by Calculated Risk on 12/24/2020 09:37:00 AM

Every year, I've posted a disclaimer that a recession could be caused by "An exogenous event such as a pandemic, significant military conflict, disruption of energy supplies for any reason, a major natural disaster (meteor strike, super volcano, etc), and a number of other low probability reasons" (emphasis added).

Unfortunately 2020 saw one of those "low probability" events, and many of my predictions weren't even close.  In a way, this is the point of the predictions.  I don't have a crystal ball, but I think it helps to outline what I think will happen - and understand - and change my mind, when the outlook is wrong.  As an example, when the pandemic hit, I switched from being mostly positive on the economy to calling a recession in early March.

At the end of last year, I posted Ten Economic Questions for 2020. I followed up with a brief post on each question. Here is review (we don't have all data yet, but enough).  I've linked to my posts from the beginning of the year, with a brief excerpt and a few comments:

10) Question #10 for 2020: Will housing inventory increase or decrease in 2020?

"Since I don't expect any change in fiscal policy during an election year, and monetary policy appears to be on hold - and I don't expect either a strong pickup in the economy (and higher rates) or an economic slump - it seems likely inventory will remain at about the same level through 2020."

According to the November NAR report on existing home sales, inventory was down 22% year-over-year in November, and the months-of-supply was at a record low 2.3 months. In 2020, inventory really declined due to a combination of potential sellers keeping their properties off the market during a pandemic, and a pickup in buying due to record low mortgage rates, a move away from multi-family rentals and strong second home buying (to escape the high-density cities).

9) Question #9 for 2020: What will happen with house prices in 2020?

"If inventory remains at close to the same level, it seems likely that price appreciation will increase from the 2019 pace to the mid-single digits."

The CoreLogic data for October showed prices up 7.3% year-over-year. The September Case-Shiller data showed prices up 7.0% YoY. With inventory lower than expected, house prices picked up more than expected.

8) Question #8 for 2020: How much will RI increase in 2020? How about housing starts and new home sales in 2020?

"My sense is the pickup that happened in the second half of 2019 will continue, and my guess is starts will be up year-over-year in 2020 by mid-to-high single digits. My guess is new home sales will be over 700 thousand in 2020 (for the first time since 2007) and will also be up mid-to-high single digits."

Through November, starts were up 7.0% year-over-year compared to the same period in 2019.  New home sales were up 19.1% year--to-date through November.   Even with the pandemic, my guess was pretty close on starts - but new home sales were up much more than expected.

7) Question #7 for 2020: Will the Fed cut or raise rates in 2020, and if so, by how much?

"My guess is the Fed will stay on hold in 2020 and the FOMC will keep the federal funds rate at 1‑1/2 to 1-3/4 percent."

With the onset of the pandemic, the Fed lowered rates to zero in March:

"In light of these developments, the Committee decided to lower the target range for the federal funds rate to 0 to 1/4 percent."

6) Question #6 for 2020: Will the core inflation rate rise in 2020? Will too much inflation be a concern in 2020?

"although I think core PCE inflation (year-over-year) will increase a little in 2020 (from the current 1.6%), I think too much inflation will still not be a serious concern in 2020."

According to the November Personal Income and Outlays report, the November PCE price index increased 1.1 percent year-over-year and the November PCE price index, excluding food and energy, increased 1.4 percent year-over-year. Inflation was lower than expected, and definitely not a concern in 2020.

5) Question #5 for 2020: How much will wages increase in 2020?

I expect to see some further increases in both the Average hourly earning from the CES, and in the Atlanta Fed Wage Tracker. Perhaps nominal wages will increase to the mid 3% range in 2020 according to the CES.

With the pandemic, and the layoffs of many lower wage employees, the wage data isn't very useful in 2020.

4) Question #4 for 2020: Will the overall participation rate start declining in 2020, or will it move more sideways (or slightly up) in 2020?

I expect the overall participation rate to decline in 2020 to just under 63% by the end of the year.

The participation rate declined sharply with the pandemic, and the Labor Force Participation Rate was at 61.5% in November.

3) Question #3 for 2020: What will the unemployment rate be in December 2020?

it appears the unemployment rate will decline into the low 3's by December 2020 from the current 3.5%

The unemployment rate increased sharply with the pandemic, and the unemployment rates was at 6.7% in November.

2) Question #2 for 2020: Will job creation in 2020 be as strong as in 2019?

"my forecast is for gains of around 125,000 to 150,000 payroll jobs per month in 2020 (about 1.5 million to 1.8 million year-over-year) . This would be the fewest job gains since 2010, but another solid year for employment gains given current demographics."

Employment decreased sharply with the pandemic, and in November the year-over-year change was negative 9.19 million jobs.

1) Question #1 for 2020: How much will the economy grow in 2020?

These factors suggest real GDP growth probably in the 2% to 2.5% range in 2020.

With the pandemic, it appears GDP will be down around 2.5% to 3.0% in 2020.

In 2020, with the impact of the pandemic, many of my predictions weren't close - especially employment and GDP.