A Bumpy, But Strong Recovery

Chief Economist Scott Brown discusses current economic conditions.

Economic data rarely follow a smooth path. Weather and external events have effects. Consumer spending can be uneven. New orders tend to come in bunches. One should never place a lot of weight on one particular month’s worth of data. The stories behind the numbers are what’s important. There is a lot of optimism as we look to the remainder of the year, some degree of fear (of inflation, likely unfounded), and more than a fair amount of uncertainty.

Most of the January and February data reports are in and weather has played a significant role. Weather was unusually mild in January and exceptionally bad in February. Consumer spending, durable goods orders and shipments, construction activity, new and existing home sales, and industrial production all posted declines in February, while still exhibiting strength on a year-over-year basis. For example, orders for nondefense capital goods ex-aircraft, a rough proxy for business investment in equipment, fell 0.8% in February, but the total for the first two months of the year were up 8.5% from the first two months of 2020. Consumer spending on durable goods dropped 4.7% in February, but was still up 17.2% from a year earlier. Existing home sales fell 6.6% in February, but were up 9.1% year-over-year.

Of course, the biggest hit from the pandemic has come in consumer services. Those services where individuals come into close contact with others were especially hard hit – and won’t fully recover until the pandemic is well behind us. For the household sector, spending on services is roughly six times the spending on durables. Consumer spending on services edged up 0.1% in February, as bad weather offset the impact of a general opening in the economy. We can expect sharp improvement in March.

While the rate of new COVID-19 cases has fallen, it’s not zero. Despite the increased availability of vaccines, the number of new cases has been trending above 55,000 per day – much less horrific that in early January (250,000), but still relatively high. Deaths from COVID-19 are running at about 7,000 per week – down from 23,000 in mid-January, but still high. Implicitly, the U.S. has made a trade-off between deaths and economic growth. To keep deaths low, the economy should open gradually, but it appears to be going fast. So now, it’s a question of how many will accept the vaccine. Lockdowns and restrictions will be behind us. Cooped up for a year, many are eager to make up for lost time. Some may still be reluctant to go out in crowds.

In his post-FOMC press conference, Fed Chair Powell said that the recovery could go “more quickly than it has in the past, because it involves reopening the economy, as opposed to stimulating aggregate demand and waiting for that to produce demand for workers.” He admitted that it will still take time for unemployment to go down and for labor force participation to recovery. However, anecdotal evidence suggests that unemployed workers may be unlikely to step into their old jobs. It’s ironic that with 9.5 million unemployed, firms continue to report difficulties finding skilled labor. A cynic would say that simply means difficulty finding people willing to work for what you want to pay them, but there are clearly issues in manufacturing. Many firms are having problems even locating those they had furloughed months ago. Worker shortages have contributed to supply chain issues. Some training will be required, but that takes time. Training should be less of a problem in the lower-skill services industries, but there are likely to be challenges matching millions of unemployed workers to available jobs.