1. What is a recession? Is the U.S. economy in recession right now?

The National Bureau of Economic Research (NBER) is a non-profit organization that dates U.S. recessions and expansions. They define a recession as, “a period of significant decline in economic activity spread across the economy, lasting more than a few months and normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”

The NBER announced in June 2020[1] that the U.S. had reached a peak in economic activity in February 2020, that is, that a recession began in March 2020. The NBER has not yet announced that the recession has ended. However, given that real GDP, employment, industrial production, and wholesale-retail sales have all increased dramatically since mid-2020, the NBER is likely to eventually date the end of the recession in April or May of 2020.

2. What is the most effective form of near-term fiscal stimulus?

To support near-term economic growth, fiscal stimulus should be focused on low-income households (particularly those with unemployed workers) who are more likely to spend any funds in the near-term. Higher-income households are more likely to save the funds, making them less effective as fiscal stimulus.

In addition, near-term fiscal stimulus should be focused on preventing closures of businesses that are viable over the longer run but face short-term funding pressures. The Paycheck Protection Program has been very helpful here.

Finally, one potential area for near-term stimulus is aid to state and local governments. These governments are required to balance their budgets. Revenue shortfalls for many governments would require them to cut spending and jobs and/or raise taxes in the near-term, which would weigh on the recovery. Federal aid could help avoid this.

3. What is the most effective form of longer-term fiscal stimulus?

Longer-term stimulus efforts should be focused on investments that would support employment but also support stronger long-run economic growth. This could include investment in infrastructure (such as highways, airports and internet access) and education.

4. Is rising national debt a threat to the U.S. economy?

The U.S. national debt is rising as a result of efforts to combat the pandemic and the Viral Recession. However, with interest rates for U.S. government borrowing extremely low right now (they are negative after taking inflation into account) the current level of debt is sustainable. Net interest costs for the federal government actually declined in 2020 as rates fell. The Federal Reserve has indicated that it will keep interest rates very low until there has been a substantial improvement in the economy, limiting the negative impacts of rising national debt.

It would be a mistake to focus on deficit reduction in the near-term when the economy is still recovering from the Viral Recession and unemployment remains extremely elevated. But at some point the federal government will need to reduce its budget deficit, through some combination of spending cuts and tax increases. Spending cuts will need to come from the largest programs, including Social Security, Medicare and national defense.

5. What is the outlook for the yield curve?

PNC is forecasting a slight steepening in the yield curve over the next couple of years as the Federal Reserve begins to taper its quantitative easing program. However, we do not see this as a risk to the economic recovery.

6. Will stimulus efforts and aggressive Federal Reserve efforts to combat the economic downturn lead to higher inflation?

Currently inflation is below the Federal Reserve’s 2% objective, and inflation has been below this objective for most of the past decade. The Federal Reserve would like inflation to move above 2% for a period of time, so that inflation averages 2% over a period of years. Fed officials have also stated that while they have many tools to deal with inflation that is too high, they have fewer tools to do with inflation that is too low. Thus, they will continue to act aggressively to push inflation up so that it averages 2% over a period of a few years.

In the current environment it is difficult to see inflation getting out of control. Many industries are still struggling with excess capacity, giving them little pricing power. The unemployment rate remains elevated and few workers are seeing wage increases. And, energy prices remain well below their pre-pandemic levels.

Inflation may increase temporarily in the spring of 2021 on a year-over-year basis due to comparisons at the same point in 2020, when prices dropped dramatically during the recession. But inflation should then slow on a year-over-year basis in the summer of 2021.

7. Would a higher minimum wage spark higher inflation?

Economic research has found that higher minimum wages have little impact on inflation. Any minimum wage increase would likely be implemented over a period of years, giving employers time to adjust. Businesses would have the ability to limit the impact of minimum wage increases on their bottom lines by hiring higher-skilled, more productive workers, who would not be subject to a minimum wage increase, and investing in labor-saving technologies. In addition, from the Federal Reserve’s perspective, a bit higher inflation from a higher minimum wage would be good for the economy over the longer run.

8. What inflation measures does the Federal Reserve focus on?

The Federal Reserve’s preferred inflation measure is the personal consumption expenditures (PCE) price index, based on a “typical” consumer bundle. The Fed looks at both the overall and core PCE price indices; the core index excludes food and energy prices, which can be volatile and hide trends in underlying inflation.

The PCE price index is an average across consumer services and goods throughout the economy. Thus, some prices rise more quickly than the average, some rise more slowly, and some decline. Looking at only a handful of prices does not give a true picture of economy-wide inflation.

9. How have extra unemployment insurance benefits affected the availability of labor?

In the spring of 2020 Congress passed legislation that made more people eligible for unemployment insurance benefits, including the self-employed, gig workers (such as Uber drivers) and independent contractors. In addition, unemployment insurance recipients received an extra $600 per week in benefits, more than their usual benefit under state unemployment insurance programs. A University of Chicago study found that three-quarters of unemployment insurance beneficiaries in mid-2020 were receiving more in benefits than they were earning before the pandemic; this discouraged labor supply, particularly for lower-wage workers.

Those extra benefits expired over the summer and were replaced with a patchwork of federal/state efforts to provide benefits above the regular amount. The stimulus bill passed at the end of December provided an additional $300 in extra unemployment insurance benefits per week, for up to 11 weeks. These extra benefits will discourage labor supply among beneficiaries, although to a lesser extent than the $600 per week in the spring and summer of 2020.

Many of these beneficiaries would still not be employed even without the extra benefits, however. They might be reluctant to work because of concerns about contracting the coronavirus, they might be caring for children who are virtual learning, or they might be waiting for their previous employer to hire them back. Some industries are experiencing labor shortages in early 2021. The availability of extra unemployment insurance benefits is one of the factors behind this, but not the only one. Those benefits are set to expire in early spring but could be extended in new stimulus legislation.

10. What is the regulatory outlook under the Biden administration?

The Biden administration is likely to impose a higher regulatory burden on businesses than did the Trump administration. In particular, President Biden is likely to impose greater regulations on energy use and the energy sector to combat climate change. The energy sector was already under pressure from low-cost shale oil and natural gas, and then from reduced energy demand because of the pandemic.

Increased regulations will have little impact on the near-term economic recovery. It will take some time to implement these regulations, and many will be tied up in court. In the long run, the increased regulatory will be a small drag on economic growth; businesses will adjust to these new regulations and find ways to work around them.

11. What is the outlook for the U.S. dollar?

Measured against a basket of major foreign currencies, the dollar is about 5% weaker in February 2021 than at the beginning of 2020. Its depreciation largely reflects the fall in U.S. inflation-adjusted ("real") interest rates over that timeframe. Real interest rates are lower because the Federal Reserve cut its policy interest rate, and because expectations for U.S. growth and inflation have increased due to aggressive monetary and fiscal stimulus. A weaker dollar tends to boost net exports by making imports to the U.S. more expensive and exports from the U.S. more competitive overseas. It also tends to raise inflation by making imported products more expensive. Since PNC expects inflation to stay very low in the next few years as unemployment remains elevated, the weaker dollar is not a concern.

PNC’s forecast[2] is for U.S. dollar depreciation to take a pause and for the currency to stabilize in 2021 and 2022.

12. What is the outlook for U.S.-China trade relations?

President Biden is unlikely to impose additional tariffs on China but reversing President Trump's tariffs is not his first priority either. Biden will try to organize U.S. allies to take a unified approach on China trade policy; this will be slow. While his administration works on this, it will be pressured by farmers and other exporters to regain markets lost to U.S. exporters because of Chinese retaliatory tariffs. On net, tariffs on Chinese imports will probably be reduced somewhat during the Biden administration but are unlikely to return to pre-Trump levels.

13. What is the outlook for the housing market?

The residential real estate sector is leading the economic recovery thanks to extremely low mortgage rates, strong consumer balance sheets and the concentration of job losses in lower-paying occupations, which left higher-income households who are more likely to be homebuyers relatively unscathed. The residential sector will grow in 2021, albeit at a slower pace than 2020, supported by very low mortgage rates and strong consumer fundamentals. Mortgage rates are likely to rise moderately from their 2020 record lows but remain very attractive for potential homebuyers.

The Biden administration has extended foreclosure and eviction moratoriums through the end of March 2021. It remains to be seen what policies or relief proposals will be implemented before the current moratorium ends.

14. What is the outlook for building materials?

Housing inventory was low coming into the pandemic and extremely strong demand for residential housing and work disruptions from the pandemic have put upward pressure on prices of homebuilding materials. Prices for building materials will likely flatten in 2021 as housing starts to stabilize and output of building materials increases.

15. What is the outlook for commercial real estate?

The commercial real estate sector was showing signs of weakness heading into the pandemic, in part due to the decline of brick-and mortar retail. Demand for commercial real estate, particularly office space, will likely decline if businesses maintain their work-from-home policies once the pandemic ends. Prices for most classes of commercial real estate are likely to decline in 2021.

16. What is the outlook for “zombie” companies?

The term "zombie company" usually refers to a company that cannot service its debts but avoids bankruptcy because its lender keeps rolling over its loans. That term doesn’t really apply to businesses that could be viable once the pandemic ends, but aren't viable right now; keeping these businesses afloat through temporary aid will make the recovery stronger, since those companies' workers won't have to find new jobs with new employers. Separately, there are companies that will become permanently unviable because of how the pandemic is changing the economy, like the shift to online shopping, but the latter group is much smaller than the former.

17. What are the economic outlooks for New York, California and Michigan?

New York and California are at risk of business migration to other states as a result of economic changes from COVID-19. The ability to maintain productivity with decentralized offices has significant downside implications for the high-cost office environments of New York and California. In the case of California, business departures due to costs and regulations were already underway prior to the pandemic.

Michigan, on the other hand, remains a relatively low-cost business environment. The Detroit metropolitan area is recovering from the city’s fiscal woes and restructuring, and the relatively low cost of doing business in Detroit will be an advantage in the years ahead. Smaller Michigan metropolitan areas, especially those in the southwest and south-central parts of the state, were generally doing well prior to the pandemic and should continue to expand once the pandemic is over. There is upside potential for Michigan’s manufacturers if U.S. businesses restructure their supply chains to use more domestic content in the wake of the pandemic.

18. What is the outlook for the stock market and retirement savings?

Please refer to PNC’s current edition of Strategy Insights [3] for views on the financial markets.

You may find additional materials from PNC Economic Reports[2] or National Economic Outlook[4].