The hottest question in Washington these days is how much more America should spend on recovery, and it’s a classic data Rorschach test. Some stare at the falling unemployment rate and see an economy well on its way to normal. Others fear they won’t fall fast enough and fear that persistent scars will affect long-term growth.
Indeed, both groups can be right. The short-term recovery appears to be quite strong, especially if another stimulus package extends the improved unemployment benefit into the fall. And the stock market
SPX + 0.47%
surely feels that a glorious summer is in sight.
As companies take advantage of the shock to adopt cost-saving technology and consumers emerge from lockdowns with new habits, not all old jobs will be filled. The crisis will result in more people settling for lower wages or leaving the workforce altogether, and it will cost more than money to heal economic wounds.
As shocking as last year’s COVID-19 pandemic was for the economy, the globally synchronized political response was surprising. Central banks have cut interest rates, Treasury departments cut checks, and the amazing efforts to find a vaccine have now provided several highly effective options.
With all the money spilling around the world, how can we not expect a sharp rebound? Even the seers on European Commission improved economic forecasts over the past week following a trend their peers on IMF and the Organization of economic cooperation and development.
Unemployment in the US has more than halved from its March high of 14.7%, while household savings are healthy and debt is low. With this additional government support, poorer households even report slightly higher incomes. Larger companies have a lot of money and the banks have sufficient lending capacity. When winter turns into spring, Americans overcome their cabin fever with plans for shopping trips and exotic trips as soon as they get that second shot.
Our key scenario is a steady recovery this year with another stimulus package that will boost growth above the market The Congressional Budget Office’s new forecast of 3.7%. Unemployment is likely to fall from its current 6.3%, but it will be difficult as the details in the employment data reveal something far more worrying.
In particular, the long-term unemployment rate, which counts Americans who have been unemployed for more than 27 weeks, continues to rise in absolute terms and as a percentage of the total unemployed. Labor force participation has also fallen sharply, having only just rebounded from the global financial crisis.
Many of these lost jobs can actually reappear when all of these people go back to the mall. But many of these trends are part of a History that goes back to the 1960s When men between the ages of 25 and 54 (called “prime age”) dropped out of the workforce due to a complex balance of power that included global competition, technological innovation and weaker unions. Some of these trends were only just improving when the crisis hit.
We’re only just beginning to understand the shock for working women. Even if the recovery is coming, some 80% of those who left the workforce in January were women.
The pandemic will result in more people settling for lower wages or dropping out of work altogether.
All recessions exacerbate the job-unemployed mismatch, but this one can be worse. In times of crisis, companies often add new technology to reduce operating costs. This time, however, there will be further disruptions from new consumption patterns and preferences after the pandemic.
When the recovery comes than study The New York Federal Reserve Bank points out that the new jobs do not match the skills of those who have been laid off. It’s not that a flight attendant can’t get farm labor in an online retailer’s logistics center, but it’s hardly automatic or convenient.
And it’s not just about training. If her former employer doesn’t call her back to work while demand recovers, the hunt will be even longer. If the previous employer went bankrupt, it’s even more difficult. By one measureAlmost a third of small businesses have closed since last January.
These are not problems that another stimulus package can easily address. In particular, long-term unemployed as an economist Marco Annunziata need support that is sufficient without undercutting the incentives to return to work mention, that. Progress also requires investment in education and training and it can take a long time to produce results.
For investors, the “good news,” if you want to put it that way, is that these are long-term trends that short-term market returns are unlikely to undercut. The bad news is that many policies continue to deteriorate the American workforce, with all sorts of implications for long-term growth, let alone political stability.
Christopher Smart is the chief global strategist and head of the Barings Investment Institute, which studies current macroeconomic and political dynamics and the forces influencing long-term investment and capital decisions.