The three most important things affecting the economy are the virus, the virus and the virus, said Patrick Harker, president and CEO of the Federal Reserve Bank of Philadelphia in a speech last Thursday.
Harker said the recent upswing in Covid-19 cases is hitting the economy, and the first quarter of this year may see negative growth. Still, GDP growth should return in the latter half of this year, though the pandemic may bring permanent changes to the economy.
“Covid-19 has been utterly determinative of the US economy’s performance, both as local governments impose measures to curtail the spread, which depress economic activity, and as consumers change their behavior to protect themselves and their loved ones,” he said. “The latter is a crucial point that sometimes gets lost.”
Harker added, “The bottom line is this: If people don’t feel safe, they won’t engage in the broader economy.”
Covid-19 cases have been on the rise since September and deaths, a lagging indicator, are even more voluminous than they were during the first wave of Covid-19 last spring, Harker said. And while pharmaceutical companies have developed highly effective vaccines quickly, vaccinations have been lagging. In fact, the country’s performance has disappointed in this regard. Fewer than 5 million people have received their first dose of the vaccine — less than 2% of the US population. By contrast, Israel has given more than 15% of its population the first dose.
“The hard times will be with us for a little while longer,” Harker said. “On the national level, for now, I’m expecting the fourth quarter of last year to show modest growth, before a significant slowing in the first quarter of this year — possibly even negative growth. In other words, ‘happy new year’ has a caveat.”
Still, the good news is that the weakness should stay relatively short-lived as Covid-19 vaccinations become more widely available, he said. The recently passed $900 billion of fiscal support will also help.
Harker predicted GDP growth will be strong in the second half of this year and through 2022 before a light tapering in 2023.
However, the pandemic may bring permanent changes, he said. Business travel could remain depressed indefinitely given the boom in videoconferencing and Americans may become even more addicted to online shopping.
Automation is another challenge, Harker said. Some jobs may not come back even after the virus has passed.
“To take an example near and dear to all of our hearts, the Pennsylvania Turnpike has switched permanently to automatic tolling — a change that was initially spurred by the onset of the pandemic and the need to promote social distancing.”
The views expressed were his own and don’t necessarily reflect those of anyone else on the Federal Open Market Committee or in the Federal Reserve System.