I recently read a book, entitled The Code Breaker by Walter Isaacson, about a revolution in gene editing prompted by the discovery of something named CRISPR in bacterial DNA. I won’t delve into the details except to say that the book is a great read and made me appreciate, once again, the relative simplicity of the economic systems I spend most of my life pondering compared to the extraordinary structure and machinery within a single human cell.
It also reminded me that the economy can best be understood as a living organism—not just one that expands and contracts but one that is in a constant state of evolution, usually growing but also being distorted by, and adapting to, a variety of shocks and changes in policy.
This is a particularly important reality to grasp today. At a superficial level, the economy is simply in the midst of a powerful recovery from a deep recession. However, a closer look at the data shows many sectors that remain far from a full recovery as well as many that have positively thrived in the pandemic environment. Moreover, both the economy itself and government policy will forever be changed by the pandemic. While a full recovery remains likely, the full-employment economy of 2022 will be very different from the full-employment economy of 2019—and the difference should have important implications for investors.
Top-Line Progress On The Road To Recovery
The broad story on the U.S. economy remains one of very strong recovery. Last week’s revised real GDP numbers for the first quarter showed the same 6.4% annualized growth as previously estimated. However, April data for consumer spending, inventories and durable goods orders reinforced our view that second quarter growth will be close to 10%. Even with a moderation in the growth rate in the second half of the year, real output by the fourth quarter of this year could be up by more than 7% year-over-year and by 5% relative to the fourth quarter of 2019, essentially marking a full recovery from the pandemic recession, even accounting for normal trend-like GDP growth.
The labor market may tell a similar story in this Friday’s May jobs report. We estimate that the economy produced a net gain of 840,000 jobs in May, with the unemployment rate falling from 6.1% to 5.8%. While this would be a marked improvement from April’s disappointing report, it still understates the potential for major job gains in the months ahead. Survey data confirm that many businesses are hungry to hire workers and that workers recognize the strength of labor demand. However, employment growth continues to be restrained by lingering pandemic worries and by generous federal unemployment benefits.
Thankfully, as more Americans have gotten vaccinated, the pandemic has receded and should be a much less significant drag on the labor market in the months ahead. In addition, 24 states, accounting for over 40% of U.S. workers, are ending supplemental unemployment benefits by early July while these benefits will expire for everyone else by September 6. In combination, these trends should eliminate most of the current distortions in the labor market, potentially allowing the unemployment rate to fall to close to 4% by the fourth quarter of this year.
The Evolving Expansion
However, while a super-fast economic recovery remains on track, a detailed look at April consumer spending reveals the distortions wrought by the pandemic and massive fiscal aid.
Some areas clearly remain depressed. Compared to April 2019, real consumer spending in April 2021 was down 16% for dentists, 17% for flights, 30% for taxis, 38% for hotels, 46% for hairdressers, 65% for spectator sports and 89% for movie theatres. Presumably, most of this spending will fully recover by the end of the summer, as pandemic restrictions fade.
Other areas have thrived through the pandemic. Again compared to April 2019, real consumer spending in April 2021 was up 9% for food consumed at home, 18% for lottery tickets, 19% for alcohol consumed at home, 28% for jewelry, 36% for televisions, 53% for games and toys, 58% for computer equipment and 66% for new light trucks. Some of this will likely fade in the months ahead, as consumers devote more of their money to services and return to their physical workplaces in greater numbers. However, some of it reflects a surge in household wealth from a booming stock market and in income from generous federal aid and these areas should continue to drive consumer spending even as the pandemic winds down.
More importantly, both the pandemic and massive fiscal stimulus have changed the economic landscape.