Economy endures its sharpest, shortest recession
Full return forecast in mid-year outlook
Shawn NarancichJune 17th, 2021
The U.S. economy is back in business after enduring its sharpest and shortest recession ever.
Zero percent interest rates at the Federal Reserve, multiple government stimulus payments, business subsidies, and generous unemployment benefits all helped prevent a pandemic induced downturn from becoming something much worse.
Technology and e-commerce allowed workers to adapt and consumers to transact from the safety of their homes. In record time, leading drug makers developed vaccines that today are conquering COVID-19 and allowing for the return of life as we know it. The job market is healing, and economic recovery is rapidly transitioning into a new U.S. expansion, one that is boosting corporate profits and elevating stock prices to record levels.
After 15 months of unprecedented upheaval and change, what lies ahead for the U.S. economy is a subject of considerable debate. How fast will the remaining 8 million jobs lost to the pandemic return? Will inflation that is now percolating turn into something more enduring and problematic? And when will the Fed, which maintains a dual mandate to promote full employment and low inflation, begin to unwind its formidable program of monetary stimulus?
With inflation, as measured by the Consumer Price Index now running above 4% and the unemployment rate back below 6%, one might think the Fed has grounds to begin removing the stimulus punchbowl now. But the current economic recovery is unprecedented in that private market excess was not to blame for the downturn that preceded it. As a result, U.S. government policymakers and our central bank applied extraordinary fiscal and monetary support to limit the depth of recession caused by the coronavirus, while also extending the duration of such stimulus to guard against more structural economic damage.
That means Powell & Co. are not likely to begin tapering their $90 billion monthly purchase of Treasury and mortgage-backed securities until the labor market has more fully healed, let alone begin raising short-term interest rates any time soon. Averaging the past two month’s nonfarm payroll gains, the U.S. economy would not return to pre-pandemic job levels until the end of 2022.
We are more optimistic about the pace of job gains to come. Since COVID-19 vaccines became widely available this spring, a couple factors are likely inhibiting a faster healing of the labor market. First, parents with kids finishing the school year online are not yet available to work outside the home. Second, supplemental federal unemployment benefits discourage workers from returning to lower wage hospitality jobs. Barring an unlikely resurgence of the virus, most children will go back to school in September—the same time extra federal unemployment benefits are set to expire.
In fact, some states have already eliminated extra unemployment benefits due to unfilled jobs. Others, such as Montana, are offering monetary incentives to those accepting new work. In a local economy like Spokane where tourism helps fill hotel rooms and populate restaurants this time of year, the challenge of restaffing post-pandemic is compounded by the extra challenge of meeting pent-up demand from virus-weary vacationers. Like Montana, businesses in Spokane are responding by offering hiring bonuses and higher wages to fill jobs.
As barriers to a job market recovery disappear, hiring is likely to speed up. Returning the jobless to productive employment is critical to tempering recently elevated levels of inflation. Without it, the result could be a wage-price spiral threatening sustained levels of higher inflation. Weekly national jobless claims provide one of the best real-time barometers of labor market health. Considerable headway is being made.
A shortage of semiconductors has challenged the economic recovery narrative, particularly in auto manufacturing. However, GM recently announced the return of productive capacity in a promising sign that this bottleneck may not have enduring consequence.
Meanwhile, one last round of stimulus payments and low interest rates are providing plenty of incentive for consumers to buy that new vehicle. In the same vein, low mortgage rates and increasing employment have created a boom in the housing market. Just as importantly, COVID-19 vaccinations are giving U.S. consumers the confidence to resume eating out and vacationing. All of which point to extraordinarily strong economic growth with gross domestic product likely to surge in the second quarter at what could be a double-digit rate of increase.
After contracting in 2020, U.S. economic output should soon eclipse pre-pandemic levels. As the economy transitions from recovery to expansion, we believe the Fed will signal an intent to begin tapering its program of quantitative easing—increasing the money supply in the economy—likely later this year or early in 2022. An unfolding economic expansion next year should provide good reason for the Fed to complete its program of quantitative easing and ultimately begin to lift short-term interest rates off the zero bound.
In sum, we foresee a full recovery for the U.S. labor market accompanied by record levels of U.S. GDP and corporate profits, all of which bodes well for Spokane’s Main Street and Wall Street.
Shawn Narancich, a chartered financial analyst, is vice president of equity research and portfolio management with Portland, Oregon-based Ferguson Wellman Capital Management, which has individual and institutional client investors in Washington, Oregon, and California. The company currently manages assets valued at $88 million in the Spokane area.
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