Q& With . . . Ernie Goss

Thought Leader Insights: 2021 Economic Forecast

What does a new year—and a new presidential administration—portend for business? One of the most prominent regional economists in the Midwest looks into his crystal ball.

Q: What’s your expectation of overall regional economic performance in 2021?
A: Less than it might have been. If the stimulus bill that the president pushed back to Congress had  come back with the $2,000 per household, we’d be looking at some pretty good growth when you put it all together. We could have been talking about growth in real terms, inflation adjusted,  of 3-4 percent in the first half of 2021. It will be considerably less than that at the $600 per household level that was approved.

“Production of wind and solar means increased cost. Who will bear that burden? The poor… We’re already talking higher gas and energy prices.” — ERNIE GOSS, GOSS & ASSOCIATES

Q: How might growth in this region differ from what other parts of the country will see?

A: It will be a bit stronger here than the rest of the nation, for two reasons. Some other state governors have been in love with lockdowns during the pandemic. New York and California, in particular, but the east coast remains much more likely to be locked down and limited economically, and the west coast as well. That slows their growth more than what we’ll see in the midsection of the country. We’re also looking at ag exports, and the farm economy is looking much better—ag commodity prices are improving, as are land prices. The COVID stimulus also had money in there for ag, as well. All those are probably going to bring better growth in the midsection.

Q: Are there any dark clouds you see forming?

A: One thing that’s more a problem here than in the rest of the U.S. is the labor supply. We’re still looking at a shortage, and a lot of that is because of a mismatch between available manpower vs. the skills required for the jobs that need to be filled. Part of the stimulus package, again, is an add-on to unemployment benefits of $300 a week. But that tends to encourage, or incentivize, workers to remain unemployed. Some have said you’d have to be an idiot to think it’s not going to have some impact in that respect; the question is, how much? You are dreaming to think that increasing the pay gap between working and not working won’t incentivize jobless workers to remain unemployed.

Q: You do a lot of work tracking regional banking, especially community banks in rural areas. What’s the prognosis there?
A: Bankers are doing pretty well. Sort term rates are at or below record lows; you can’t get any lower there. The long-term rates are increasing, so the yield curve is steepening, and that’s good for bankers. But farmers are not borrowing as much as they have in previous times, going back to 2013. Certainly the farmers are in a pretty good position, the best since 2013, and what they’re doing now is buying, for the first time in quite a while, increased amounts of ag equipment that’s financed, and that’s good for the bankers. We’re not seeing as much of the in-bank business with individuals, who are not as prone to visit the banks these days, but nonetheless, bankers are doing well. As to the quality of loans, farmers are borrowing less, but the borrowing is to support productivity increases. That’s good for the bankers and good particularly for the dealers in these communities, as well as for the manufacturers, like John Deere in Iowa and CLAAS in Nebraska.
Q: And the softer spots?

A: Retail is not doing nearly as well. Even in urban areas, and tack on that the taverns and bars, leisure and hospitality, anything there is weak in rural areas. The first Paycheck Protection Program was good for small business, and it was very good for bankers, so with the new money in the stimulus for that, I expect it to have some of the same positive impact on the banks. They are administering loans for the Small Business Administration, and that has helped, but how much longer can those small businesses limp along? Even with fed-
eral support, without people in the restaurants, for example, it’s tough. 

Q: What other sectors do you see having the hardest time rebounding from the pandemic?

A: International travel, but that’s more an issue on the east and west coast. Obviously, (New York Gov. Andrew Cuomo) looks at any way he can limit travel in or out, that’s certainly an issue with U.K. and the U.S. strains of COVID. The east and west coasts, that’s much more of an issue for those areas, and not as much for the midsection. But international travel and domestic travel will continue to constrain growth.

Q: How do you think the Fed will approach interest-rate policy in the coming couple of quarters?

A: The Fed’s committed to low rates on the short end, and they’ll remain low—zero to 25 basis points on the short end with the funds rate. All these interest rates on the short end will remain very low. On the long end, we’re looking at higher interest rates. The Fed will do what it can in quantitative easing, but with inflation ticking up and the federal deficit getting bigger and foreigners losing their taste for U.S. bonds, I expect long-term rates to move up within the next six months to a year. They’re already up as much as a quarter percent over the last two or three months, and that trend is going to continue.

Q: Who are the winners and losers in that scenario?
A: Well, we’re not off to the races yet; we’re still reasonably competitive but have a long way to go, as much as 3/4 to 1 percent to get back to pre-COVID rate levels. Of course, those who have to borrow in an increasing rate environment, it’s tougher on them; those who are lending, it’s good for the bankers as the curve steepens. With long-term rates rising and short term stable, the banks benefit there. Mortgage rates will be headed higher, that’s one of the areas we’ll see some impact. The real issue is with bankruptcies rising in the first half of 2021. I don’t see any way out of that. The Fed will try to provide support as much as they can with guarantees underpinning corporate bond markets and municipal bonds. But the Fed’s already up to $7.8 trillion or $7.9 trillion on the balance sheet, and it’s growing even more. By February or March, that balance sheet will have doubled from where it was before COVID. They had worked off some of that from the Great Recession, but not enough, and that was a mistake on their part. They just kept on that expansionary policy a bit too long. That means they had all these bonds on their balance sheet, and they’ve still got ’em.  

Q: Do you believe the COVID recession is winding down, and either way, what continuing or lingering impact do you foresee from it?

A: It’s certainly true that by being more open, in South Dakota for example, the infection rate has been higher. The question is, what has that openness done to the economy? It’s kept South Dakota’s much stronger compared to Oregon, New York, or some others with lockdowns. Nebraska is the same way, as is Missouri by being more open. The problem, as everybody can see, is that once you take the lockdown off, infections spring up. There is some reason to do it now because there’s a vaccine out there on the horizon. Before, there wasn’t, so why not lock down?

Q: From a historical standpoint, when a new presidential administration comes in from the opposing party, how disruptive is the regulatory framework that follows, in terms of challenges and costs for business?
A: It really depends on the industry you’re in, but it definitely can be very disruptive. For example, energy, that’s going to be disruptive. There will be disruptions in auto production, Tesla vs. GM and Ford, because the Biden administration will be more favorable to electric and green than Trump’s was. I don’t know why more economists are not talking about this. The fact is, Trump stumbles and steps all over his own message. He had a good message. He had done a great job with the economy in terms of deregulation, and even with his stumbles and mistakes in international trade, while the jury is still out, there’s some evidence that things are moving in the right direction. 

Q: What other megatrends are you tracking?
A: Another story that should be talked about more is about how Trump was supposedly in bed with big business. Are you kidding me? Big business was heavily behind Biden. They don’t mind regulation; they love regulation, because it’s usually favorable to them. Trump was more on the side of small business. Look at Facebook and Google—they gave millions to the Democrats and Biden, and almost nothing to Trump. Reimposing regulations cut by Trump could have growth come down fairly sharply. The Green New Deal is the green raw deal—there’s no other way of characterizing it, it’s 
a big payoff to certain green industry companies.

Q: That seems to be a sore point …
A: The nonsense about it—look, I worked at the Department of Energy when I was a grad student, the old DOE where oil was king. But nonetheless, you have to say for electricity production as we talk today, alternative energy is not base-loaded. That is, you have to have backup, and that’s largely from natural gas. Biden sent a mixed message, but was fairly consistent that he wants to reduce fracking. So do people in his administration. Production of wind and solar means increased cost. Who will bear that burden? The poor. Washington will try to subsidize the heck out of it with money to make up for increased costs of electricity, but we’re already talking higher gas and energy prices.