Boil Then Simmer
As a hungry child, growing up in a large family, some forays into cooking were essential. My early rice-making experiments, however, were exercises in frustration. I would start with a large sloshing pot of icy water and, having transported it to the stove with wobbly hands, I’d dump in a bag of rice and wait for results. It seemed to take ages for the water to heat up, as I peered down hopefully at the submerged pile of grain. Eventually, things would begin to bubble and steam, but long before the rice came close to “al dente,” the water had boiled down, exposing an island of uncooked rice, with an acrid burning smell emanating from the bottom of the pot.
Over time, however, my skill increased. I’d measure quantities carefully. I’d fill the pot with warm water, make sure there was a good strong flame beneath it and cover it with a lid, all in an attempt to bring it to a boil faster. Then, I’d carefully turn it down to a simmer, and patiently wait for better results.
Just as I learned from my early experiments in cooking, both the federal government and the Federal Reserve seemed to have learned something from their attempts to reheat the economy after the Great Financial Crisis. The economy is already surprisingly warm and, with the help of very aggressive policy, is likely to heat up quickly from here. However, the critical question remains whether they have the skill and discipline to turn the policy temperature down to a simmer before inflation, and not just the economy, comes to a boil.
A Warmer Starting Point
At the outset, it should be acknowledged that economic conditions at the start of the year aren’t quite as frigid as many had feared.
New Covid-19 cases have fallen from a seven-day moving average of almost 260,000 in early January to roughly 60,000 today. The pace of improvement has slowed in recent weeks. However, a steady increase in vaccinations and a growing population with some natural immunity should continue to whittle these numbers down in the weeks ahead. This should also be the case for daily deaths from Coronavirus, particularly as those with the greatest medical vulnerability have been prioritized in the vaccine rollout. With the authorization of the Johnson & Johnson vaccine, the president has pledged that every adult who wants a vaccine will be able to get one by the end of May and this seems attainable. Even with some worrying variants, it appears that the pandemic should recede over the summer.
Meanwhile, even as the pandemic raged, retail sales in January were remarkably robust while home buying and home building continued to boom. Bad weather and a shortage of inventory may have prevented much further progress in either of these areas last month. However, consumer activity should rebound further in March. We now expect real GDP to grow by between 2% and 3% annualized in the first quarter, leaving output less than 2% below its peak of the fourth quarter of 2019.
Employment is similarly in a somewhat better place than feared. Friday’s February jobs report showed a non-farm payroll gain of 379,000, roughly double the consensus forecast and the unemployment rate edged down another 0.1% to 6.2%. The official unemployment rate does continue to understate the degree of dislocation in the labor market. While the number of unemployed people is 4.3 million higher than a year ago, the labor force is 4.2 million smaller and those who left the labor force because of the impact of the pandemic on their industries are not counted in the official unemployment numbers. Still, of the 21.4 million private sector jobs lost in the pandemic, 13.3 million, or 62% have now been recovered.
The economy also appears to be in a warmer-than-expected place on inflation.
Last week’s meeting of the OPEC+ group adopted a relatively tough line on maintaining production cutbacks, allowing the price of a barrel of WTI oil to reach $66.28 a barrel, its most expensive level since 2018. Chronic shipping delays and very strong U.S. consumer demand for goods have boosted input prices, with the ISM manufacturing prices paid index coming in at 86 for February, its highest reading since 2008. And February wage growth of 5.3% year-over-year, while undoubtedly boosted by the loss of jobs in low-wage sectors, would still have been a strong 4.3% year-over-year if the broad sectoral employment mix was the same today as a year ago.