Economic Signals Remain Mixed

Despite signs of an improving economy, the latest data suggests that the recovery is more complex.

By Nate Griffin – November 22nd, 2021. Updated December 1st, 2021.

Key Points:

• Fed keeps rate near zero, but begins tapering asset purchases.

• GDP and Employment numbers show an improving economy.

• There is still significant state-wide heterogeneity in terms of recovery.

• Inflation and new COVID variant may dampen recovery.

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On November 3rd, Jerome Powell – the current chairman of the Federal Reserve – announced that the Fed would keep the Discount rate very close to zero, an indication that economy still needed support.

But, Chair Powell also remarked that economic conditions are headed in a positive direction, saying:

Nonetheless, aggregate demand has been very strong this year, buoyed by fiscal and monetary policy support and the healthy financial positions of households and businesses.

With COVID case counts receding further and progress on vaccinations, economic growth should pick up this quarter [Q4 2021], resulting in strong growth for the year as a whole.

With that positive outlook, he then announced that the Fed would begin reducing it's monthly pace of asset purchases by about $15 billion, and would re-evaluate the amount as economic conditions improve.

But, with positive economic news coming in, and the Federal Reserve looking at reducing asset purchases, how are Americans fairing overall?

GDP

The harsh effects of COVID-19 – and the associated shutdowns – severely impacted the overall economy. Q2 of 2020 saw the largest decline in annualized economic output in modern US history. During that time, many businesses to temporarily shut down production, millions of workers lost their jobs, and some businesses closed up for good.

However, the economy quickly rebounded in the following quarter. And by Q2 of 2021, the overall economy had surpassed it's previous peak. Real GDP increased 6.7 percent (annualized) in the 3rd quarter of 2021.

But the picture is quite different at the state level, some states grew at a much faster pace between Q1 2020 and Q2 2021. New York (8.1 percent), California (8.1 percent) and Nevada (9.7 percent) rebounded at rates much higher than the average.

But four states, as of Q2 2021, had not recovered to pre-2020 levels:

• Louisiana: 0.84 percent lower than Q4 2019

• Oklahoma: 0.93 percent lower than Q4 2019

• Alaska: 1.5 percent lower than Q4 2019

• Hawaii: 3.37 percent lower than Q4 2019

Each state has been affected differently by the pandemic. Hawaii, which heavily relies on tourism, enacted a mandatory 2 week quarantine in March of 2020, essentially eliminating travel to the island. As a result, economic activity dropped sharply and left a deeper impact.

Employment

While Real GDP quickly rebounded from it's Q2 2020 plunge, the Unemployment Rate took much longer to recover, and is still slightly elevated compared to to pre-pandemic levels.

But the unemployment rate alone does not show the whole story. Many individuals dropped out of the labor market either temporarily or permanently, meaning that the simple unemployment rate calculation is likely providing an incomplete picture of employment.

October's Unemployed Persons by Reason report shows that over two million workers re-entered the labor force in that month. Rising wages and declining COVID cases are likely helping to bring people back into the workforce.

But employment conditions going into 2022 will largely depend upon how the US handles COVID and new challenges like the Omicron variant.

Inflation

While it is good news that production and employment have rebounded, the cost of living has risen at a decade-high rate. Many economists have weighed in on this topic, with opinions ranging from feeling that inflation is temporary to others considering it a bigger and longer term problem.

Chair Powell weighs in saying:

...our baseline expectation is that supply bottlenecks and shortages will persist well into next year, and elevated inflation as well, and that, as the pandemic subsides, supply chain bottlenecks will abate—and job growth will move back up. And as that happens, inflation will decline from today’s elevated levels.

Bottlenecks are a genuine concern for the economy right now. For instance, there are a record number of container ships waiting to reach port in the US. And challenges are emerging in seemingly every step of the supply chain, from trucking to warehouses to just finding enough labor in nearly every industry.

Those bottlenecks are a part of the reason why annualized inflation topped 6 percent in October.

When asked about the Fed's role in balancing inflation against employment – often referred to as the dual mandate – Chair Powell explains what makes this situation so different from the past:

...this isn’t the traditional Phillips curve situation where there’s a direct tradeoff...The inflation that we’re seeing is really not due to a tight labor market. It’s due to bottlenecks, and it’s due to shortages, and it’s due to very strong demand meeting those. So I think it’s not the classical situation where you have that precise tradeoff.

But the rising cost of living is affecting everyone differently, the Bureau of Labor Statistics reported that average real wages declined for nearly every industry except for leisure and hospitality.

And while wages in that industry have grown, the quit rate for is nearly double the average. A record 892,000 workers left their job in August of this year.

The Wrap

“I think all day: ‘What am I going to buy when I get off [work] that I can afford? What am I going to get?’ It’s just hard.”

There are many reasons to be hopeful for economic growth going into 2022, however, this largely depends on the effects of COVID which are hard to predict, especially with a new and highly contagious variant making it's way into the US.

Inflation remains a concern, and the Fed will continue to balance economy recovery against keeping inflation in check.

But in the mean time, Americans around the country are struggling with the rising cost of goods. Mendy Hughes, a grocery worker recently said in an NBC news interview: “I think all day: ‘What am I going to buy when I get off [work] that I can afford? What am I going to get?’ It’s just hard.”

COVID massively disrupted the economy in often unpredictable ways; things may never be "normal" again.