This summer, the National Bureau of Economic Research declared the recession officially ended in April 2020. The global pandemic and resulting US lockdowns caused a massive, but short-lived, economic contraction lasting just two months… however, by many measures, our economy has yet to fully recover. Where are we currently in the economic recovery? Read on to see how major measures tracked over the last 18 months, and the 5 major factors to watch as we head towards 2022.
5 Key Factors in the Economic Recovery
In late August, Fed Chairman Jerome Powell gave a speech at an Economic Policy Symposium in Jackson Hole, which gave a great summary of both the short-lived but severe recession that spanned just 2 months in early 2020 and the uneven recovery thus far. And while the Fed focuses on the labor market and inflation primarily, he also highlighted several other factors the Fed monitors as it seeks to set monetary policy and monitor the progress of the economic recovery.
To help paint the picture of the economic recovery thus far, let’s dive into the following 5 factors, how they’ve progressed historically, recently and what to watch for as we move towards 2022.
- The Labor Market
- Personal Income and Outlays (aka Consumer Expenditures)
- State of the Pandemic
Gross Domestic Product
What is it?
Gross domestic product, or GDP, is the overall measure of a country’s total economic production. It’s how the size of an economy is measured. It’s also the key metric used in defining an economic cycle. When we look at what happens during a recession, it is when there is a decline in a country’s GDP.
What does it tell us?
According to the NBER, the economy peaked in February 2020, and the official recession, or period of contraction, only lasted 2 months right at the start of pandemic lockdowns – spanning March and April 2020. Since then, we have been in the economic recovery phase. The latest GDP numbers from the Bureau of Economic Analysis for Q2 2021, ending June 30, 2021, show we may have just eked past the prior peak, and officially entered the expansion phase of the economic cycle.
Current economist consensus expectations are that GDP will continue to grow into 2022, at rates beyond the long-term average growth rate. In Powell’s speech Friday, however, he talked at length about the uneven economic recovery. If we dig below the headline GDP numbers we can see this more clearly.
Personal Consumption Expenditures, or PCE, represents everything you and I spend, on everything from groceries to manicures. The US is a consumer-driven economy, with our expenditures driving the bulk of GDP.
Over the last 70 years, our spending has shifted significantly from buying goods to a more services-driven economy. And pandemic lockdowns dramatically impacted services, many of which require in-person interaction.
While Personal Consumer Expenditures on Goods bounced back almost immediately and have since grown beyond historical growth rates, spending on Services only just returned to pre-pandemic levels in Q2 2021, ending June 30, 2021.
But if you look at real expenditures, adjusted for the currently elevated levels of inflation, service expenditures are still down vs. February 2020 peak levels.
What does GDP say about the status of the economic recovery?
Based on GDP measures in aggregate, our economy has fully recovered and surpassed the pre-pandemic peak. We have now entered the expansion phase of the economic cycle.
However, various segments within the economy, particularly the services sector, have not yet fully recovered on a real, or inflation-adjusted, basis.
What is it?
One of the biggest economic concerns over the last 6 months has been inflation. In the simplest of terms, inflation is simply rising prices. While a little bit of inflation is normal, too much can significantly reduce consumer’s purchasing power, as their income doesn’t change or increase as fast as prices increase.
One of the primary goals of the Fed’s monetary policy is to provide price stability in the economy. They have indicated they believe a long-term average inflation rate of 2% to be consistent with that goal. They use the Core PCE Price Index (ex-food and energy) as their primary data point when looking at inflation.
What does it tell us?
Supply chain bottlenecks, labor shortages, increased demand, accommodative monetary and fiscal policy (low-interest rates and printing of money by the Fed and significant stimulus spending by the Federal government) are all factors contributing to inflation over recent months.
Elevated levels of inflation typically are a sign that there are too many dollars chasing too few goods. All the stimulus checks and expanded unemployment benefits actually increased aggregate incomes through the recession, when typically it declines. Meanwhile, at the same time, supply has been impacted due to production limitations, shortages, both in raw materials and labor, as well as supply chain bottlenecks.
There are two primary data points that track inflation monthly: the Consumer Price Index (CPI) and the PCE Price Index, which is favored by the Fed.
No matter which data point you choose, and even if you strip out more volatile food and energy prices and just look at “core prices,” inflation is elevated… and even if prices just hold at current levels through the end of the 2021, it will remain elevated.
Fed Chairman Powell in his Jackson Hole remarks last month, said the following:
The spike in inflation is so far largely the product of a relatively narrow group of goods and services that have been directly affected by the pandemic and the reopening of the economy. Durable goods alone contributed about 1 percentage point to the latest 12‑month measures of headline and core inflation. Energy prices, which rebounded with the strong recovery, added another 0.8 percentage point to headline inflation, and from long experience we expect the inflation effects of these increases to be transitory…
We consult a range of measures meant to capture whether price increases for particular items are spilling over into broad-based inflation. These include trimmed mean measures and measures excluding durables and computed from just before the pandemic. These measures generally show inflation at or close to our 2 percent longer-run objective.Chair Jerome H. Powell, Monetary Policy in the Time of COVID, Jackson Hole, August 27, 2021
The following chart of these measures was also shared by the Fed:
What does inflation say about the status of the economic recovery?
The Fed continues to believe inflation will be transitory, or temporary, and alleviate as depressed comparisons fall out of the data and supply chain bottlenecks are removed. However, they have also indicated they plan to begin to ease back on accommodative monetary policy actions by reducing monthly purchases of US treasury bonds and mortgage-backed securities, slowing the increase in the money supply, as we move further into 2021.
Those with opposing views say both the Fed and the federal government have flooded the market with too many dollars for too long and inflation may last longer than any of us would like, slowing real economic growth, dampening the economic recovery going forward. Chairman Powell acknowledges this could be a potential outcome as well:
Central banks have always faced the problem of distinguishing transitory inflation spikes from more troublesome developments, and it is sometimes difficult to do so with confidence in real time. At such times, there is no substitute for a careful focus on incoming data and evolving risks. If sustained higher inflation were to become a serious concern, the Federal Open Market Committee (FOMC) would certainly respond and use our tools to assure that inflation runs at levels that are consistent with our goal.Chair Jerome H. Powell, Monetary Policy in the Time of COVID, Jackson Hole, August 27, 2021
Only time and additional data points will tell which position proves to be true.
The Labor Market
What is it?
The labor market is made up of all the people able and willing to work in the US. In our consumer-driven economy, the health of the labor market is critical to the health of the overall economy as it drives income, consumer spending, and overall consumer confidence.
What does it tell us?
There are several data series that help us track the health of the labor market. On a weekly basis, the Department of Labor releases new and continued jobless claims. This represents the people filing for and continuing to receive unemployment benefits.
On a monthly basis, the Bureau of Labor Statistics releases the Employment Situation. It gives more detailed insights into the supply side of the labor market, including the size of the labor force, those unemployed, as well as breakdowns by gender, race, age, and industry.
Also on a monthly basis, the Bureau of Labor Statistics releases Job Openings and Labor Turnover (JOLTS), which gives insights into the demand side of the labor market, including hires and separations.
The recession provoked a sharp and unprecedented decline in employment overnight.
Recovery began almost immediately, and the government was quick to act as well, expanding unemployment benefits – granting all filers an additional $300 per week in benefits, expanding eligibility (Pandemic Unemployment Assistance, or PUA) and also extending the duration of benefits for up to 75 weeks (Pandemic Emergency Unemployment Compensation, or PEUC), or nearly a full 18 months, as compared to most state programs which typically only offer 12-26 weeks of benefits.
As of the latest data, more than 77% of unemployment benefit recipients were receiving benefits under expanded federal programs – all of which officially ended in early September 2021.
Meanwhile, the employment situation while better than at the height of lockdown, still has a long way to go to recover, with payrolls still down 5.3 million jobs vs. the pre-pandemic peak. While headline unemployment rates (5.2% in August) are approaching Fed targets for full employment (historically around 4% unemployment), levels of long-term unemployment and the number of discouraged workers, who have stopped looking for work, reflected in the U-6 rate, pegs unemployment levels still closer to 9%.
Another issue? Labor participation rates – the percentage of the population of age and able to work who are actually employed or looking for work – are at levels not seen in decades, especially for women.
Finally, the largest aggregate number of unemployed persons remain in the Retail and Leisure & Hospitality industries. These were hardest hit by the pandemic, and it remains unclear if, not when, all of these jobs will ever be recovered.
What does the labor market say about the status of the economic recovery?
The labor market typically lags the broader economic recovery, so it is not unusual for employment numbers to be behind even when metrics like GDP have already fully recovered.
Moreover, the headline numbers mask an uneven labor market recovery. It is this point that the Fed now includes in its mandate, that “the maximum level of employment is a broad-based and inclusive goal.” This more inclusive goal could lead to longer periods of accommodative monetary policy – lower interest rates and ongoing open market purchases – than may have happened before, in order to leave no one behind in the labor market recovery.
Of some concern, however, has been the gap between labor supply and labor demand. Typically, it is businesses being slow to rehire that slows the labor market recovery. In the current environment, many businesses want, but are struggling, to hire. Some experts attribute this labor supply shortage to the widespread and extended unemployment benefits, which have just ended, but the reality is more complex. Childcare shortages, school closures, health concerns, and now health mandates, all play a role.
Related Post: What’s Up with the Labor Market?
While continued unemployment claims remain elevated, job openings reached an all-time high, since the data began being reported more than 20 years ago. As of the end of July 2021, there were 10.9 million job openings vs. just the 235,000 jobs added to payrolls in August.
This has created opportunities for employees in the labor market. Quits, or voluntary job separations, now drive nearly 70% of all separations. This lack of labor supply is also driving up average wages. Hourly wage rates for non supervisory employees are up 4.8% over the last year, with hours up as well, driving average weekly earnings up 5.4%.
Overall, the labor market is the biggest point of weakness in the economic recovery. September data points will be very telling of where it goes next, now that schools are mostly re-open and federal unemployment benefits have ended.
Personal Income & Outlays
What is it?
Every month, the Bureau of Economic Analysis, part of the US Department of Commerce, releases a report on aggregate levels of personal income and outlays, or consumer expenditures. This is a great leading indicator for GDP, given consumer expenditures make up nearly 70% of GDP. It also gives us additional data points, like personal savings rates, which can also be an indicator of overall consumer confidence – when consumers feel good about the economy, they spend more and save less. When consumers are worried, they save more. And as mentioned above, it also features the PCE Price Index, which is the Fed’s preferred measure of inflation, showing the price change in what consumers are actually buying.
What does it tell us?
The monthly Personal Income and Outlays report gives total disposable income and personal expenditures in aggregate across the economy on a seasonally adjusted and annualized basis.
Typically, in a recession, we see consumers get worried about the economy and pull back on spending to increase savings, increasing their savings rates. This results in businesses pulling back on employment, which reduces personal incomes.
The pandemic recession and recovery look different. Consumer spending fell sharply when the country went into lockdown and remained down as quarantine and health measures persisted. While unemployment spiked, disposable income never really fell.
Quick action by Congress boosted personal incomes both via direct stimulus payments (see the 3 spikes in the green lines? Directly correspond to the three rounds of stimulus checks sent in Spring 2020, December 2020 and March 2021), as well as expanded and extended unemployment benefits, and in the summer of 2021, the start of advanced payments of the expanded child care tax credit.
What do personal income and outlays say about the status of the economic recovery?
Over the last 18 months, Congress has approved $4.7 trillion in resources for the pandemic and the related economic impact. This includes $850 billion in direct payments to consumers and hundreds of millions more in unemployment benefits and expanded child tax credits, as well as funding to businesses, schools, and landlords.
So far, those have not only proposed up disposable income, but even boosted it above the long-term trend line. For many, it boosted personal savings rates as well.
As consumer spending came back, some of it shifted away from services to more durable goods, creating some of the inflationary pressures we are currently seeing.
The question that only the passage of time can answer is: as government support payments come to an end, what will happen to employment, disposable income, and consumer expenditures?
Next data point?
August Personal Income and Outlays released October 1, 2021
What is it?
The current economic downturn was triggered by the nationwide shutdown due to the spread of Covid-19.
What does it tell us?
While initially back in March 2020 we all planned to stay home for a few weeks, and contain the spread of the virus, reality has played out far differently. More than a year and a half later, we are still talking about rates of community spread and quarantines, debating whether or not schools and businesses should be open and whether people can return to offices.
What does the state of the pandemic say about the status of the economic recovery?
The pandemic remains the biggest unknown and the source of the greatest instability in the strength of the economic recovery.
After vaccines began rolling out at the start of 2021, new cases plummeted, and the early summer of 2021 started to feel almost normal. Then, the emergence of the Delta variant and corresponding increase in cases and hospitalizations began to weigh on the economic recovery progress, slowing hiring, spending, and delaying office and school re-openings in some areas.
At some point, as a country and even globally, we will have to accept the transition from a state of constant emergency due to the pandemic and acknowledge that this virus is now endemic. It’s never going away.
On August 10, 2010, the World Health Organization (WHO) International Health Regulations (IHR) Emergency Committee declared an end to the 2009 H1N1 pandemic globally… Internationally, 2009 H1N1 viruses and seasonal influenza viruses are co-circulating in many parts of the world. It is likely that the 2009 H1N1 virus will continue to spread for years to come, like a regular seasonal influenza virus.CDC from archived 2009 H1N1 Flu pandemic landing page
P.S. H1N1, the cause of the last major global pandemic, still circulates seasonally today and is sometimes part of the annual flu vaccine mix, which is recommended for most people annually.
While I am not equating Covid-19 to the flu, like the flu, it is a virus. And like other viruses, it will continue to circulate, mutate, and new variants will continue to emerge. How and at what point we adapt to live, work, and function in its midst will determine the strength and stability of the economic recovery and expansion currently underway.
Next data point?
All data is available and updated daily at CDC’s Covid Data Tracker
So, what is the state of the economic recovery? A little mixed, with an uncertain outlook given the state of the pandemic, and termination of federal stimulus funding. The next few months will tell us a lot about the economy’s ability to stand on it’s own two feet, the strength of the labor market, and the resilience of the American consumer.
How are you feeling about it all and its impact on your personal finances to date? Have questions about the economy? Join me Mondays and Wednesdays for Live Q&A at 9AM ET on Instagram or submit a question for the Finance Explained podcast here anytime!