need to find the right balance between the need to support the recovery of the economy and the necessity to maintain a sustainable level of public debt. The COVID crisis has accelerated the digital transformation of the local economy as an increasing number of businesses in Vietnam are now offering their services online.
The government has also enhanced the digitalization of its procedures and databases. The report argues that for most countries in the world, including Vietnam, becoming a digital powerhouse will not be determined by the ability to produce technological breakthroughs, but rather the capacity to make the most of digital technologies developed elsewhere. Policymakers need to encourage businesses and workers to acquire the right skills to take advantage of the digitalization transformation, nurture innovative capacity among firms through competition and financial support to local startups and talents, and promote information access, quality, and security.
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