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[...]conflicting public health messages regarding Covid-19 have produced challenges for economic recovery. Dr. Nahavandi is Associate Professor of economics at Pfeiffer University School of Graduate Studies, specializing in Business Economics, International Business, and Healthcare Economics. Board = Conference Board, New York, New York; Fannie Mae = Fannie Mae, Washington, D.C.; GSU - EFC = Georgia State University, Economic Forecasting Center, Atlanta, Georgia; Moody's Economy = Moody's Economy.com, Westchester, Pennsylvania; Mortgage = Mortgage Bankers Association, Washington, D.C.; NAM = National Association of Manufacturers, Washington, D.C.; Perryman Gp = The Perryman Group, Waco, Texas; Royal Bank of Canada, Toronto, Ontario, Canada; S&P = Standard & Poor's, New York, New York; US Chamber = U.S. Chamber of Commerce, Washington, D.C.; Wells Fargo = Wells Fargo Bank, San Francisco, California.
Eleven months into the Covid-19 Pandemic, the U. S. economy has rebounded impressively from an incredible shock. However, conflicting public health messages regarding Covid-19 have produced challenges for economic recovery. A return to strict lockdowns in major metropolitan areas to mitigate pressure on the healthcare sector is expected to add to the initial unemployment claims, particularly among hourly wage workers who are already struggling to meet necessary expenses. In addition to a significant logistical challenge, vaccination hesitancy is expected to prolong the process of economic normalization. A historically low unemployment rate of 3.5 percent in February shot to 14.7 in the following two months and stood at 6.7 in November. In February, the unemployment rate for men was slightly higher than women at 3.6 versus 3.4 percent. In April, the unemployment rate for women shot up to 16.2 versus 13.5 for men. However, in November, the male unemployment rate stood at 6.9 versus 6.4 for women despite the pressure of homeschooling and a shortage of daycare facilities.
CONSUMER SAVINGS SKYROCKETED IN EARLY 2020 BUT CONSUMPTION EXPENDITURE IS RETURNING
Personal consumption expenditure (PCE) tanked sharply in April to 81 percent of the February level. However, PCE has rebounded to 98 percent of the February peak. The number of workers unemployed longer than fifteen weeks has declined from 5 percent in July to 3.6 percent in November, while unemployed as a percent of the labor force has dropped from 10.2 percent to 6.7 percent in the same timeframe. That said, a broader measure of unemployment that includes marginally attached and economic-part-time workers remains alarmingly high at 12 percent. This population amounts to 19.5 million individuals who are suffering the most due to the Pandemic.The personal saving rate jumped from 13 percent in March to 33.7 percent in April and now stands at 13.6 percent, well above the 7 percent averagefor the past six years. In November, households used their massive savings for shopping in November, in part to cope with stress. Weekly initial unemployment insurance was 853,000 in the first week of December, almost four times higher than in March. Consensus expects personal disposable income to be virtually unchanged in 2021, while personal consumption expenditure is expected to grow at a healthy rate of 3.25 percent.
The growth in consumption spending is expected to come from a mix of savings, stimulus, and wealth-effect. Between the first and second quarter of 2020, household wealth grew from 104.7 trillion to 112 trillion. Labor participation dropped from 62.7 percent in March to 60.2 percent in April and now stands at 61.5 percent in November, well below the all-time high of 67.2 in March of 2001. Labor participation for women and men stands at 55.9 and 67.4 percent in November, down from 57.3 and 68.5 percent in March. The consensus expects an unemployment rate of 5.78 percent by the end of 2021. Chained and Consumer Price Indexes are expected to grow at 1.49 and 2.23 percent respectively in 2021. A lower Chained Price Index suggests that households are expected to return to lower-priced substitutes in light of employment and income uncertainty, a trend that had reversed before Covid-19. The Consumer Confidence Index reported by the Conference Board dropped to 96.1 in November, down from 101.4 in October. The consumer survey by the Conference Board points to less favorable expectations in 2021.
LARGE RETAILERS ARE GOING BANKRUPT; SMALL BUSINESSES HANGING BY ATHREAD
A large number of well known retail brands have filed for bankruptcy since the start of the Pandemic. Surprisingly, despite a sharp rise in unemployment, chapter 7 liquidation and chapter 13 reorganization bankruptcies filed in 2020 are down relative to 2019. Explanations range from stimulus spending, difficulty accessing the court systems, loan forbearance, and hope for a rapid rebound once a vaccine becomes widely available. Industrial production dropped from 109 percent (2012 = 100) in February to 91.3 percent in April and stood at 103.2 in October. Manufacturing took a larger dip, from 106 in February to 84.8 in April and stood at 101.2 in October. Capacity utilization was at 72.75 in October, down from 77 in February. Consensus expects industrial capacity utilization to rise by two percent to 74.25 by the end of 2021. Non-residential fixed investment is expected to grow by 3.75 percent in 2021. A brighter spot is the construction sector. Consensus expects private housing starts to jump in excess of three percent with 1.46 million units by the end of 2021, in part due to low mortgage rates and liquidity. The city center apartment lifestyle has given way to suburban single-family construction. Total light-vehicle sales are expected to grow at a robust rate of 4.8 percent, with 16.63 million units by the end of 2021. Vehicle production has been trending downward since July. The employment cost index has not changed its upward trend despite high unemployment as many workers stay outside of the labor market and do not compete for jobs. A large exodus of working women has reduced the size of the labor force.
FED STAYS ON COURSE WHILE APPEALING FOR FISCAL APPROACH TO REBOUND THE ECONOMY
For the past six months, the Fed has been purchasing $120 billion of U. S. government debt, split between two-thirds on treasuries and one-third on mortgage-backed securities. There is no indication that this approach will change soon. A near-zero interest rate policy is expected to remain in place well into 2023. There is a call for the Fed to modify its purchase policy toward long-term treasurys to keep the cost of borrowing low for firms. Consensus expects the triple-A corporate bond rate to remain very low at 2.78 percent by the end of 2021. The Federal Fund Rate is expected to remain at 0.14 percent in 2021. Interestingly, the consensus expects the M2 money supply to contract by two percent in 2021, while GDP is expected to grow at 2.7 percent. Labor productivity jumped by 10.6 and 4.6 percent in the second and third quarters, dashing the Fed's hope of any inflationary pressure any time soon. Rising productivity makes it possible for GDP to grow despite high unemployment.
Copyright Journal of Business Forecasting Winter 2020/2021