Economic outlook

Q1 2021: Taxiing before takeoff

Strong supports will help the economy overcome the Q1 momentum loss and allow growth to truly take off when vaccines and herd immunity arrive later in 2021.

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February 1, 2021 | 21 minute read

The outlook for 2021 is one of recovery, vaccine optimism and growth. But first, we have to get through Q1. There is good news: Despite stalled momentum, consumer and business confidence have been steadfast, private sector balance sheets are solid, and policy will continue to be a tailwind. For investors, 2021 will truly be new territory, with rising yields and reflation posing challenges not seen in over a decade.

Key takeaways

  • We are at the dawn of a new expansion, and markets will rightly focus on inflation, reflation and inflation expectations.
  • We expect dollar weakness to deepen in 2021, as low real yields and rising twin deficits erode support for the greenback.
  • In 2020, equities became increasingly linked to interest rates, leaving investor portfolios even more exposed to rising yields.

Momentum has stalled, but sentiment is steadfast

Hopes for the economy in 2021 are high. The Fed estimates the economy will grow 4.2% in 2021,1 the fastest rate since 1999, and some private forecasters are even more optimistic. But a snapshot of the economy at the start of 2021 is one of stalled momentum. First and foremost, the pandemic resurged in mid-October and has continued to worsen. In some states, this has caused fresh restrictions on school, dining and other mandated social distancing. In other states, rising community spread caused people to choose to stay home even if was not dictated by policy. For our early economic recovery, this caused a setback.

Several indicators have clearly shown a loss of momentum. Retail sales, which had surged from May to September, experienced three consecutive months of decline from October to December. At the start of 2021, initial jobless claims unexpectedly surged to over 900,000, a level not seen since August 2020. Anecdotally, the Fed’s regional survey of business conditions mirrored this as our index of economic conditions reversed course in the January 13, 2021, report.

Index of Beige Book economic conditions

Source: Federal Reserve, FS Investments, as of January 13, 2021.
Note: Index reflects net word search of positive terms (strong, strength, expand, expansion, recover) and negative terms (weak, soft/soften/softer, tight/tightening).

  • Median 2021 GDP forecast from the economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, December 16, 2020.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

Lara Rhame

Chief U.S. Economist + Managing Director

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