PENT-UP DEMAND WILL DRIVE A STRONG RECOVERY The Stage is Set for Strong Economic Growth This Year and Next
T
he cycle is different. The nature of the pandemic-induced recession led the economy into a severe shutdown essentially overnight last spring. Since then nearly every economic indicator has looked better than first feared. The stage is set for a very strong recovery this year and next as the pandemic wanes. This is largely due to the improvements seen in public health, the large federal fiscal policy response, and underlying resiliency in the economy. Most encouraging is that there has been surprisingly little economic scarring in the form of business closures and permanent layoffs to date.
online as they typically do going out to eat, on vacations, and getting their hair cut. Nationally, households have built up nearly $2 trillion in excess savings. Here in Oregon financial institutions have seen substantial increases in deposits. Much of this savings is currently sitting in bank accounts, ready to be spent when the time comes. That time is here.
Federal aid has kept most firms and households afloat over the past year. Despite being down 160,000 jobs (8%) to start the year, total personal income in Oregon today is higher than it was prior to the onset of the pandemic. Expanded unemployment insurance benefits and recovery rebates have helped keep the majority of the laid off workers from falling behind on bills and rent, even as job prospects have remained dim throughout the pandemic. The latest federal aid package will help tide over the hard-hit service sector employees another couple of months as the recovery gathers steam.
Specifically, large service-providing industries like health care, leisure and hospitality, and other services – namely barbershops and nail salons – will need to staff back up quickly as consumer spending rises. These sectors account for more than half of the current jobs hole today. Some subsectors like health care, social assistance, and food services have reduced their employment proportionately to the drop in consumer spending during the pandemic. Effectively, that means for every increase in spending in the months ahead, these firms will need to hire more workers to meet consumer demand.
Looking forward, as the economy continues to reopen and households become more confident in their ability to venture out safely, consumer spending will accelerate. Many forms of spending have been restricted by the pandemic, from indoor dining and nightlife to air travel and routine dentist appointments. Even so, consumers have spent where and how they have felt comfortable doing. In particular spending has shifted into physical goods, e-commerce, and home entertainment including streaming services. Furthermore, car sales and home sales have rebounded strongly since last spring.
Other subsectors like art, entertainment, and recreation, and accommodations have undertaken large levels of layoffs but also experienced even bigger drops in revenue. This likely means two things. First, these firms may not need to staff up as quickly as they can absorb a sizable increase in demand before needing to bring on additional labor. Second, these firms are very likely operating at losses in the past year. They relied on reserves, raised additional capital, or issued new debt to remain in business.
That said, even with the strong spending on goods, middle- and upper-income households have accumulated sizable savings in the past year. Despite consumers’ best effort, they are unable to spend as much ordering
As overall spending picks up, patterns will also start to move back toward old habits. This shift out of physical goods and back into laborintensive, in-person services will create strong employment growth later this year.
The key macroeconomic risk remains the permanent damage and business closures that accumulate before the pandemic is over. Here, too, the data is better than feared. The total number of businesses in Oregon is up two or three percent over the past year. In terms of closures, bars and
restaurants are the most impacted sector during the pandemic. The number of active OLCC liquor licenses for on-premise sales is down about five percent. Liquor license renewals have dropped proportionately across the different regions of the state. More encouraging is that start-up activity in Oregon and around the country continues to be quite strong. The number of total new business applications in the past six months has never been larger. As such, the economy is not suffering the double hit of more closures and fewer new businesses as was the experience in past severe recessions. All told, the stage is set such that economic growth this year and next will be the strongest we have seen in decades, possibly generations. Even so, it will likely take a year or two for all of the lost jobs to fully return. The current hole is that deep. However such a timeline means the current cycle, while severe, will be much shorter in duration than recent recessions. Much of the bullishness in terms of the outlook is due to the quick development and deployment of vaccines, plus the strong federal policy response. Oregonians are ready to resume the activities previously restricted by the pandemic and most have the income to support it. JOSH LEHNER, ECONOMIST, OREGON OFFICE OF ECONOMIC ANALYSIS
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