A Look Back, and Forward By: Tom Barkin, President, Federal Reserve Bank of Richmond
As we begin a new year, I’ve been thinking back to the beginning of 2020. At that time, many people were asking, “After such a lengthy upturn, is a recession around the corner?” My response was that expansions don’t die of old age—they die of a heart attack. Little did I know I had the wrong ailment, and we were about to experience a shock with unprecedented costs, both human and economic. I’d like to reflect a bit on the roller coaster ride that’s been the past year, and share some perspectives on where we might be headed. (As always, these views are my own, and not necessarily those of my colleagues on the Federal Open Market Committee or in the Federal Reserve System.) Of course, in April the economy shut down. Spending plummeted, as did jobs. Sadly, the workers most affected were those on the bottom rungs of the income ladder — personal contact service workers who are disproportionately young, female, and people of color. The extraordinary fiscal stimulus enacted by Congress helped to bridge a number of those who lost their jobs. Real personal 8
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income actually increased through the spring and fall, despite the unusually sharp downturn, because of enhanced unemployment benefits and direct distributions to households. And people who were able to shelter at home found their spending declined dramatically. Both of these factors contributed to a huge increase in the saving rate. Those with elevated savings couldn’t spend on services the way they used to. So they paid down their credit cards and shifted their spending toward goods, especially those related to time at home or outdoor recreation, such as furniture, home and garden supplies, and boats. Spending on durable goods is actually higher than it was before the pandemic, while spending on services remains depressed. Manufacturers have benefited from elevated goods spending. Low rates haven’t hurt; interest-rate-sensitive sectors such as residential and automotive have been booming. Home builder confidence has hit all-time highs and single-family housing starts are the highest they’ve been since before the Great Recession.
Spending is returning to normal faster than employment. As I write this in early December, GDP is still 3.5 percent lower than it was at the end of 2019. Employment is down 6.5 percent. There are nearly 10 million fewer jobs in this country than there were in February— a deficit even larger than the one we saw in the aftermath of the Great Recession, when we were down 8.7 million jobs. Many businesses are still running at constrained capacity; others are understandably cautious and have taken the opportunity to streamline their operations. Leisure and hospitality employment remains down more than 20 percent. Despite elevated unemployment, I am still hearing from employers, especially in manufacturing, technology and health care, that they can’t find workers. In part, this is due to a drop in labor force participation, particularly among women. You have to imagine that it’s more difficult to commit to work when childcare and schools may be closed or remote and elder care facilities seem less safe. It’s also due to labor market mismatch; many displaced service workers don’t have the skills for
