January economic outlook: an economy that’s treading water—and what it means for your wallet

Quick takeaways

  • Prepare yourself for lots of up-and-down economic news, especially in the first quarter of 2021. Until the pandemic is contained, some industries may be unable to recover, which will continue to affect employment and spending.
  • Double-down on your normal January financial routine—set a budget, establish short- and long-term goals—but do some scenario planning. If overseas travel becomes a possibility, for example, do you want to plan for a delayed trip?
  • Changes in national leadership may not impact most of us for a while. Patience in 2021 can help as we wait to see how the economy adjusts.

If uncertainty and worry were our guardrails through 2020, hope may be on the horizon for 2021.

For starters, vaccine shots are already helping protect health care workers. A wider distribution could spur a robust economic recovery.

In January, we may feel as though we’re treading water—good news coupled with some lost ground—but key factors will lay the groundwork for the month ahead and the rest of the year.

Here’s what to watch for, and how drown out the noise to focus on your financial health.

A month of changes—but perhaps little action

In December 2020, lawmakers—prompted by the urgency of expiring unemployment benefits and continued widespread unemployment—passed limited relief for many Americans. But that’s probably all the aid we’ll see for a while. President-elect Joe Biden indicated he’ll support more assistance, but we don’t have specifics yet.

Expect little to happen in January—a usual symptom of a lame-duck session of Congress. “Given the runoff elections in Georgia and a handful of other races being reviewed and contested, it may be tough to get major plans put into action right away,” says Heather Winston, assistant director of financial advice and planning at Principal®. “Add in the delays to the appropriations bills, and there’s a lot on Congress’s plate at the start of 2021.”

Your wallet: In a typical January, you’d probably focus on the coming year’s budget and organizing tax documents. This year should be no different but give yourself some leeway. You don’t know, for example, if you’ll be able to take that much-delayed family vacation, or when you can get together with extended family. Map out a couple of scenarios (and a couple of budgets). “We tend to be a very optimistic society,” Winston says. “While 2020 challenged that spirit, we should stay optimistic in our planning. But realistic, too.”

We should stay optimistic in our planning. But realistic, too”

Heather Winston, assistant director of financial advice and planning

Limits to the help the Fed can provide

In 2020, the Federal Reserve (Fed) did a lot, from cutting interest rates to robust lending that helped mitigate economic pain. January 2021 may find fewer tricks in that toolbox. “There are only so many ways you can inject money into the system,” Winston says. “The hard part is recognizing that there’s a limit to what institutions can do.”

Your wallet: Take advantage of what the Fed’s already done to spur consumers. Interest rates for consumer goods such as cars and mortgages remain at or near historic lows. That’s good news if you need a different vehicle or are ready to purchase a home. If you’re ready to sell a house, the economy is doing you a favor, too: Housing demand remains strong, with an average on-market time that’s 13 days less than the same time last year.1

Financial institutions and your money

Confused about the role federal financial institutions play in your daily life? Here are two that may affect our day-to-day the most.

The U.S. Treasury: This is the country’s spending arm. The Treasury can infuse the economy with cash (like a stimulus), and it collects federal taxes. When you use currency and coins, you’re using money the Treasury prints.

The Federal Reserve: Generally referred to as the Fed, the Federal Reserve is the country’s central bank. In contrast to the Treasury’s spending, the Fed lends money. When it adjusts its rate, that change trickles down to everything from inflation to car loans. Because the Fed is a nonprofit, any extra funds the Fed generates go directly to the Treasury.

Stagnant economic numbers

If end-of-year employment numbers are any clue, a U.S. economic rebound may be slowing to a halt. November’s non-farm employment, far below expectations, surprised even experts. And there are worries about long-term unemployment. “Some people may be giving up on looking for work,” says Seema Shah, chief strategist for Principal Global Investors.

With vaccine distribution limited for now, January isn’t likely to offer many positive economic glimmers related to the pandemic’s trajectory. Experts figure we’ll see the first real effects of a successful vaccination campaign by March or April. Any economic upswing that follows won’t likely be quick or follow a straight line, either.

“Think of it as a tipping point,” Winston says. “We want a vaccine to fly off the shelves, but supply will be limited at first. Pressures like that could make economic recovery more difficult.”

Your wallet: If you’re facing significant financial challenges in January, think carefully and clearly about what you can do to make it through the next several months. “For a lot of people, the largest amount of money is in their retirement funds. It's important you consider other options before considering access it,” Winston says.

Make a short-term plan to get through difficult times. Planning should include steps you’ll take to return to status quo. For example, can you suspend contributions to emergency funds for three months and pay off a credit card? Are there other things you could prioritize to avoid withdrawing long-term savings (which might get heavily taxed)?

An up-and-down market

Expect some January jitters in the markets as we transition to 2021. “We could see some profit-taking, and that equals downward pressure on the markets—more sellers than buyers,” Winston says. “This can feel like uncertainty, but not all sell-offs are unhealthy.”

Your wallet: Ease your stress by controlling what you can. For starters, when’s the last time you checked in on your retirement accounts and rebalanced or re-allocated them as needed based on your risk tolerance or long-term plan? (Log in if you have an account with Principal.)

“We don’t know exactly what this recovery will look like, and our usual sense of new year optimism might be cloudy,” Winston says. How you get to your short- and long-term goals might not always be straightforward. Some months may be harder than others. Stay focused on the fundamentals—a realistic budget, a commitment to saving—as a guide.

We don’t know exactly what this recovery will look like, and our usual sense of new year optimism might be cloudy.”

Heather Winston

Next step

Ask for help. A financial professional will talk you through what economic news means to your short- and long-term goals. Don’t have one? Check with your HR department or employer to see if your company’s retirement savings plan offers this service. Or, we can help you find one.

1 https://www.realtor.com/research/november-2020-data/

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