The hottest question in Washington these days is how much more America needs to spend on recovery, and that’s a classic data Rorschach test. Some are staring at the declining unemployment figures and see an economy well on its way to normal. Others are afraid that they will not fall fast enough and fear that long-lasting scars will damage long-term growth.
In fact, both groups may be right. The short-term recovery looks quite strong, especially if another stimulus package expands improved unemployment benefits in the autumn. And the stock market
certainly notices that a glorious summer is coming.
But as companies take advantage of the shock of introducing cost-saving technologies, and when consumers come out of the lockdown with new habits, the same old jobs will not all be there to fill. The crisis will leave more people settling down with lower wages or dropping the workforce altogether, and it will take more than throwing money at the problem to heal the economic wounds.
As shocking as the COVID-19 pandemic was for last year’s economy, the world’s synchronized political response was even more surprising. Central banks are lowering rates, finance ministries are reducing controls, and an astonishing effort to find a vaccine has now provided several highly effective options.
With all the money slipping around the world, how can we not expect a sharp rebound? Even the viewers know European Commission upgraded economic forecasts last week following a trend that their peers on International Monetary Fund and Organization of economic cooperation and development.
US unemployment has more than halved from its peak of 14.7% in March last year, while household savings are healthy and debt is low. Poorer households report even slightly higher incomes with the extra public support. Larger companies are inundated with cash, and banks have plenty of capacity to lend. As winter turns to spring, Americans control their cottage fever with plans for shopping and exotic travel as soon as they get the second shot.
Our key scenario is a stable recovery this year with another stimulus package that will increase growth over Congressional Budget Office’s new 3.7% forecast. Unemployment should fluctuate lower than the current 6.3% rate, but it will be tough because the details of the employment data show something far more worrying.
Specifically, long-term unemployment, which counts Americans who have been out of work for more than 27 weeks, continues to rise in absolute terms and as a percentage of total unemployed. The labor force participation rate has also risen sharply after recovering from the global financial crisis.
Many of these lost jobs may actually reappear when all of these people return to the mall. But many of these trends are part of one history dating back to the 1960s as men aged 25-54 (so-called “prime age”) began to drop out of the workforce due to a complex brew of forces that included global competition, technological innovation and the weakening of trade unions. Some of these trends were only just getting better when the crisis hit.
In the meantime, we are only just beginning to understand the shock delivered to working women. Even when the recovery takes hold, some 80% of those who left the workforce in January were women.
The pandemic will allow more people to settle with lower wages or drop out of the workforce altogether.
All recessions exacerbate the mismatch between jobs and the unemployed, but this can be worse. When the crisis hits, companies often add new technologies to reduce operating costs. This time, however, there will be further disruption from new post-pandemic consumer patterns and preferences.
When the recovery comes, as one examination of the Federal Reserve Bank of New York points out that the new jobs do not fit the skill sets of those who were released. It’s not like a flight attendant can not get a job on land at an online retailer’s logistics center, but it’s hardly automatic or comfortable.
And it’s not just a matter of training. If their former employer does not call them back to work as demand recovers, the hunt will be even longer. If the former employer went bankrupt, it’s even harder. After a measure, nearly a third of small businesses have closed since last January.
These are not problems that can be easily solved, even with a different stimulus package. The long-term unemployed in particular need support that is adequate without undercutting incentives to return to the workforce, as economist Marco Annunziata points out. Progress will also require investment in education and it can take a long time to deliver results.
For investors, the “good news”, if you will call it that, is that these are long-term trends that are unlikely to underperform short-term market returns. The bad news is that by many measures, America’s workforce continues to deteriorate with all sorts of consequences for long-term growth, let alone political stability.
Christopher Smart is a global strategist and head of the Barings Investment Institute, Which one explores the current macroeconomic and political dynamics as well as the forces shaping long-term investment and capital decisions;.