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9 3 expensive in foreign markets and foreign imports more expensive in US markets, but because nearly all foreign economies will be struggling the contribution that international trade makes to US GDP growth will be small. There are nearly as many negatives. Most importantly, the pandemic is not over. Self-quarantine, contagion fears, and social distancing will continue to keep many businesses from getting back to operating normally. We may see a resurgence of the virus during the traditional cold and flu season, but very few states will shut down their economies a second time. That's because many policymakers realize that another broad population lockdown or broad business shutdown would be economically devastating. Due to social distancing and contagion fears many high-contact business will continue to operate at greatly reduced capacity levels (e.g., lodging, airlines, and dine-in restaurants), which will not be profitable for many firms. Some types of businesses will remain essentially shut down (e.g., live entertainment). Some businesses will never reopen (many restaurants and movie theatres). The debt that companies incurred to survive the pandemic may limit their growth during the recovery. Increasingly, people will come to accept the reality that their job and income losses are permanent rather than temporary and will scale back spending. Most of the large federal fiscal stimulus programs enacted at the beginning of the pandemic wound down in the third quarter of 2020. More federal stimulus is needed, but it is unlikely to provide enough support to accelerate the pace of the economic recovery. Business and personal bankruptcies will rise dramatically 2021, which will be a source of persistent layoffs. Put it all together and the year-over-year rate of GDP growth will be about 3.5 percent in 2021. Growth will be weak in early 2021, but under the assumption that an effective vaccine is widely available and adopted in mid-2021, GDP growth will be strong in the remainder of the year. The "New Normal" Once an effective vaccine and/or treatment is widely available and adopted, the US economy will fully engage and will quickly shift onto a higher – above average – growth trajectory. The pace of growth will be faster and steadier. The recovery will be less fragile and more durable as well. It should be noted that even with a vaccine that's very (75%) effective it's likely that mask wearing and some degree of social distancing (for vulnerable segments of the population) will be necessary. The Terry College assumes that one or more approved COVID-19 vaccines will be widely available in the US by mid-2021. If this assumption holds, the third and fourth quarters of 2021 will experience annualized rates of GDP growth of about 5 percent. At that time, the labor market will begin to heal faster, too. If an effective vaccine is not developed by mid-2021, then it will take much longer to reach herd immunity and, in turn, longer before the economy truly engages and fully recovers. Essentially, achieving herd immunity without an effective vaccine would delay full economic recovery, perhaps by a year or more. The expectation of an above-average pace of GDP growth in the second half of 2021 reflects a dramatic broadening of the US economic expansion to include even the most severely impacted industries and geographies. That broadening will be possible at that time only because of the widespread vaccination of the US population. For the first time since the pandemic began, high-contact industries such as restaurants, hotels, and live entertainment will be able to fully engage. Similarly, regional economies highly dependent on travel, hospitality, tourism, and public transportation will finally gain traction and move forward. Consumer and business confidence will rise significantly, releasing animal spirits heretofore restrained by contagion fears. Recession Risks The risks are skewed to the downside. COVID-19 remains the main recession risk. A dramatic worsening of the pandemic could cause the economy to go back into recession. Even if there is not a dramatic surge in the number of COVID-19 cases, more federal fiscal stimulus may be needed to avoid a double-dip recession. A mistake in the US government's response to the pandemic is a downside risk to the forecast. Inadequate federal fiscal stimulus and/or mistakes in the wind down of the massive stimulus programs already in place are possible. Because risks are tilted towards the downside, it is better to err on the side of too much stimulus rather than not enough – especially given that interest rates are at, or near, record lows. Recent rapid growth in lending to highly leveraged businesses represents another risk to the US economic expansion. Corporate leverage is at historic highs – 49 percent of GDP. The default risk is difficult to gauge, partially because a significant share of leveraged loans are held by the "shadow banking" sector, which includes small funds and finance companies. Defaults there could spill over into the formal finance sector and create a financial crisis. The Federal Reserve has taken notice of the rise in corporate debt levels and created a facility to buy corporate debt. The Federal Reserve's ability to backstop non-investment grade debt is limited, however. Because interest rates are extremely low, leveraged lending to businesses probably will not trigger a double-dip recession in the coming year, but it could worsen

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