The countdown continues, just 10 days left of Christmas online shopping.
With just 2.5 weeks left in 2020 and the fourth quarter, time to assess the economic activity. The Atlanta Federal Reserve estimated the 4th quarter US GDP will be at 11.2% showing a nice amount of growth. Of course third quarter growth was 33%, you have to consider the math before you make any final assessments. Essentially the second quarter was so awful that even a slight increase in activity would show as huge growth. Likewise, building on the third quarter strength, the growth rate would be somewhat subdued. I would agree, the fourth quarter GDP will be strong with the basis for the growth coming in October and most of November. There has been a drag in December as new shutdowns and restrictions have curtailed economic activity. Overall for 2020, US GDP will be negative due to the horrific first two quarters of the year, particularly the second quarter. Estimates suggest an annual contraction of 3.5% for 2020.
2021 is not looking good from the indicators I am seeing. This past week the European Central Bank predicted that the fourth quarter of 2020 will see a 2.2% contraction based on the second wave of shut downs due to Covid. They also revised the estimates downward for 2021. As Europe is experiencing the second wave earlier than the US, we may not be past the worst of it yet. The vaccine may assist in climbing out faster, but we will have to see. Because of growing restrictions on business, a lack of a stimulus program from Washington as well as a normal seasonal drop in consumer spending in January and February, we should expect the first quarter of 2021 to contract in economic activity. Whether the contraction will continue into the second quarter remains to be seen.
Another pending impact on the GDP for the US will be the rate of business closings. The numbers are already increasing slightly and are expected to pick up. While many firms in specific industries survived the earlier round of restrictions in 2020 with the help of PPP funds, the second round without any support is decimating the hospitality, food and health club industry. Retail is the next to feel the brunt as shoppers flock to on line purchases, avoiding close contact in smaller stores. Investment real estate is just now experiencing stress in their payment streams. Commercial buildings are being hit with tenants scaling back office floor space. Others are seeing tenants close up for good or vacating as the lease expires. Many core city centers are essentially ghost towns during business hours as more employees are working remotely. Residential investment real estate owners are getting caught between the eviction moratoriums and not receiving any cash flow from some tenants. They cannot evict non-paying tenants and cannot re-lease the spaces as the non-payers are not leaving. The banking industry is just now seeing a slight uptick in late payments on loans. This will surely rise as companies exhaust the PPP and other funds they received last summer.
The last bit of Grinch news that will impact 2021 is the taxation on unemployment benefits. All the workers that received the happy news that they qualified for an extra $600 a week will, sadly, find that it will be considered taxable income unless Washington provides a waiver. Many of those that received the funds likely did not save anything for taxes, and may have been laid off again with the second wave or were unable to return to work. This will have a devastating effect on many consumer households when tax season rolls around. Even for those who were able to get back to work, this unexpected tax bill will put many in dire financial straits.
On the bright side, gas prices should be declining, we continue to be awash in oil.
Have a great week.