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You Decide: Will these seven predictions come true in 2021?

By Dr. Mike Walden

It’s that time of year again for predictions about the upcoming year. In my case, of course, these will be forecasts for the economy. Here are seven predictions I think have a reasonably good chance of happening in 2021.

The aggregate economy will be better in 2021 than in 2020. This is a fairly easy call. It looks like total production of products and services will drop four or five percent in 2020. Most of the damage was done in the spring, and the economy has rebounded nicely in the second half of the year. However, the resurgence of the virus at the end of 2020 and the re-emergence of some economic restrictions in the country will cause growth to be slow, or slightly negative, at the end of 2020. Still, with most of the population expected to be vaccinated for COVID-19 by mid-2021, the economy should grow during the year, perhaps by as much as five percent. However, this growth rate won’t return the economy to pre-pandemic levels because it will be applied to a smaller initial base.

Unemployment will drop, but not all the way. A little more than half of the jobs lost from the COVID-19 recession have been recovered. The official unemployment rate has fallen to near six percent from the mid-teens levels in the spring. This is the good news. Yet in looking ahead to 2021’s job market, there are several worries. One is the jobs that have come back have not all been the ones that were lost. Businesses are revamping their hiring and shifting away from tasks requiring in-person contact. This means many jobless people today will need to take different jobs with different skill needs. Some companies will provide on-the-job training, but others will require formal training, such as at community colleges. There’s also the worry about jobless people who aren’t counted as unemployed because they haven’t been actively looking for work. Counting them as jobless means the actual unemployment rate is closer to eight percent. A year from now the jobless rate will still be above five percent.

There will be upward pressure on inflation and interest rates. As the economy recovers and spending increases, the massive amounts of money the Federal Reserve has injected into the economy will recycle faster. If the quantity of products and services don’t keep up, the situation described by the late economist Milton Friedman of “too many dollars chasing too few goods” will push the rise in prices (inflation) higher, possibly close to three percent. The Federal Reserve would likely respond by also raising interest rates.

Income inequality will widen. Rising income inequality has been a big issue in the 21st century. It results when incomes of top earners rise faster than incomes of lower paid earners. One of the reasons for the recent widening of income inequality is the replacement of many modestly-paid jobs by machines and technology. The pandemic will accelerate this trend.

Federal taxes will increase. Federal government debt – also known as the “national debt” –ballooned by over $4 trillion in 2020, and another COVID-19 aid package could boost the amount to $5 trillion. Add to this the facts that federal taxes were cut in 2017 and the new Biden Administration wants some new spending initiatives, and the stage is set for pressure to begin to “put the federal fiscal house in order” in 2021 by increasing federal taxes. The most likely candidates for hikes are the corporate income tax and the personal income tax rates paid by higher-income taxpayers.

North Carolina will out-perform the national economy. The North Carolina economy and people have suffered mightily from both the COVID-19 virus and resulting recession. Yet several metrics show job losses and deaths on a per capita basis have been much better than in many other states. This means North Carolina will come out of the pandemic with its reputation intact as a great state in which to live and work. In fact, the state’s economic brand may be enhanced. Households and businesses looking to leave states where the pandemic was more devastating will see North Carolina as an option for a new home. I predict growth rates in both economic output and employment in North Carolina will be better than in the nation in 2021.

New economic opportunities will arise in North Carolina. There will be significant reshuffling of the economic deck after the pandemic that will create new industries and expand others. One area for growth is “supply chains.” A supply chain is simply a set of companies making inputs – or supplies – for companies making final products you and I buy. In the pre-pandemic world many of these supply chains were in foreign countries. The pandemic taught us such supply chains can be vulnerable if a virus hits a foreign country, even if leaving our country immune. Consequently, there will be an effort to rebuild domestic supply chains. With North Carolina’s large manufacturing sector, our state could benefit from investments in these chains.

Another need made obvious by the pandemic is to increase the nation’s self-sufficiency in medical supplies, from gowns to masks to ventilators to medicines. With our state’s tradition in textiles, manufacturing and pharmaceuticals, North Carolina is a “natural” for this production.

2021 will still be a challenging year. Even by year’s end we won’t be completely recovered from COVID-19. What will the 2021 economy look like? Do my seven predictions make sense? You decide.

Dr. Mike Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook and public policy.

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