The Economy Isn’t Going Back to February 2020, Fundamental Shifts Have Occurred
Wednesday, June 23, 2021
The U.S. economy is emerging from the coronavirus pandemic with considerable speed but markedly transformed, as businesses and consumers struggle to adapt to a new landscape with higher prices, fewer workers, new innovations, and a range of inconveniences.
In late February 2020, the unemployment rate was 3.5 percent, inflation was tame, wages were rising and American companies were attempting to recover from a multiyear trade war.
The pandemic disrupted everything, damaging some parts of the economy much more than others. But a mass vaccination effort and the virus’s steady retreat this year has allowed many businesses and communities to reopen.
What Americans are encountering, though, is almost unrecognizable from just 16 months ago. Prices are up. Housing is scarce. It takes months longer than normal to get furniture, appliances and numerous parts delivered. And there is a great dislocation between millions of unemployed workers and millions of vacant jobs.
Federal Reserve Chair Jerome H. Powell acknowledged all the uncertainty this week, saying that policymakers had misjudged parts of the recovery and that they aren’t certain what exactly will happen next.
“This is an extraordinarily unusual time. And we really don’t have a template or any experience of a situation like this,” Powell said Wednesday. “We have to be humble about our ability to understand the data.”
There’s dispute, among other things, about how many of these changes are temporary and how many are true fundamental shifts that will stick around for years and reshape behaviors. But many people agree, at least, the changes are proving very disruptive.
There are obvious changes, like the realization that working from home is possible for a sizable part of the labor force and the widespread adoption of online ordering for daily necessities like groceries. These will remain significant parts of work and commerce going forward. Nearly a quarter of workers are likely to work at least a day or two from home each week, the McKinsey Global Institute predicts. And e-commerce, which grew three times faster last year than in prior years, shows few signs of ebbing.
Then there are new dynamics emerging as home prices soar in many parts of the country that are unaccustomed to seeing such extremes. While millions of American homeowners suddenly find themselves “house rich,” the surge in prices is exacerbating the affordability crisis as first-time buyers are getting priced out. Experts fear a rental crisis could be next.
Then there is inflation, which hit a 13-year high in May, and is widely viewed as the biggest risk that could sink — or at least stall — the recovery’s progress. Although the Fed predicts this will be a short-lived phenomenon, businesses and consumers are already changing some behaviors. Many companies are shrinking the size of how many paper towels are in a package or how much cat food is in a can and still charging the same amount. Home builders are refusing to guarantee prices in fear that material costs will jump further, and investors are suddenly reviving interest in Treasury Inflation-Protected Securities.
“Because there are now so many retirees, I think there will be more political pressure to tame any inflation,” said Lisa Cook, an economics professor at Michigan State University. “The general public has gotten used to low inflation.”
All of this is coming at a time when workers are increasingly demanding more pay and better working conditions. They want more flexibility, more opportunities for workers of color and more understanding from employers of mental health and child care needs. Businesses are paying attention, largely because they are desperate for workers. There are an estimated 9.7 million job openings right now, according to job site Indeed. That’s a record, and several million more than the nation has seen before.
How all of this will play out remains uncertain. In housing, prices in many markets are up 10 percent or more from a year ago, a very different dynamic than what the nation experienced coming out of the Great Recession. Many of the fastest growing prices are in smaller cities as Americans are relocating to places with more green space and sense of community.
A major concern is what happens now that so many first-time home buyers are being priced out because they can’t afford the hefty down payments. They will have to stay as renters.
Susan Wachter, co-director of the University of Pennsylvania’s Penn Institute for Urban Research, predicts the nation is on the verge of a rental housing crisis. At the end of this month, the national eviction moratorium expires, and many landlords are eager to bump up rent and force out tenants who lost jobs in the crisis. At the same time, investors have scooped up cheap single-family homes in the hopes of renting them out for good profits. Single-family home rents were already up 5.3 percent a year as of April, according to research firm CoreLogic.
“I see this coming year as a year where rents will increase by a surprisingly high amount,” Wachter said. “The affordability problem is going to extend out into more places, especially second and third-tier cities.”
In a worst-case scenario, it could lead to more homelessness, even in such a hot economy. It will almost certainly reinforce the divides between the haves and have nots.
The same is true of the rise of automation during the pandemic. As companies looked for ways to reduce the number of people in an office, hotel or factory, they turned to robots and telework. They invested heavily in technology, which economists predict could result in one of the biggest boosts to worker productivity in years. This higher productivity forecast is one of the reasons the McKinsey Global Institute says the United States could see an economy that’s $3,500 per person bigger by 2024. But those gains are unlikely to be evenly distributed. Automation also has downsides, especially layoffs for workers without college degrees.
“This is not a sure thing that we reap the benefits of faster growth without negative side effects. There are real worries about inequality,” said Susan Lund, head of the McKinsey Global Institute. “Are we able to create real opportunities for people who have been in low-wage, low skilled jobs?”
In addition to equality and housing questions, policymakers are also grappling with what will happen with inflation. The nation hasn’t seen sustained high inflation in 30 years. It’s unclear how Americans will react.
There is perhaps no better illustration of the disruptive price and supply chain issues than lumber prices, which hit an eye-popping record of $1,670 per thousand board feet in May.
There was a sigh of relief on Wall Street and in the White House as lumber prices on the commodities exchanges fell about $600 in the past two weeks. The price is still about three times higher than pre-pandemic norms, but it is trending down.
But home builder Jerry Konter in Savannah, Ga., says reality on the ground is a lot different than charts on a Wall Street trading terminal. Sky-high prices for lumber remain at stores and many suppliers because they still have to sell all the wood they bought at the top. Konter doesn’t expect retail prices to change until August or September.
For the first time in his 44-year career building homes, Konter altered his standard contract to no longer guarantee a firm date or price. He has to explain to buyers that the price could jump and items like cabinets that used to arrive in 10 days now take four months. While hopeful for improvement, he’s preparing for high prices and supply bottlenecks to last. His expectations — and behaviors — have shifted.
“I personally believe we are about to kill the golden goose in the economy with these supply issues,” Konter said, adding, “There are so many people that are being left out of getting a home because of the additional input costs. It’s almost impossible to build an entry-level home.”
While many economists and Wall Street traders believe the Fed’s prediction that inflation will subside later this year, they are quick to say their biggest fear is that the Fed is wrong. If a lot of people start believing inflation of 5 percent a year is here to stay, then they will demand higher pay and businesses will respond by raising consumer prices again, igniting a vicious cycle. The Fed would have to respond to that cycle by hiking interest rates quickly, a tactic that typically causes recessions.
“In the next few months, we’ll have very high inflation numbers. It’s unlikely to persist, but it’s a real risk that it does. That risk is higher now than it has been for decades,” said former Fed official Randall Kroszner. “Will consumers accept it as temporary? We really don’t know. In some ways, this is faith-based monetary policy.”
The Fed is forecasting 3.4 percent inflation this year and 2.1 percent next year. Even if that scenario comes to pass, it might be notable to Americans who have grown accustomed to closer to 1.5 percent inflation in the past decade, especially baby boomers who are retiring and living off fixed incomes.
Over on the hiring front, there’s nearly one unemployed person for every job opening, but it’s never that easy to fill vacancies. People don’t necessarily live where the jobs are or have the right training and skills. After such a harrowing year, workers are also reluctant to do the same thing they did pre-pandemic for the same pay and conditions.
“This could be a real shift in the bargaining power of labor, which we really haven’t had since the demise of unions,” said Diana Farrell, the former chief executive of the JPMorgan Chase Institute and an eBay board member
Mackenzie Tran, an unemployed worker in Missouri, describes the economy right now as a “limbo nation.” Many are waiting to see if they can make their dream job a reality. After a tough year, they long for something more, and the stimulus payments and unemployment aid have given them enough money to not have to take the first job available. Some GOP governors have already started rolling back unemployment benefits in an effort to spur people to return to work faster.
“There’s this feeling and accusatory tone that you must just be lazy if you aren’t working right now. But people’s lives have been disrupted drastically,” Tran said. “People tell me I should just go work at McDonald’s, but that’s not my career.”
Tran and her husband have managed a live performance space in Kansas City since 2014. They shut down during the pandemic when their main venue closed. They have just started to have a few shows. A recent outdoor one was foiled by rain. They are optimistic they will mostly be back by the end of summer, but they are barely making any money now, and Missouri just cut off unemployment entirely for gig workers and the self-employed.
The high number of job openings has given Americans confidence to ask for higher pay and try out new fields, knowing they can likely fall back on restaurant or hospitality work if it doesn’t pan out. Workers are quitting their jobs at the highest rate ever recorded, and many Americans are launching start-ups they’ve wanted to do for years. New business applications jumped 24 percent in 2020, the biggest surge in history, and they remain at a much higher level then precrisis. These are signs that workers feel they have more power, a shift likely to endure.
“The pandemic delivered a massive shock to American entrepreneurship that has seriously altered established trends in new business formation,” the Economic Innovation Group wrote earlier this year.
This is a summer of limbo, as the Missouri worker put it. Many fundamental shifts in the economy will take much longer to understand. About the only certainty is that the economy coming out of the pandemic is going to look much different than it did before.
Category: Economic News, COVID-19