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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Everything is about to get more expensive. It’s a crucial next step for the US economic recovery.

Walmart coronavirus shopping
Some things are about to get way more expensive for Americans.

  • The US economy is headed for a rebound, but it’ll make things more expensive for Americans.
  • Experts say the economy won’t overheat, but more demand for things like homes and gas will mean higher prices.
  • This is good; inflation like this is a sign of a return to normal and a healthy economic recovery.
  • Visit the Business section of Insider for more stories.

Experts are growing increasingly hopeful the US economy will rebound in 2021, but there’s a price to pay for that. The price of most things, actually. 

A vaccine rollout, a $1.9 trillion stimulus package, and the lift in spending from December’s smaller stimulus paint a promising picture of a roaring, reopened America with lively restaurants, indoor dancing, and crowded stadiums. The economy is set for “stellar” growth as the pandemic subsides, a Bank of America note stated Monday, while boosting its 2021 GDP growth estimate to 6.5% from 6%. 

It could all be the biggest boomtime in the US economy in a generation – but not without a cost.

While history indicates that the US likely won’t see an overheated economy after Biden’s massive stimulus package launches, Wall Street is predicting that certain goods and services might become more expensive.

JPMorgan’s David Kelly wrote in a recent bank note that high demand could “boost prices” across a range of services as the pandemic recedes over the summer, “maintaining inflation at or above” the Federal Reserve’s 2% target. And Mark Haefele, the chief investment officer of global wealth management at UBS, wrote on Tuesday that while fears about persistent rise in inflation are likely “overdone,” his bank is predicting that inflation may spike in the short-term. 

“If pent-up demand emerges, prices could even rise above their pre-pandemic levels,” Brian Rose, senior economist at UBS Global Wealth Management, told Insider. 

This may not be friendly news for Americans’ wallets, but higher prices and a demand for commodities without overheating is a sign of a healthier economy and a crucial next step toward the US’ economic recovery.

Rising Treasury yields – a famous barometer for future inflation – were in evidence this week, and Wall Street economists see signs that everyday essentials like houses, gas, and healthcare are about to get more expensive.

Stronger inflation? Treasurys say so

The Treasury market spoke up this past week. The 10-year yield, after steadily climbing through February, leaped as high as 1.614% on Thursday. The note now trades with its highest yield in more than a year, and President Joe Biden’s stimulus proposal is driving the economic optimism largely reponsible for this bond-market movement.

This matters because Treasury yields, especially in the 10-year, are an indicator of what investors think about the likelihood of inflation. It also matters because it could become a self-fulfilling prophecy.

Investors have largely priced in the $1.9 trillion in relief set to be approved by Democrats in the next few weeks. Supporters argue a large-scale deal is needed to bring the economy back to its past strength. Republicans have voiced concerns that the package will overfill the hole in the economy and spark rampant price growth.

Markets, at least for now, are siding with the Democrats. Expectations for stronger inflation lifted yields as investors demanded higher returns to offset price growth. The continued rotation to cyclical assets – those most likely to outperform during a rebound – saw cash rotate from defensive investments and to riskier plays.

But rising yields have consequences. Since Treasurys serve as a benchmark for the broader credit market, higher yields signal regular payments on consumer loans will soon swing higher. 

Rates on car loans, for example, closely track the 5-year yield, Kathy Bostjancic, head US financial market economist at Oxford Economists, told Insider. Those notes saw outsize selling through the week as investors bet on a sharp but temporary rise in inflation.

Higher yields can be the canary in the coal mine for commodity prices. Treasurys reveal how investors expect the economy to perform in the future, and those expectations can influence current spending activity. Since commodity markets focus so much on contracts for future sales and purchases, yields influence those forward price curves.

“Heating oil and natural gas could perhaps be a problem,” Bostjancic said.

To be sure, yields are far from flashing warning signs of rampant inflation. Real yields, which subtract inflation from bonds’ nominal yields, are still negative across all maturities. Though the 10-year yield sits near one-year highs, negative real yields suggest investors aren’t yet fearful of uncontrollable price growth.

In fact, real yields began turning negative in 2019, well before the pandemic roiled the US economy. The recent uptick in yields is a healthy development, but the pace risks shocking the financial system at a critical turning point, Bostjancic said.

“The bottom line is the 10-year and the yield curve could have a ways to run, and that’s not necessarily negative,” she said. “But if it happens too rapidly, then it can be destabilizing. It could choke off this nascent recovery before it gets going.” 

Homes, gas, and healthcare

So, what does this all mean for Americans’ wallets?

Well, the answer largely depends on what Americans want to spend money on the most. A UBS note this week predicted that largely looks like entertainment, personal services, and education – all key drivers in the experience economy.

“The biggest price increases are likely to be seen as a rebound to normal levels in those services that have been hit hardest [by the] pandemic,” Rose said, citing airfare and hotel stays as examples.

Gas, too, is going to get expensive. A recent Jefferies note revealed the energy sector has already seen a 23.6% increase in CPI, a bigger uptick than any other industry, as cars increased in popularity during the pandemic. Oil prices increased from $40 per barrel last summer to nearly $60 per barrel at present and will likely stay that way through 2021, per the JPMorgan note. 

A pandemic, naturally, has also driven health spending up. The healthcare sector has seen a 14.7% increase in CPI, per Jefferies, signaling that Americans will have to pay even more for health care than they already are. 

Then, there’s housing. The market has been booming, but buying a house has become more expensive. Interest rates hit a historic low in 2020, but the higher treasury yields signal that may be about to change. As of Thursday, mortgage rates climbed back to their highest level since August. 

Mortgage lenders will hike up rates for borrowers to compensate for higher yields as they trade mortgage-backed securities on the bond market. “The market is looking out two or three years and thinking that rates are going to rise,” Todd Johnson, a division manager in Wells Fargo’s mortgage unit, told The Financial Times.

More expensive, but in a good way

Since price increases will be driven by stronger demand, Rose said, it’s an “encouraging sign that the impact of the pandemic is waning and life is returning to normal.”

The Treasury market’s latest moves suggest the Democrats’ stimulus package will prompt a sharp but temporary rise in price growth. Where inflation settles in the long term depends on how well the labor market heals, Seema Shah, chief strategist at Principal Global Investors, told Insider.

The Fed has indicated it won’t raise rates until it sees progress toward full employment. Once inflation runs hot for a period and unemployment declines, the central bank will move toward tamping down on inflation with higher interest rates. 

Judging by the Treasury market, nobody expects the US to face runaway price increases, Shah said.

“The market is saying growth is going to be higher, therefore labor-market slack is going to disappear a lot quicker than people were anticipating,” she said. “And therefore the Fed will actually hike earlier than expected, and by hiking earlier than expected, we’re not going to see inflation take off.”

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