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10 4 a recession triggered by another factor. A related risk is the size of the junk corporate bond market. Excessive risk taking took place in these two areas of the financial system. In addition to domestic risks, there are at least two non-trivial geopolitical risks capable of triggering another downturn – trade tensions with China and high levels of sovereign debt. Even with the Phase One trade deal, the US-China trade war may cause another recession and any major escalation could be fatal to the US economic recovery. The higher tariffs enacted in 2018-19 were not a large enough percentage of GDP to push the US economy into recession, but most remain in place and will be an economic headwind. At this juncture, a worsening of relations with China or other major trading partners is capable of pushing the US economy into recession. Due to both the COVID-19 pandemic and insufficient deleveraging after the Great Recession, sovereign debt levels are very high and could bring on a global financial crisis. A sovereign debt crisis that begins in the EU, or developing economies, could quickly spread to other financial markets and take down the US economy. Put it all together and we estimate the overall risk that a recession begins before the end of 2021 is about 40 percent. Consumer Spending The Terry College expects the consumer will be the main strength of the 2021 economy. In contrast, the Federal Government was the main strength of the 2020 economy. On an inflation-adjusted basis, personal consumption expenditures will grow by about 4 percent in 2021. That will be quite an accomplishment given that personal income is expected to decline due to a massive drop in federal assistance transfers to households. The increase in consumer spending will be possible due to a drop in the personal savings rate from about 17 percent in 2020 to about 8 percent in 2021. That amounts to $1 trillion in spending out of accumulated savings. Another factor powering increases in consumer spending is 0.9 percent job growth in 2021. Gradually improving labor market conditions will support modest growth in wages and salaries, with compensation per hour rising by about 1 percent. More importantly, the number of hours worked will rise. That favorable combination will support growth of wage and salary income in 2021. Unfortunately, personal income derived from all other major sources – transfer payments, earned interest, dividends, and rent – will decline. The decline in transfer payments will be especially large and will be the main culprit behind the overall drop in personal income. It will be large due to the wind down of the federal government's massive stimulus programs enacted in 2020. Growth in consumer credit will contribute significantly to the projected increase in consumer spending. Consumer credit markets contracted significantly in 2020, but the pullback was confined to revolving credit. In 2021, credit will expand, with revolving credit growing much faster than non-revolving credit. Job growth and the lower unemployment rate will support credit growth. Another very positive factor that will support credit growth is that household balance sheets are still in good shape. Credit will be more available to households in 2021 than in 2020 and it will be very inexpensive. Debt burdens borne by households therefore are very low. For example, the ratio of debt payments to households after tax income was 9.5 percent prior to the COVID-19 recession and are expected to rise to about 10 percent in 2021. In comparison, the debt service ratio was 13 percent leading up to the Great Recession. Another positive for the outlook for consumer spending is that many households locked in historically low mortgage rates in 2020, lowering their mortgage payments. More will do so in 2021. Consumers will take on more home equity debt and will spend aggressively for home improvements, which is high octane fuel for the economy. The proportion homeowners who extract cash from the refinancing of their home mortgages probably will rise slightly, but it will not surge as it did prior to the Great Recession. Consumer confidence currently is not very high. Uncertainty regarding COVID-19, fears of a double-dip recession, the high – albeit declining – unemployment rate, and the wind down of massive government support programs will keep consumers' confidence from rallying very much until a vaccine is widely available. Job growth should keep confidence above recessionary levels, but barely so. If our assumption that one or more effective vaccines are widely availability in the second half of 2021 holds, then consumers' confidence will rise substantially at that time. That will go a long ways towards transforming a weak and "choppy' recovery into a strong and steady recovery that ushers in an extended period of above-average US GDP growth. Less positively, wealth-effect spending will probably be absent in 2021. A global savings glut has caused the prices of almost all types of assets to be bid up. There's probably still some limited upside potential for home prices. Bond prices should hold firm, but equity markets are very richly valued. Stock prices therefore are vulnerable to correction. That's a

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