Economic Outlook

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 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

the jobs that are available, and given the uncertainty around the virus, they’re hesitant to move or invest in training for their next job.

As evidence, look at community college enrollment. Community colleges offer certificate programs that can deliver new skills in a relatively short period of time, and so ought to be prospering in this time of elevated unemployment. But, unlike at four-year schools, enrollment is down, likely due to uncertainty, challenges with child care, lack of engagement with online schooling, or too little information about available financial aid.

We have been talking about uncertainty all year. But recently the future seems to be coming into focus. I had hoped this virus would be behind us by now, but the continued escalation in cases makes me believe we still have a ways to go. Despite the encouraging progress with vaccines, it seems unlikely that a broad-enough rollout to make us comfortable fully interacting in personal commerce would occur before this summer. So the next few months could be challenging, but there is daylight on the horizon. On the fiscal side, further legislative stalemate seems probable. Many businesses like this situation, and believe it promotes the certainty that supports investment. At the same time, while there may be one more smaller targeted stimulus to come, it seems likely the country will be revisiting fiscal prudence over the coming months.

What does all this mean for 2021?

I see promising signs for business investment, as I suggested earlier, supported by our accommodative forward guidance in monetary policy. In contrast, I think the spike in government spending is behind us.

The key question then is what consumers will do—and those decisions constitute two-thirds of the economy. Here we have to come back to the elevated saving rate. There is a lot of money in people’s pockets that is cushioning the end of fiscal stimulus and could propel the economy at some point. The last time we saw a saving rate this high was during World War II, and the post-war years saw huge spikes in consumption — could we unlock similar pent-up demand next year? While I certainly hope so, I see these savings more as a backstop than a stimulant. In the first half of the year, if the virus surges and fiscal support subsides, these savings will be essential to support spending, particularly for goods, and to enable the less fortunate to cope. In the second half of the year, I do expect some post-vaccine resurgence in demand for high-end services like a good meal or a nice vacation or a business trip. But services generally don’t yield themselves to significant volatility—you don’t make up for missed haircuts, dentist appointments or vacation days— and the wealthy, who would by then have most of the savings, generally take a longer-term mindset on their spending.

Overall, my outlook is for a slow recovery; you might say we took the elevator down and we are taking the stairs back up. But I also foresee a steady recovery— despite the downsides, the saving rate and fiscal and monetary policy are providing backstops. And the horizon isn’t far off.