November 27, 2020
The issue is no longer whether additional government spending is required. It is coming. With President-elect Biden in favor, his Treasury Secretary Janet Yellen pushing for it, and Fed Chair Powell on board it is clear that by early next year we will see additional government spending. Call it fiscal stimulus. Call it a corona virus relief bill. The end result is that the economy will soon see additional support.
The unemployment rate is currently 6.9%. By yearend it should fall to 6.0%. We thought it might be useful to look at the economic environment the last time the unemployment rate was at 6.0% (in September 2014). In December 2014 we wrote the following about the 2015 economic outlook. “A pickup in the pace of economic activity, the relentless tightening of the labor market, and an uptick in inflation will cause the Fed to raise interest rates for the first time in eight years.”
We thought GDP might rise 3.3% in 2015. We expect GDP to rise 5.5% in 2021.
We thought the unemployment rate might decline to 5.0% in 2015. We expect it to be 3.5% by the end of 2021.
We thought inflation might rise to 2.8% in 2015. We expect it to climb 2.8% in 2021.
The point is that neither we nor anybody else was particularly concerned about a 6.0% unemployment rate. Nobody suggested that unemployed workers were in dire straits. Nobody argued that certain sectors of the economy were in dire need of assistance. That is because economists generally expected the economy to accelerate in 2015, the unemployment rate to continue its decline, and inflation to quicken. But that is almost exactly the same forecast we envision for 2021. But many economists and politicians today argue that drastic action is required to solve the perceived problems.
Let’s step back for a minute. In March, the virus was spreading rapidly. The stock market was plunging. Americans were clamoring for a national quarantine because such action had been effective in China and European countries had adopted that same model. So, Trump and many state governors implemented the stay-at-home order which triggered the biggest single-quarter drop in economic activity in our history.
Government action caused this to happen. Prior to the recession large and small businesses were operating profitably and growing at respectable pace. The economy was at full employment. And then, through no fault of their own, everything changed. Washington felt a responsibility to make these people whole. The $3.0 trillion of fiscal stimulus was roughly the magnitude of the GDP decline in the first and second quarters combined. Such additional spending was expected to quickly replace the GDP loss in the first half of the year. That should happen by the first quarter of 2021. But even if the unemployment rate quickly declines to 6.0%, it will still be considerably higher than the 3.5% rate that existed prior to the recession.
But the reality is that you cannot put Humpty Dumpty together again. Like it or not, the pandemic has changed our world. We have significantly increased our willingness to purchase items on line which means that there will almost certainly be fewer traditional brick-and-mortar stores – both large and small – in the years ahead. There will almost certainly be less business travel, which means a reduced amount of air travel and need for hotels. Consumers and businesses, aided by technology, will adapt and create robust growth in 2021. But jobs for many workers in those affected sectors will never come back. The question is, how long should American taxpayers continue to support those workers? And how should we go about doing it? The answer to that question is both unclear and complicated.
We can all empathize with those displaced workers. It is only by sheer luck that we are not one of them. But almost everyone should agree that we cannot continue to support these workers forever. We are more hard-nosed about the notion of additional support than most and worry about the impact on government debt outstanding. Having said that, it is hard to argue with people who look at the humanitarian impact on the economy of long-term unemployment and believe that more assistance is required.
The stimulus bill passed last March was crafted quickly and a bit clumsy, but it was also substantial and injected cash into the economy quickly. In our opinion it was absolutely necessary and without a doubt was responsible for the dramatic 33% GDP rebound in the third quarter. But the economy today is not what it was then. The stock market had fallen 32% in the spring. It is at a record high level today. The economy collapsed by 31% in the second quarter. It rebounded by 33% in the third quarter with additional rapid growth expected in the fourth quarter. The unemployment rate surged to 14.4% in April. It should shrink to 6.0% by yearend.
Today we have the luxury of time to tailor a package that will provide the greatest amount of assistance to those truly in need. Many sectors of the economy will plead their case – unemployed workers, small business owners, hospitals, state and local governments. They all have legitimate needs, but the amount of funds available will be finite. Hard decisions will have to be made about both the size and composition of the spending. And that is exactly how it should be. Politicians should have a spirited debate, but then quickly come to a conclusion and do something.
Part of the reason that Biden, Yellen, and Powell are so worried is that the Fed continues to anticipate a very slow return to full employment. In June, the Fed thought the unemployment rate at the end of this year would by 9.6%. By September it lowered its forecast to 7.6%. It- did not envision the unemployment rate falling to the 4.0% mark — its full employment level – until the end of 2023.
But today the unemployment rate is 6.9%. It is expected to reach 6.0% by the end of this year. That is 1.6% lower than what the Fed thought just three months ago. Surely, it now expects the labor market to achieve full employment much sooner than the end of 2023. We expect the unemployment rate to reach that level by September of next year. Fed economists ought to be humbled by their economic forecasts this year which widely missed the mark. If the Fed were to believe that the economy would reach full employment by September of 2021, would it still feel that the economy needs $2.0-3.0 trillion of additional support? We doubt it.
Additional government spending is coming. Given that a vaccine will be broadly available early next year and the end of the pandemic is in sight, we hope that our elected officials will opt for a relatively small $0.5-$1.0 trillion package, and tailor it to provide the greatest amount of assistance to those truly in need.
Stephen Slifer
NumberNomics
Charleston, S.C.
Yes, bring means testing front and center to the policy decisions.
I saw a spot on CNN this morning interviewing a Chef who retrained for residential construction. He stated he had less stress and was making more money. Not to make light of “change is hard” but for this person it looks to have worked out well.
Steve, hopefully the government will put asides it’s animosities and be able to work together for the good of America. Based on the track record I doubt it but I share your hope. I do think that something does need to be done to support people as they transition to a new job/career.
I am starting to see a significant number of my tenants not able to pay rent. It wasn’t a large percentage until about a month ago. Suddenly it is a problem. For right now the government has an unfunded moratorium on a evictions. Meaning landlords like myself eat the cost and can’t move the tenant out. Starting at the end of December, we’ll begin the evictions on the tenants that haven’t worked up a payment plan with us to get current on their rent. I was reading today that somewhere around 21 million households are at risk of losing their shelter.
What these people need is something that encourages and supports them as they transition to the new jobs. I suspect that they will continue to be lost in the tug of war of politics and stereotyping of most everyone who’s low income as lazy. It’s a situation that’s ripe for continued polarization and leaving ordinary citizens worse off. I am hopeful that I am wrong on this.
Chris
Steve, one additional comment about employment. What percentage of those workers have left the job market or are under employed in gig jobs without healthcare? I don’t know if we have information yet on what percentage of the workforce has replaced better jobs for worse one, or vice versa?
That’s going remain a continuing issue that the Bernie Bro’s and Blue collar MAGA’s have a common gripe about. Their economy is not our economy.
Hi Denny,
Thanks for letting me know about that CNN observation. I suspect there are a lot of people in that category. The labor market is not back to where it started, but it is getting their faster than anyone expected.
Best.
Steve
Hi Chris,
As usual, insightful questions.
I have heard the same sort of chatter re: people who could potential be evicted in coming months. And you, obviously, have some first hand knowledge about that. I have no doubt there are some, but I wonder how many there really are. There was a study by the National Low Income Housing Coalition in early August that estimated 30-40 million people in America could be evicted from their homes by the end of 2020. Not even close. Here is the link to that article. Now we have the number you found which is 21 million. Is that right? I don’t know, but my guess is that it, too, is inflated.
https://nlihc.org/news/30-40-million-people-america-could-be-evicted-their-homes-end-2020
I took a look at the unemployment rate. In February it was 3.5% and at that time there were 5.8 million people unemployment. By April that surged to 23.1 million and the unemployment rate was 14.7%. Today the unemployment rate is 6.9% and 11.1 million people are still unemployed. Using my estimate that number falls to 10.0 million in November and 9.2 million by the end of the year. So it seems to be that we will have 3.7 million more people unemployed at yearend than would be the case if everybody who wanted a job actually wanted one. I presume those 3.7 million people could lose their homes. But 3.7 million is not even close to 21 million. Sure, there could be people who have jobs that lose their homes, but by the same token not all 3.7 million will lose their homes just because they do not have a job. I do not know what the right number is, but I suspect it is greatly inflated. By March I have those unemployed workers falling to 8.2 million or just 2.4 million more than would be the case if we were at full employment.
I have no idea what will happen on the political front early next year, but I suspect that Biden will get a pass in the first few months of his presidency and, as a result, some sort of stimulus/relief bill will get passed.
I guess we will find out.
I do not know the answer to this question, but can provide at least some sense. First, see the comment from Denny Boyd below that he heard from CNN re: a chef who got a job in the construction industry and is making more money with less stress than before. How many others are there like him? I do not know.
I look at average hourly earnings. In 2019 they rose 4.2%. In April that spiked to 8.0% (because many low paid workers were laid off). Today it has fallen to 4.5% roughly in line with where it was prior to the recession. If your hypothesis were true, I would have expected that average to be lower than normal by now. It is not. Perhaps because the chef (and undoubtedly others) have gotten higher paying jobs. If you move from being a restaurant worker to a job in an Amazon distribution center I am not sure what way it goes.
Same thing is true tor average weekly earnings which encompasses how many people were working, how long they worked, and how much they got paid. In February these weekly earnings had risen 3.0% in the previous 12 months. Like average hour earnings it spiked to 7.5% at the height of the recession and is now 5.7%. Once again, if your hypothesis were true I would have expected weekly earnings to be rising more slowly by now. That is not happening.
Steve
Thanks Steve, interesting data and analysis. It does fill in some gaps and makes sense.
What I can report from my anecdotal direct experience is that we went from about 5% of our tenants paying rent late or not at all to about 25% last month. They all referenced COVID job losses, loss of assistance payments and as you would expect they mostly had hospitality jobs previously. Demographically speaking they seem to be a high percentage of women, generally single mothers with a few older people with health issues. I hope whatever stimulus comes out, has something to help tide and/or transition these folks over. Possibly many of them can’t easily move over to construction, Amazon or even gig jobs. Hopefully it’s a small percentage of the population overall. For perspective, in “normal” times we see about a 2% to 5% late payment each month.
Addressing the other half of your comment about employment and wage increases, anecdotally again that would seem to match what we are seeing. We have a waiting list now for most of our properties and are quite upfront about needing full deposits and background checks. So it does seem that a fair number have managed to successfully transition to something that pays well enough. Which is good news.
Thanks Chris. That information is helpful. The kind of people you describe are the ones that truly need assistance. The challenge is how to provide those funds without simply turning on the spigot.
Best.
Steve