Craving ‘Normal Activity’, Consumers Will Drive Growth; Trouble On The Horizon: The Cost Of Excessive Monetary And Fiscal Stimulus
The economic recovery from the historic COVID-19 pandemic that began last year regained steam at the start of 2021, and record savings and hot financial markets indicate an even more accelerated upturn will play out across the rest of the year. According to Beacon Economics’ latest outlook for the U.S. and California, the pandemic exacted its heaviest and most persistent damage within job markets, but a quickened pace of vaccinations and the easing of health-mandated restrictions nationwide is setting the stage for a major hiring bounce.
At the start of the pandemic the U.S. saw its payroll workforce decline by approximately 22 million jobs as the unemployment rate soared to 14.8%. The damage was not evenly distributed with some 40% of the losses occurring in the Leisure and Hospitality sector alone. But as of March 2021, 62% of the lost jobs have been recovered and the U.S. unemployment rate has fallen to 6%. Moreover, the job openings rate is currently higher than it was pre-pandemic, and wages among workers who have kept their jobs have continued to grow at a normal pace.
“As good as this data is, we’re not there yet. But even the most damaged industries are starting to see light at the end of the tunnel while industries that were essentially unscathed are facing tight job markets and having trouble hiring people,” said Christopher Thornberg, Founding Partner of Beacon Economics and one of the forecast authors. “Additionally, the depths to which badly affected labor markets sank have created conditions for exceptional growth as restrictions on activity – the only thing preventing hard-hit industries from expanding – recede.”
The new forecast estimates that the nation’s unemployment rate will shrink to 5.7% in the 2nd quarter of 2021 and to 4.9% by the end of the year.
Driven by consumer demand, other parts of the U.S. economy have already rebounded sharply, even flourishing throughout the pandemic. “Frustrated consumers who were denied an opportunity to eat at a favorite restaurant or fly to Disney World, spent unused dollars in other areas of the economy such as buying houses, campers, and home goods,” said Thornberg. “This is why worker earnings have recovered, job openings have remained remarkably high, and there was a surge in corporate profits – to their highest point ever in the second half of last year.”
While U.S. GDP experienced its largest annual decline in decades in 2020, these losses will be offset and the economy will likely return to trend this year – driven primarily by consumers, according to the new outlook.
Like the nation, California’s pace of vaccination has ramped up and the easing of restrictions will accelerate the state’s labor market recovery (assuming health criteria is met, the state is scheduled to fully open on June 15). As of March, California had 8.6% fewer jobs compared to pre-pandemic levels, while the national economy had 5.5% fewer jobs. “The state finds itself in a deeper hole with respect to jobs lost than is the case nationally,” said Taner Osman, Research Manager at Beacon Economics and one of the forecast authors. “But that relative underperformance will likely translate into higher job gains in 2021.”
The new outlook estimates that California’s unemployment rate will shrink to 7.1% in the 2nd quarter of 2021 and to 4.4% by the end of the year.
Also like the nation, while the state’s job recovery lags, many aspects of California’s economy have returned to their pre-pandemic trends, and some, such as the housing market, boomed over the past year. Home prices in the state increased 15% from the 4th quarter of 2019 to the 4th quarter of 2020, compared to just 5% growth from the 4th quarter of 2018 to the 4th quarter of 2019. Moreover, a severe shortage of housing supply in California will continue to place upward pressure on home prices in the year ahead, said Osman.
Additional Key Findings:
- In California, sales of single-family homes have also increased, jumping by 24% from the 4th quarter of 2019 to the 4th quarter of 2020. This rate of sales is unsustainable, however, as supply and inventory constraints will act as significant headwinds.
- The economic fallout from labor market losses in both the U.S. and California disproportionally affected the lowest wage earners. An unprecedented policy response by the federal and state governments went some way towards dulling the pain.
- This year, the Federal deficit will be on the order of $4 trillion. In two just two years, the United States has issued $7 trillion in new debt—an amount equal to 30% of the nation’s GDP, or $24,000 for every person in the United States under the age of 70. This threatens to be an overstimulation and could have seriously distorting economic consequences in the future.
- U.S. commercial bank deposits mushroomed during the pandemic, increasing by $3 trillion in 2020 compared to 2019 levels.
- Over the past year, the nation’s household savings rate shot up to levels never seen in U.S. history: 25% in the 2nd quarter of 2020 and a still high 13.4% by the end of last year. This was driven by the fiscal stimulus but also by the fact that spending dropped significantly.