Update 498 – Amid Heated Debate on Trump
Economy, Jobs, Wages Stuck in Deep Freeze
After the fatal occupation of the Capitol last week, the nation’s attention is squarely focused on the state of our democracy and approaching transfer of power. For the first time in our history, the House is poised to impeach the President a second time, this time with the help of some Republicans. After that, it’s off to the Senate, where there’s a 67-vote hurdle with only a week to go till inauguration. No Senate trial is expected, at least before January 20.
Meanwhile, harsh economic realities, chiefly stagnation, have settled in across the board as COVID sets new records every day: wages, unemployment, consumer spending, new investment, etc. Last week, the final employment report of President Trump’s administration capped the worst year for U.S. job losses on record.
President-elect Biden has the opportunity to push for even more relief spending at the start of his administration. Below, we examine macroeconomic conditions from the worker, consumer, homeowner/renter, and investor perspectives. Friday, we look at optimal policy solutions.
The Labor Market
Cold weather and mandated lockdowns halted labor market recovery in December. Last month’s jobs report showed a net loss of 140,000 jobs — the first drop in payroll since April.
The majority of December’s job losses were in the leisure and hospitality sector. Overall, employment in this sector fell by 498,000. Major losses also occurred in the service industry, where restaurants and bars slashed 372,000 positions. While retail, business services, manufacturing, and construction made small gains in December, the gains were not enough to offset losses.
The December report underscored employment disparities among groups already disproportionately affected by the economic downturn, including:
- Women: Women, particularly those of color, accounted for all the net job losses recorded last month (a net loss of about 156,000), while men gained around 16,000 jobs.
- Black and Hispanic Workers: Though the unemployment rate for Black workers decreased from 10.3 percent to 9.3 percent, Black unemployment remained higher than any other racial group. Unemployment rates for Hispanic workers, on the other hand, rose to 9.3 percent in December.
- Young Workers: Finally, the December data showed workers between the ages of 16 to 24 experienced an uptick in unemployment claims.
In total, 22.2 million jobs were lost since the pandemic began, and only 12 million have been recovered so far, leaving the nation 9.8 million jobs short of the pre-pandemic level.
Unemployment claims have been holding at about four times their pre-pandemic average through the fall and into the winter. There are now around 11 million unemployed, and the jobless rate remains stagnant at 6.7 percent, double the pre-pandemic rate. Nearly 20 million Americans are receiving some form of unemployment assistance. The halted recovery of the labor market blows open the door for Biden and the Democratic-controlled Congress to offer another relief package focused on further expanded unemployment benefits.
Last year saw a half-trillion dollar fall in consumer spending. Plummeting consumption has not been even across sectors, especially in services. Though consumer spending is recovering, it is not expected to match 2019 levels again until 2023.
Change in U.S. sectoral spending patterns in 2020 (in $ billion)
Source: Brookings Institute (Data: BEA and World Data Lab projections for Q4 2020)
Declines in spending were concentrated in services that involved an increased risk of contracting COVID, such as food services and recreation. These sectors are on track to recover by 2023 or 2024. Other sectors including clothing, personal care, and social services are not projected to recover to pre-COVID levels until 2026 or later. But in certain sectors such as food, durable goods (i.e. automobiles or books), housing, and financial services, consumers are expected to outperform 2019 spending.
Middle- and upper-income workers drove demand for certain goods, but spent less on dining out, travel, and other services. Steep declines in consumer demand followed the expiration of unemployment benefits, rental relief, and stimulus checks, pointing to the need for additional relief, particularly in the form of direct cash payments and extended unemployment benefits.
Housing/Commercial Real Estate
A lack of homes for sale and low mortgage rates have caused residential home prices to soar, creating wealth for homeowners. And despite rising COVID cases, bond markets remain stable. The current 10-year Treasury rate stands at 1.13 percent, up from 0.94 at the end of 2020 but down from 1.83 percent this time last year.
As this rate climbs, one might expect mortgage rates to follow, with demand for housing taking a hit; but that is not happening. Since bottoming out in August 2020, bond yields have increased, yet mortgage rates have continued to fall. Mortgage rates are expected to eventually rise, but only modestly, as the Fed is expected to keep interest rates low through 2023. As the vaccine is rolled out, experts are forecasting increased demand from homebuyers, particularly from young adults.
Commercial real estate is another story. COVID lockdowns shuttered thousands of restaurants, gyms, stores, and office buildings, and while landlords and lenders have granted forbearance, it is a temporary solution. Property owners in debt will have to double down and put more money into their buildings, or sell at distressed prices (property values are not expected to reach pre-COVID levels until 2022 or later). Per Bloomberg, roughly $430 billion in commercial and multifamily real estate debt matures in 2021, and delinquency rates are soaring already.
Percentage change in property values since the beginning of 2020
Source: CBRE Group
American society post-COVID will look different, too. Companies are already moving away from full-time office space, allowing more employees to work from home. And the rise of e-commerce is propelling the death of retail, from brick and mortar to mega malls. With Congress’ new COVID relief passed in December, lenders now have more flexibility to assist struggling borrowers, but the commercial real estate market is one to watch carefully.
One silver lining: as remote work allows workers to leave high-cost areas like New York and San Francisco, apartments have lowered rents. Not only has this alleviated financial burdens on renters, it has decelerated the regionalism we’ve seen hollow out the middle of the country in favor of the coasts.
Even with rents falling in high-cost areas, the threat of a massive eviction crisis is still very real. Nearly 12 million renters are expected to owe around an average of $6,000 in back rent and utilities this month, per Moody’s Analytics. The Biden administration will need to prioritize rental assistance in the next package to ensure this looming crisis is averted rather than postponed again.
On the surface, financial markets are thriving. Propelled by the Federal Reserve’s enhanced lending powers, markets have soared, surpassing pre-COVID levels. The S&P 500′s current forward price-earnings ratio is just below 23 — nearly its highest level dating back to 2000. Eighty percent of stocks sit above their 200-day moving average. But digging deeper, some concerns emerge.
Some market indicators point to the possibility of a double-digit recession. Following a sharp decline in retail sales in November 2020, consumer confidence is weakening, and last month’s unexpected job losses portend dark clouds on the horizon. But for now, financial markets will continue to climb higher, irrespective of the goings-on in the real economy, as investors bullishly bet on another large stimulus package.
The Case for Stimulus
During the first two years of Biden’s term, Democrats will control Washington — though without a filibuster-proof majority in the Senate. Biden’s economic team and Democratic leadership are expected to push a relief package that includes funds for expanded and extended unemployment insurance, $2,000 checks, state and local government relief, rental assistance, additional small business support, and vaccine distribution.
Even with another stimulus package, the path to a full recovery will be long. The U.S. is currently experiencing a K-shaped recovery. Those at the top have experienced a near-full recovery, while tens of millions of lower-income Americans suffer the effects of a severe recession. Economic inequality during the pandemic has reached levels not seen since the 1920s. Addressing inequality will be a top priority for President Biden. But fighting rampant wealth inequality must start with another relief package from Washington targeted toward those who need it most if the recovery is to be faster and fairer than the last one.