Democrats have to pass Biden’s agenda or the US won’t get back to pre-crisis prosperity, Oxford Economics says

Joe Biden Chuck Schumer
President Joe Biden and Senate Majority Leader Chuck Schumer.

  • Passing Democrats’ spending plan is the difference between a stellar and a subpar recovery, according to Oxford Economics.
  • Failure to do so would slash economic growth and delay a full labor-market rebound, the firm says.
  • Democrats aim to pass a measure in September, but key disagreements risk killing the plan altogether.
  • See more stories on Insider’s business page.

Passing Democrats’ latest spending plan could mean the difference between a stellar economic rebound and a subpar recovery that lasts for years, experts at Oxford Economics said Wednesday.

Congressional Democrats are currently pushing forward with plans to pass President Joe Biden’s sweeping infrastructure proposal. Details around the plan – which includes $3.5 trillion in spending – have slowly emerged as House committees finalize their portions of the bill. But as Democrats near their September deadline for passing the plan, disagreement over key elements such as the child tax credit and the price tag threaten to delay a vote.

It might be better for Democrats to move forward with a smaller package, as failing to pass new spending would seriously hamper the US recovery, economists Nancy Vanden Houten and Gregory Daco of Oxford Economics said in a note. The team expects Democrats to shrink the latest spending proposal to $2.5 trillion before passing it through budget reconciliation. If lawmakers fumble efforts to pass the smaller measure with the $550 billion bipartisan infrastructure plan, the recovery will suffer for years, the economists said.

OXFORD
Chart via Oxford Economics.

For one, the US economy won’t grow nearly as fast. Failure to pass the bills would cut 2022 growth to 3.7% from 4.4%, Oxford Economics said. Growth in 2023 would slide by 1.4% from 2.6%.

It would also drag on the labor market’s rebound. A lack of new spending would lead to 1.2 million fewer jobs being created, according to the team. The unemployment rate would only fall to 4.2% through 2023, instead of 3.5% in the firm’s baseline scenario that sees both measures passing.

More broadly, botching both plans’ passages would leave the country struggling to return to its pre-pandemic economic health. Passing both packages would help US gross domestic product outpace its pre-crisis trend early next year, according to Oxford Economics’ forecasts. That would mark a substantial victory over the pandemic after nearly two years of harsh economic pain.

Conversely, a dearth of fresh stimulus dooms the country to a substandard recovery. Gross domestic product growth would retake its pre-crisis trend in 2022 but quickly slow and remain below the critical level well into 2023, the economists said.

Approving both bills, then, can determine whether the country ever returns to its pre-COVID welfare.

“September will be a pivotal month for the trajectory of US fiscal policy and President Biden’s domestic policy agenda,” the team said. Failure to pass the spending packages would drag on the economy just as other fiscal boosts are set to fade, they added.

Oxford Economics’ latest forecast comes after several banks slashed their own outlooks for the recovery ahead. Bank of America and Goldman Sachs nearly halved their GDP estimates in August, blaming the Delta wave and weaker spending for the gloomier projections.

JPMorgan followed on Wednesday, cutting its third-quarter growth forecast to 5% from 7%. While some of the lost growth will show up in the fourth quarter, much is permanently lost to supply-chain issues and weak demand, Michael Feroli, chief US economist at JPMorgan, said in a note.

With Delta case counts climbing higher through September, the US recovery is on the ropes. Democrats’ efforts to pass trillions of dollars in new spending could decide whether the rebound accelerates or runs out of steam.

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Millennials just don’t care about inflation as much as boomers do

Walmart coronavirus shopping
Shoppers are seen wearing masks while shopping at a Walmart store, in North Brunswick, New Jersey, on July 20, 2020.

  • Millennials don’t fear inflation like America’s baby boomers do, according to a survey by Bankrate.
  • Three-quarters of boomers said recent price growth hurt their finances, while just 55% of millennials did.
  • Higher inflation eats into boomers’ savings, while millennials have more time to recover, Bankrate said.
  • See more stories on Insider’s business page.

Baby boomers are sounding the alarm on inflation, bracing for the fastest price growth since the 1980s and fearing for their life savings.

Millennials aren’t as bothered, and most experts are on their side.

The Consumer Price Index – a popular measure of broad price growth – rose 0.5% in July, continuing a streak of decade-high inflation. And Americans are feeling that heat. Nearly nine in 10 adults in the US have experienced price hikes this year, and two-thirds said those hikes have hurt their finances, according to a survey conducted by Bankrate.com.

But for such widespread inflation, different generations are experiencing the price surge in starkly different ways.

Boomers are easily the most concerned about soaring prices. Ninety-five percent of them have run into higher prices, and three-quarters said the faster rate of price growth negatively impacted their financial situations. Both shares were only slightly lower for Gen Xers, Bankrate said.

Conversely, the country’s youngest adults are far less frightened. While 84% of millennials said they ran into price hikes this year, and 75% of Gen Zers did, these higher prices only hurt 55% of millennials’ finances and 54% of Gen Zers’, according to the survey.

The generational gap makes some sense, Ted Rossman, senior industry analyst at Bankrate, said. Older Americans have already built up the bulk of their savings, meaning faster inflation poses a serious risk to their cash piles.

“Price increases are especially painful for retired boomers who are trying to make their savings last,” Rossman said. “Younger, employed adults are in a better position to weather rising costs because their salaries should be rising as well.”

Worrying about inflation can also keep the country from addressing a bevy of arguably more pressing economic issues. At a time when mass unemployment, income inequality, student debt, and affordable housing plague the US economy, inflation fearmongering can take the air out of much-needed work. Even the Federal Reserve is letting inflation run hot in pursuit of a more equitable recovery.

The ghosts of inflation past

Boomers are also painfully familiar with how strong inflation can decimate an economy. Rampant price growth tanked the US economy throughout the 1970s as prices surged faster than wages could keep up. Measures used to cool inflation brought new pain and sparked two recessions in the early 1980s. Living through that decade “could cast a long shadow” over the generation’s views of inflation, Deutsche Bank economists said in March.

Younger Americans simply don’t have that experience to shape their views. And the disparity shows in each groups’ inflation expectations. Median price-growth forecasts from Americans less than 40 years old reached 4% in July, according to a survey conducted by the Federal Reserve Bank of New York. That median estimate rose to 4.5% for Americans aged between 40 and 59.

For those more than 59 years old, the median forecast hit 5.9% last month. That’s the highest one-year expectation in data going back to 2013. Should that happen, it would be the fastest year-over-year price growth since 1982.

The latest data suggests older Americans’ fears won’t come true. The July CPI report was a big slowdown from June’s print. Items powering the summer surge also cooled massively. Used-car prices rose just 0.2% in July after soaring at least 7.3% in each of the previous three months. Prices for airline tickets fell slightly, and prices at services rose at the slowest pace since February.

The Fed and the Biden administration both maintain stronger inflation will prove temporary, citing short-term surges in prices linked to reopening. Other experts see inflation reaching less worrying levels by early 2022 as the economy settles into a new normal.

Millennials, then, seem to be right not to worry. And fearful boomers should avoid their second nationwide inflation crisis.

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Wall Street is bummed the Delta wave has you spending less

Wall Street NY summer
People walk past the New York Stock Exchange (NYSE) on Wall Street on July 15, 2021 in New York City.

  • Goldman Sachs and Bank of America both cut GDP forecasts. The reason: not enough spending.
  • Americans’ spending slid more than expected in July, starving the recovery of its biggest booster.
  • Still, both banks see growth rebounding as the Delta wave weakens and Americans get back to shopping.
  • See more stories on Insider’s business page.

Wall Street is tempering its hopes for the US recovery. A handful of big banks say it’s the American people who spoiled the party.

With the Delta wave on the rise, causing a dip in consumer spending and confidence, Goldman Sachs slashed its forecast for third-quarter gross domestic product growth to 5.5% from 9% on Wednesday. Bank of America followed on Friday, cutting its GDP estimate to 4.5% growth from 7% and officially implying the recovery peaked in the second quarter.

Bank economists aren’t the only ones on Wall Street growing more pessimistic toward the recovery. Only 27% of fund managers expect growth to improve over the next 12 months, according to a survey conducted by BofA earlier in August. That’s the smallest share since April 2020, when lockdowns just started to freeze the US economy. That print also came before retail sales data showed spending slow more than expected in July.

That spending slowdown sits in the center of Wall Street’s gloomier outlook. The surge in Delta cases prompted a resumption of mask-wearing rules across the country and revived fears of catching the coronavirus. Those trends quickly dragged on Americans’ spending. Retail sales slid 1.1% in July, with the largest declines showing up at clothing stores, bookstores, and car dealerships.

Consumer spending counts for roughly 70% of economic activity, making retail sales one of the most relevant measures of the US recovery. Put simply, Americans stopped spending as much in July, and the recovery is likely going to be worse off for it.

The retail sales report shows a “sharp pullback in demand” and starts the quarter off “on a bad note,” BofA economists led by Michelle Meyer said in a note. Even if spending bounces back in August and September, the bleak July print points to “relatively muted” growth in the third quarter, they added.

The data showed a “larger slowdown in spending than we expected,” particularly in service sectors that have yet to stage full recoveries, Goldman economists led by Jan Hatzius said. If case counts continue to rise and restrictions intensify, the recovery could stumble further.

Still, both teams are holding out hope that spending can bounce back before 2022. The slump shouldn’t last long, as the duration of Delta outbreaks in Europe suggest case counts in the US could start to fall in September, the Goldman economists said. The bank raised its fourth-quarter GDP forecast to 6.5% from 5.5% on Wednesday as well, noting the expected drop in cases should power a buying spree similar to that seen through spring.

BofA maintained its fourth-quarter estimate of 6%. The Delta wave will bring “some permanent growth destruction,” but most growth will simply be delayed further into the future, the team said.

“Once the Delta threat is reduced and this COVID wave subsides, we should see the return of pent-up spending for leisure services,” the economists added. “Some categories will have a bigger bounce than others – perhaps travel more than restaurants/bars, for example – but we should see people reengage in these activities.”

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The US economy might’ve reached peak recovery

vacant mall oculus
The Oculus transportation hub and mall stands nearly deserted in lower Manhattan on March 29, 2020 in New York City.

  • Recent economic data suggests the US recovery is slowing from the rapid pace of early summer.
  • Americans are spending less, unemployment filings are flatlining, and confidence in the recovery plummeted in August.
  • Americans are bracing for a slower rebound as the Delta variant sends case counts skyrocketing.
  • See more stories on Insider’s business page.

The US economy is still getting better. But the pace of recovery might be slowing down.

After a summer of reopening, vaccination, and lower cases, the coronavirus is bouncing back. The Delta variant’s spread lifted daily case counts to their highest levels since January, and authorities have since reinstated some restrictions to counter contagion.

The booming recovery of the summer – fueled by fresh stimulus and a surge of consumer spending – is fading. Second-quarter economic growth has already proved disappointing, coming in at an annualized rate of 6.5% compared to the median estimate of 8.5%. And as August data comes in, the virus resurgence is likely to slow activity.

Early indicators suggest the recovery has already peaked. Whether growth rebounds depends on Americans accepting jobs and continuing to spend.

Spending fueled by reopenings is starting to slow down

Chase credit- and debit-card spending data tracked by JPMorgan shows a sharp decline in spending on categories most affected by reopening since mid-July. Spending at restaurants sits slightly below the highs seen last month. Activity at hotels and other lodging businesses, however, is down notably from its summer peak. And spending on airlines has plunged before even returning to its pre-pandemic levels.

JPM
Chart via JPMorgan

The broad drop in spending corresponds with daily case counts, which started to swing higher early last month. Taken together, it seems virus fears and the return of some mask-wearing rules led Americans to pull back on reopening.

Unemployment filings are flatlining

While just a fraction of the highs seen earlier in the crisis, weekly filings for unemployment benefits have hovered around 370,000 after sliding through most of the year. The latest reading came in at 375,000, matching forecasts but still above the pandemic-era low.

To be sure, continuing claims, which track Americans receiving benefits, staged a more promising recovery through the end of July. Yet both weekly and continuing claims are roughly double their pre-pandemic levels, and recent reports hint at a plodding recovery as Delta cases climb.

Americans are bracing for the worst

Consumer sentiment plummeted to 70.2 in early August from 81.2, according to the University of Michigan’s Surveys of Consumers. That’s the lowest reading since 2011 and the largest one-month drop since confidence evaporated at the start of the pandemic. The only steeper drops came when virus lockdowns began in April 2020 and at the worst period of the Great Recession in December 2008.

The souring of economic hopes was broad-based. Americans cited increased concerns around inflation, unemployment, and their personal finances. Losses were spread across age, income, educational, and geographical lines, according to the university. And measures of current and future conditions also tanked, suggesting people were prepared for the Delta variant to pose a lingering threat.

The sentiment metric can stage a quick recovery and even shift toward optimism if the country can get a handle on the virus’s spread, Richard Curtin, chief economist at the Surveys of Consumers, said in the report. Still, with spending on the decline, Americans still leaning on unemployment, and recovery hopes worsening, it seems the country is getting ready for a steeper climb ahead.

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The economy is getting better, but the rest of 2021 will be far from normal

Job fair Florida
A man hands his resume to an employer at the 25th annual Central Florida Employment Council Job Fair at the Central Florida Fairgrounds.

  • The 2021 economy has been a wild ride with reopenings, people quitting jobs, and firms desperate to hire.
  • Economic data points to improvements in the second half of the year as wages rise and jobs increase.
  • But not for everyone. Unemployment for teenagers and Black and Hispanic workers is still high.
  • See more stories on Insider’s business page.

Halfway through 2021, the June jobs report signals a good step forward, but let’s not call this economy “normal” just yet. Things are still kinda weird.

The US added 850,000 jobs last month, beating estimates and showing a strong acceleration in the labor market’s recovery. It was the largest one-month jump since August and the sixth straight month of gains. After a bumpy six months for the labor market’s recovery, it’s starting to look like smoother sailing.

But it’s still choppy. While the sectors that transitioned to remote work have regained almost all lost jobs, those hit hardest remain far from healed. And while pandemic lockdowns have reversed, businesses will have to rehire in a wholly new environment.

The first strange signs for the economy came in April, when vaccinations were running ahead of schedule and reopening started in earnest. The jobs report that month was expected to show 1 million payrolls added, but it was a paltry quarter of that figure. Job openings sat at record highs, but factors ranging from virus fears to childcare costs kept workers on the sidelines. It was better than fears of a double-dip recession – when jobs unexpectedly dropped in December – but it was decidedly abnormal.

As the country reopens, the post-pandemic labor market is taking shape. It has little in common with the one left behind in early 2020.

An early look at the new job market

Working from home redefined employment, real estate, even culture in 2020. It’s shrinking back from its widespread adoption, but it may be here to stay. Despite many state and local governments reversing their strictest economic restrictions, roughly 14% of Americans still telecommuted in June.

The labor shortage remains an obstacle for businesses looking to hire, and it’s having an effect on workers’ pay. Average earnings climbed again in June. Pay grew the most in the leisure and hospitality sector, suggesting higher pay helped businesses hire more workers.

On the other end of the market, only 10% of job seekers are urgently looking for work, according to hiring giant Indeed. Most are taking a more leisurely approach, citing virus fears and financial cushions. June data reflects that relaxed pace; the number of people actively looking for a job was flat and the unemployment rate edged higher to 5.9%.

And while job growth broadly improved in June, the recovery is still leaving several groups behind. Despite a hiring bonanza for low-wage jobs, unemployment among teenagers rose to 9.9% from 9.6%. Unemployment among Latinos rose 0.1 point to 7.4%, while Black unemployment gained to 9.2% from 9.1%. That compares to the 5.2% unemployment rate seen among whites.

Relief programs for unemployment and student loans are about to end

There’s reason to believe Americans will take more jobs in the months ahead.

Several states are just starting to end the federal boost to unemployment insurance (UI) ahead of its September expiration. Twenty-six states in total – all but one are Republican-led – are set to end the benefit early in an effort to spur hiring. And jobless claims data suggests the effort is working. Filings for UI fell to a new pandemic-era low last week.

Other government relief programs, including the student-loan freeze, are also set to lapse in the fall. Economists refer to the deadline as a “fiscal cliff” and expect it to drive more Americans into the workforce.

Continued vaccinations, school reopenings, and reskilling should have a similar effect, Federal Reserve Chair Jerome Powell said in a June 16 press conference. Childcare costs and virus fears kept countless Americans at home, unable to find work. As those pressures diminish in the coming months, it’s likely worker supply will more closely match labor demand, Powell said.

“I think it’s clear, and I am confident, that we are on a path to a very strong labor market,” he added. “I would expect that we would see strong job creation building up over the summer and going into the fall.”

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3 fundamental changes from the pandemic economy that could become permanent

Coronavirus restaurant
A customer pays for his purchase in the doorway of Dave’s New York, a retail store, as phase one of reopening after lockdown begins, during the outbreak of the coronavirus disease (COVID-19) in New York City, New York, U.S., June 8, 2020.

  • Some elements of the pandemic-era economy are likely to stick around well after the recovery.
  • Experts warned the post-crisis economy would be different, and now it’s becoming clear how.
  • From remote work to a red-hot housing market, 4 fundamental shifts could be permanent.
  • See more stories on Insider’s business page.

The post-pandemic economy is taking shape.

Fifteen months after the US first plunged into lockdown, the economy is well on its way to a complete reopening. Spending is up, businesses are rehiring, and Americans are – slowly – returning to work. Economists largely agree that economic output will grow at the fastest rate since the 1980s this year.

Yet experts have warned the recovery will occur in a country that is permanently changed. Americans should brace for “a different economy,” Federal Reserve Chair Jerome Powell said in an April conference hosted by the International Monetary Fund.

Kristalina Georgieva, managing director of the IMF, said the post-pandemic economy could yield improvements if policymakers are prepared for substantial change.

“It doesn’t mean a worse economy if we think well in advance, if we think about educational attainment, if we think about flexibility for people entering the labor market, and if we think about where growth is going to come from,” she added during the conference.

And while the US is far from completing its recovery, some fundamental shifts are increasingly clear. Here are three pandemic-era changes that could turn permanent as the country enters a new normal.

1. Remote work becomes the norm

Remote work coronavirus
A video producer works from his at-home studio to conduct remote interviews with talent on April 19, 2020 in Franklin Square, New York.

Most of the US has reversed restrictions that kept employees from the office, but not all companies are mandating in-person work like they did in February 2020.

As much as 71% of the US workforce telecommuted some or all of the time during the coronavirus crisis, according to an October survey from Pew Research. Of the 5,858 American adults surveyed, 54% said they want to work from home after the pandemic ends. 

Business leaders themselves are embracing remote or hybrid work. The switch to flexible work structures is “a permanent civilizational shift,” venture capitalist and tech entrepreneur Marc Andreessen wrote in a recent blog post, while Facebook CEO Mark Zuckerberg has said he’ll work remotely for at least half of 2022, saying it made him “happier and more productive at work.” Facebook told its 60,000 workers in June they only need to work from offices 50% of the time. It was one of many giant firms to give its workers that kind of permission.

2. A persistently hot housing market

homebuilder

The shift to remote work made housing hot, as Americans drove outsize demand for new and existing homes. The rally intensified further as mortgage rates hit multiple record lows through the end of 2020.

That boom has since run out of steam, but not for insufficient demand; decades of chronic underbuilding left the market with insufficient supply. After months of surging sales, nationwide inventory sank to record lows and prices leaped at their fastest pace since the housing bubble of the mid-2000s.

The market needs as many as 6.8 million new homes to balance out supply over the next decade, the National Association of Realtors said in June. That would require a 27% jump in homebuilding activity, and economists aren’t optimistic builders will rise to the occasion. The lingering gap between home supply and buyer demand will likely keep home prices climbing at an elevated rate for years, the Urban Land Institute said in May. 

3. Service jobs are out of fashion

NYC coronavirus tables restaurant
Empty tables stand at a restaurant in Manhattan on March 01, 2021 in New York City.

Jobless are largely avoiding the service industry amid reopening.

The pandemic exposed a handful of weaknesses throughout the sector. Employees risked exposure to COVID-19 just by showing up to work; wage growth remained stagnant; and conditions in retail and food service jobs worsened as businesses pushed to do more with fewer workers.

Surveys show people are looking for better pay, conditions, or both. Separately, quits soared to a record-high 4 million in April, with most occuring in the retail, food services, and accommodation industries.

Service businesses are catching on. Large-scale employers including Chipotle, McDonald’s, Amazon, and Under Armour all raised their starting wages in recent months as they rush to attract workers. Others are offering perks ranging from signing bonuses to fitness machines. To be sure, this could be a temporary hiccup during a reallocation of the workforce.

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The massive jobs shortage will keep stronger inflation temporary, Goldman Sachs says

Job fair coronavirus
People seeking employment speak to recruiters at the 25th annual Central Florida Employment Council Job Fair at the Central Florida Fairgrounds.

  • Stronger inflation will soon fade as millions of Americans rush back to work, Goldman Sachs said.
  • Labor supply will rebound as virus fears fade and enhanced unemployment benefits lapse, the bank said.
  • Ending the labor shortage should cool wage inflation, and price inflation will also likely be temporary, Goldman added.
  • See more stories on Insider’s business page.

When it comes to the inflation debate looming over the US economy, Goldman Sachs is on the side of the Federal Reserve and the Biden administration.

Gauges of nationwide price growth are surging at their fastest rate in more than a decade, sparking concerns of an overheating economy ending the recovery early. Republicans and some moderate Democrats have blamed the Fed’s ultra-easy policy stance and unprecedented fiscal stimulus for the inflation overshoot. The Biden administration and the central bank have instead argued the stronger price growth is temporary and fade starting next year.

Goldman economists led by Jan Hatzius reiterated their stance on the Biden side on Monday, citing the latest jobs numbers as supporting evidence. The US added 559,000 nonfarm payrolls in May, missing the median estimate but still a sharp rebound from the dismal April report. Wages shot higher for a second straight month, signaling inflation was picking up in pay and pricing.

The combination of soaring wages and stronger inflation amplified Republicans’ claims of an overheating economy. Yet both pressures should cool in the coming months, Goldman said. For one, the economy is still down roughly 8 million payrolls, and May’s pace of job creation still places a full recovery more than a year into the future. Labor supply, which has been slowing hiring in recent months, should also “increase dramatically” as virus fears dim and enhanced unemployment insurance lapses. As more Americans return to work, wage growth is expected to slow.

Inflation should also cool on the pricing side, according to the bank. Goldman’s trimmed core Personal Consumption Expenditures (PCE) index – which excludes the 30% largest month-over-month price changes – has only risen 1.6% from the year-ago level. By comparison, standard PCE – among the most popular US inflation gauges – notched a 3.6% year-over-year gain in April. Core PCE strips out volatile food and energy prices and is generally viewed as a more reliable measure of long-term inflation.

The disparity reveals the “unprecedented role of outliers” in driving inflation higher, and such an effect should “have only limited effects on longer-term inflation expectations,” the economists said in a note to clients.

“Ultimately, the biggest question in the overheating debate remains whether US output and employment will rise sharply above potential in the next few years,” the team added. “If the answer is yes, then inflation could indeed climb to undesirable levels on a more permanent basis. But our answer continues to be no.”

The forecasts echo sentiments shared recently by central bank officials. Fed Governor Lael Brainard said last week that, as schools reopen and vaccinations continue, it’s likely that the labor shortage will unravel. Job openings sat at record highs by the end of March, and a matching of such huge demand with bolstered supply should drive “further progress on employment,” she added.

More broadly, Goldman expects GDP growth to slow after peaking in the second quarter and normalize as stimulus support lapses. The massive jobs shortfall makes for “significant slack” in the labor market, the bank said, adding that unemployment-based output should reach its maximum potential in late 2023.

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One stunning chart shows just how much faster the US labor market is recovering now compared to the financial crisis

Now Hiring man with mask
  • A full labor-market recovery is more than a year away, but the rebound is still fast by historical standards.
  • The pandemic saw unprecedented job loss, but payrolls are bouncing back faster than in past downturns.
  • The US is on track to recoup all lost jobs in two years. The same feat took more than six years after the Great Recession.
  • See more stories on Insider’s business page.

The US labor market is far from a full rebound. Compared to the last recession, however, the recovery is moving at a breakneck pace.

The economy added 559,000 nonfarm payrolls in May, data out Friday showed. The reading marked a fifth consecutive month of job additions and a strong uptick from the disappointing gains seen in April. The US unemployment rate also hit a pandemic low of 5.8% and major stock indices neared record highs on the encouraging news.

Still, payroll growth hasn’t enjoyed the kind of V-shaped bounce-back staged elsewhere in the economy. At May’s pace of job creation, it would still take until July 2022 for the economy to recoup every job lost during the pandemic. It would take about another year from then to recapture jobs that would’ve been made had the pandemic not occurred. The projections also don’t take the nationwide labor shortage into account, which could further drag on job additions.

Calculated Risk recession chart
Source: Calculated Risk

Comparing the pandemic recovery to the Great Recession and other downturns tells an entirely different story. In a Friday post, economics blogger Bill McBride of Calculated Risk contrasted job creation from recent months to that seen during post-World War II recessions.

The trend is clear: despite seeing far more severe job losses at the start of the recession, the labor market’s recovery is the most V-shaped in modern history.

A few factors explain the pronounced rebound. The government’s response throughout the pandemic was unprecedented. Congress approved roughly $5 trillion in fiscal stimulus, and the Federal Reserve eased monetary conditions through historically low rates, massive asset-purchase programs, and extraordinary lending programs. Combined, the efforts helped economic activity bounce back relatively soon after the pandemic first hit.

The nature of the recession also played a role. The economic crisis was simply a symptom of a once-in-a-century pandemic. Lockdown measures used to curb the virus’s spread were a top reason for weaker activity. Once those restrictions were lifted, Americans with pent-up demand and bolstered savings got out and revived the economy.

The current downturn also doesn’t possess the same structural problems faced in the late 2000s. The Great Recession was fueled by a collapse of integral financial systems. Long-trusted institutions were suddenly behind an economic collapse, and the government was forced to step in with then-unheard-of support. Distrust in said institutions and severe damage throughout the housing market led to a painful and plodding recovery.

The COVID-19 crisis, by comparison, was simple. A deadly virus was spreading throughout the country, so authorities forced lockdowns that caused great harm to the economy.

The US has also learned from the Great Recession and the recovery that followed. An early push for fiscal austerity and inadequate aid for state and local governments hindered the labor market’s healing for years after the financial crisis. Payrolls didn’t return to their pre-recession highs until more than six years after the initial drop, longer than any previous postwar recession.

Policymakers are trying something else this time around. The $1.9 trillion stimulus measure approved in March included $350 billion for state, city, and local governments to offset budget shortfalls. On the monetary front, the Fed’s newly updated goals signal it will maintain ultra-easy monetary conditions well after the pandemic threat fades.

“Now is not the time to be talking about an exit,” Fed Chair Jerome Powell said in January. “I think that is another lesson of the global financial crisis, ‘be careful not to exit too early.'”

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The Chamber of Commerce just sounded the alarm on America’s labor crisis – and it’s blaming a lack of qualified workers for a historically stark shortfall

Now Hiring sign
A customer walks by a now hiring sign at a BevMo store on April 02, 2021 in Larkspur, California.

  • A shortage of qualified workers is hindering the labor market’s recovery, the Chamber of Commerce said.
  • Sectoral shifts in worker demand drove a gap between Americans’ skillsets and job openings.
  • Training programs, childcare support, and an expansion of work visas can counter the mismatch, the Chamber said.
  • See more stories on Insider’s business page.

The US economy hasn’t faced a labor shortage quite like this one.

By several measures, the economy is on the mend. Consumer spending has bounced back, more than half of Americans are fully vaccinated, and the strictest lockdown measures have been reversed. But as businesses look to rehire after months of slowed activity, they’re finding it hard to fill openings.

The labor shortage now represents “the most critical and widespread challenge” to US businesses, the US Chamber of Commerce said in a Tuesday report. Only 1.4 available workers exist for each US job opening, according to government data. That’s just half the 20-year average, and the ratio is still falling. In sectors hit hardest by the virus, such as education and government, job openings fully exceed available workers.

Worker availability ratio
Source: US Chamber of Commerce

Economists and politicians have pegged the shortfall to a number of factors, ranging from virus fears to enhanced unemployment insurance. The right-leaning Chamber on Tuesday highlighted the country’s massive skills gap as fueling the shortage.

“We must arm workers with the skills they need, we must remove barriers that are keeping too many Americans on the sidelines, and we must recruit the very best from around the world to help fill high-demand jobs,” Chamber CEO and President Suzanne Clark said.

The organization announced a new initiative on Tuesday aimed at addressing the shortage of qualified workers and difficulties in developing skills. The Chamber is calling for a doubling of the cap on employment visas, federal investment in job-training programs, and an expansion of childcare access for working parents.

A separate survey by The Conference Board echoed the Chamber’s remarks. About 80% of organizations hiring industry and manual service workers said it was either “somewhat difficult” or “very difficult” to find qualified employees, up from 74% before the health crisis. The share of firms saying it’s “very difficult” to find workers grew to 25% from 4%.

The Chamber’s call to action comes as the country forms a wholly new economy. Experts have warned that the post-pandemic economy won’t mirror that seen in late 2019. Millions of Americans will struggle to find work as their jobs are permanently erased, Federal Reserve Chair Jerome Powell said in April. Meanwhile, openings will shift to other industries as the country settles into a new normal.

The mismatch between displaced workers’ skills and new job openings is among the biggest challenges facing the US labor market, economists at Fitch Ratings said last week. The rapid change in worker demand by sector “can lead to lasting increases in unemployment” if Americans aren’t able to quickly pivot, the team said in a note.

Underscoring the mismatch is the decision by GOP governors in 25 states to prematurely end participation in federal unemployment benefits. Those governors have cited increased benefits as a reason that workers are opting not to come back, causing a labor squeeze. But workers say that’s not the full story.

Dina Jones, 54, lives in Texas. Her state’s governor, Greg Abbott, announced that Texas will pull out of all federal benefits effective June 26. Prior to the pandemic, Jones had worked in the airline industry for 27 years.

“I made a really good living, and to go out and take a $12, $15 job is – I’m very skilled,” Jones told Insider. She said she used to manage over 100 employees. She added: “I just don’t understand what’s happening out here in the world that I can’t get a job.”

Early signals suggest low-wage workers will have a harder time pivoting than most. A February report from McKinsey found that low-wage sectors – those hit disproportionately hard by the pandemic – will see permanently weaker labor demand as the country recovers. More than half of the workers displaced from such industries will need to develop new skills and find higher-paying jobs to stay employed after the pandemic ends, the firm said.

“Almost all growth in labor demand will occur in high-wage jobs,” the report added.

As for Jones, who will lose all of her unemployment benefits come June, it stings to hear her governor say that there are plenty of jobs out there.

“The jobs that are out there aren’t the jobs that I used to have, that I’m skilled for, she said. “And that’s the part that hurts.”

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Global growth will hit a 5-decade high in 2021 on vaccine-powered rebound, OECD says in upgraded forecast

Japan shopping street coronavirus
  • The OECD lifted its 2021 global GDP estimate to 5.8% from 4.2%, forecasting the fastest growth since 1973.
  • Group of 20 countries will see even stronger growth and emerging countries will lag, the organization said.
  • Central banks need to look through temporary inflation and keep policy support in place, the OECD added.
  • See more stories on Insider’s business page.

Economic recoveries are improving around the world, but the global rebound remains massively uneven, the Organization for Economic Co-operation and Development said in a new report.

The OECD revised its estimate for global gross domestic product higher on Monday, citing unprecedented policy support and the effectiveness of COVID-19 vaccines. Output is now expected to grow 5.8% in 2021, up from the December 2020 forecast of a 4.2% expansion. That rate would mark the strongest year of economic growth since 1973 and follow last year’s 3.5% contraction, the OECD said.

Global GDP will then grow 4.4% in 2022, according to the report. Global income will still sit roughly $3 trillion below its pre-crisis trend by the end of next year as emerging countries struggle to keep up.

“The global economy remains below its pre-pandemic growth path and in too many OECD countries living standards by the end of 2022 will not be back to the level expected before the pandemic,” Laurence Boone, chief economist at OECD, said.

Living conditions aren’t the only disparity expected to widen through the recovery. Real GDP is expected to grow 6.3% and 4.7% among G20 nations in 2021 and 2022, respectively. That outpaces the average growth estimate.

Meanwhile, some emerging-market economies are expected to post substandard growth in the near term. Countries still enduring deadly waves of COVID-19 such as India and Brazil “may continue to have large shortfalls in GDP relative to pre-pandemic expectations” and only bounce back once the virus threat fades, the organization said.

Improving vaccine distribution is key to supporting such countries, especially as virus uncertainties linger. New variants of COVID-19 could necessitate a return to partial lockdowns if populations aren’t vaccinated quickly enough, the organization warned. Such a resurgence could also drag consumer confidence lower and halt any rebound in spending.

Upside risks have emerged as well. Household saving boomed through the pandemic, and that cash could soon be unleashed as people unwind pent-up demand. Spending just a fraction of the bolstered savings “would raise GDP growth significantly,” the OECD said.

But with spending comes inflation. Supply-chain disruptions and bottlenecks around the world have driven material prices higher in recent months. When coupled with a sharp bounce in demand and various stages of reopening, price growth now sits at its highest levels in more than a decade. The OECD expects inflation to average 2.7% in 2021 before cooling to 2.4% next year.

Central banks should allow for a brief inflation overshoot as production normalizes and temporary pressures ease, Boone wrote. Running economies hot can allow for stronger hiring and wage growth, particularly among low-income groups. Central banks must “remain vigilant” and look through temporary inflation, the economist said.

“What is of most concern, in our view, is the risk that financial markets fail to look through temporary price increases and relative price adjustments, pushing market interest rates and volatility higher,” Boone added.

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