National & Local Economic Conditions

A Year Into the Pandemic

By Rita Kuster, Chief Credit Officer, Saint Louis Bank

One year after the World Health Organization declared COVID-19 a global pandemic, there appears to be greater optimism about the economy, but the pandemic remains the biggest risk to both global and domestic economic growth.  The economic recovery continues to depend on the ability to defeat the virus.  Over the course of the past 12 months, millions of people have found themselves unemployed and trillions of dollars have gone to stimulus spending.  This month’s report summarizes some key data of the past year and may provide insight as to where the economy could head next.  Some of these numbers are staggering.

National Trends

• $5.4 trillion – How much the federal government has now authorized in stimulus spending. That money came over the course of six relief bills enacted by Congress over just one year.  The first two bills signed in early March 2020 authorized federal funding for virus testing, small business loans, and expanded unemployment and paid sick leave.  President Trump signed the next bill and the largest of the six, the CARES Act, into law on March 27, 2020, just 16 days after the World Health Organization declared COVID-19 a pandemic.  The CARES Act authorized the first round of $1,200 stimulus checks, set up enhanced federal unemployment insurance at $600 per week and jump-started a number of other major relief programs.  The CARES Act was immediately followed by a $484 billion bill that replenished the Paycheck Protection Program after it ran out of funding in just two weeks.  After a months-long impasse in Congress, President Trump signed a $900 billion stimulus bill into law just after Christmas.  That was followed by President Biden’s flagship American Rescue Plan Act, which he signed into law on March 11, 2021.
• Nearly zero – Current interest rates, after the Federal Reserve Bank (“FRB”) cut them to prevent a market catastrophe. On Sunday, March 15, 2020, after a week that saw stocks’ worst losses since 1987, the Federal Reserve announced it would slash interest rates to near-zero levels (a target between 0.0% and 0.25%, down from the previous target of between 1.00% and 1.25%).  The sudden rate cut and accompanying announcement that the Fed would purchase $700 billion in government debt was an attempt to stabilize the careening market and reassure investors that the federal government would see the economy through the crisis.  A year later, amid concerns that trillions of dollars in stimulus spending and a frothy stock market could trigger dangerous inflation, the Fed has signaled it won’t raise rates any time soon and will continue buying $120 billion in bonds per month despite some signs the economy is improving.
• $3,200 – How much eligible Americans received over the course of three rounds of stimulus checks. Included in all those stimulus bills were provisions for three rounds of direct payments from the federal government in the amounts of $1,200, $600, and $1,400. Those relief payments were widely credited with boosting household spending, especially on rent, bills, and other essentials, though households with larger incomes tended to save rather than spend them.
• $1.6 trillion – Excess savings households accumulated last year. Thanks to business closures across the country, especially in the leisure and hospitality sectors, U.S. households accumulated some $1.6 trillion in “excess savings” in 2020.  That is $1.6 trillion that Americans were prepared to spend, sitting in bank accounts until businesses rebound.  Those excess savings are expected to fuel a surge in consumer spending later this year, though experts have said all that money won’t be spent at once and that high-income households are much less likely to spend it at all.
• $835 billion – How much the government has authorized for struggling small businesses through the Paycheck Protection Program. The popular Paycheck Protection Program was set up by the CARES Act last March to extend forgivable loans to help small businesses cover payroll and overhead costs during the pandemic.
• 5 million – How many jobs have not yet been recovered, one year into the crisis. According to data released by the Labor Department in February, the United States is still down 9.5 million jobs compared to February 2020, the month before the pandemic hit.  That is a huge improvement compared to the 22 million jobs that were lost by last April, but it is also an indicator that the labor market has a long way to go before it recovers to pre-pandemic levels.
• 10% – How much home prices soared between January 2020 and January 2021 while millions struggled with rent. As interest rates plummeted last year and remote workers sought larger spaces, home prices jumped by 10% on an annualized basis this January.  That is their highest annual gain since 2013, according to CoreLogic, and it is likely prices will keep rising this year.   But while the housing market sizzled, the pandemic also exacerbated housing insecurity for millions of Americans.  This February, some 13.5 million adults living in rental housing said their household was not caught up on rent, according to data from the Census Bureau.
• 5% – GDP losses in 2020, but major growth is on the horizon. After a 3.5% contraction in 2020, experts are expecting massive growth in the U.S. economy this year.  The Federal Reserve is expecting 6.5% growth in 2021, as is the Organization for Economic Cooperation and Development (“OECD”).  The OECD’s most recent forecast is more than double its December estimate of 3.2% growth and is based on a faster than expected vaccine rollout and the federal government’s unprecedented stimulus spending.
• $3.1 trillion – The U.S. budget deficit in the 2020 fiscal year. As tax revenues shrank and stimulus spending skyrocketed, the federal budget deficit hit an all-time high of $3.1 trillion in the 2020 fiscal year or nearly 15% of GDP.  That is its highest level since 1945 and more than triple the deficit in 2019.  Data released by the Treasury Department shows that the deficit rose to more than $1 trillion in the first five months of the 2021 fiscal year (ending 9/30/2021).  That was before the passage of the American Rescue Plan in March, which is expected to add another $1.856 trillion to the deficit between this year and 2030, according to the Congressional Budget Office.
• 1957 – April’s inflation losses were the largest since data collection began in 1957, but levels are climbing back to normal – for now. In addition to pumping up the deficit, some economists are worried that unprecedented stimulus spending coupled with a surge in consumer spending when the economy reopens will send inflation soaring to unsustainable levels.  The core consumer price index, or “CPI”, (one measure of inflation) dropped 0.4% from the previous month in April 2020, its largest decline since data collection began in 1957.  The Federal Reserve expects core CPI to hit 2.2% in 2021 – that is above the central bank’s 2% target.  The Federal Reserve continues to indicate it will provide support to the economy “as long as it takes.”

The above information summarizes only 10 key data points. There are other issues that will affect national and local economic conditions including potential changes in the taxation of corporations and individuals, and vaccine efficacy and distribution in different parts of the world. As we review some of the fundamentals above, we continue to believe there is a heightened risk level as we navigate through the pandemic.

Regional Trends

On a regional basis, the pace of activity continues to remain mixed across sectors. Per research provided by the Federal Reserve Bank’s, Beige Book, published in February 2021, firms reported mixed changes in employment levels with difficulties attracting candidates for positions despite increasing wages.  Inflation pressures have increased as the FRB reported moderate increases in prices, with many firms believing it will be difficult to pass on further price increases.  Per the publication, which covers the Eighth District that includes St. Louis, Little Rock, Louisville and Memphis, the overall outlook continued to improve and was generally optimistic. However, most FRB contacts cited a high degree of uncertainty about the pace of recovery, which related primarily to the pace and efficacy of vaccinations.

Employment trends continue to be mixed.

On net, 12% of respondents to the FRB reported employment levels lower than a year ago. Contacts noted stagnant or declining employment, especially among small businesses and leisure and hospitality firms, with continuing closures in a slower-than-expected recovery. Transportation and manufacturing firms reported their desire to expand their workforce has been stymied by a scarcity of workers. Many FRB contacts ascribed this scarcity to unemployment benefits and other government aid. Some reported turning to automation. COVID-19 exposure has also depressed existing workers’ hours. Wages grew slightly. On net, 23% of FRB respondents reported wages higher than a year ago. Many contacts emphasized the need to raise wages while workers remained scarce; some, however, reported more stagnant wages, especially in the worst-hit sectors.

Prices charged to consumers have increased moderately over the past several months.

FRB contacts believe they have less ability to further increase prices. Some examples of this are a regional grocer reporting lowering some prices due to competitive pressures and making up profits on higher volumes, and a restaurant reporting an inability to increase prices amid already slow business. FRB contacts also noted that ocean freight costs have more than doubled, which a warehouse contact believes will lead to higher prices for consumers. Contacts also reported higher steel and lumber prices, which will impact construction projects, along with various other industries including manufacturing.

After a sharp decline, consumer confidence begins to recover.

As illustrated below, consumer confidence declined sharply at the start of the pandemic.  In mid-2020, we began to see recovery of this element of the economy.

Indication of consumer confidence from the Organization for Economic Co-operation and Development. Shading indicates U.S. recessions, the most recent one is ongoing.

Activity in the nonfinancial services sector has decreased slightly.

Half of all nonfinancial services FRB contacts reported sales below expectations this quarter, reflecting clients who are cautious to spend due to uncertainty about the near-term economic recovery, as well as pandemic-related difficulties meeting new clients. Revenues at several small regional colleges have fallen due to declines in enrollment. Logistics contacts reported first-quarter sales were stronger than expected despite the post-holiday slowdown. Most contacts expect sales next quarter to be at least as good as this quarter, given vaccinations are becoming more widespread.

Passenger traffic at regional airports remains depressed.

Provided below is the monthly and annual comparison of air traffic as of February 2021 at the St. Louis Lambert International Airport evidencing over a 60% decline in passenger volume. Nonetheless, the volume of air cargo has grown over 20% (in lbs.) year-over-year.

The residential real estate market remains favorable to sellers.

FRB contacts reported that home inventory remains low and expect it to remain so. Residential construction activity has risen this quarter, with many expecting further increases. The FRB noted that throughout the Eighth District there were some reports of residential construction projects being backlogged due to labor and material shortages. FRB contacts also reported problems and price increases stemming from high lumber and steel prices. Also, shipping delays and production issues have increased lead times on most building supplies and appliances.

Commercial real estate activity has been mixed.

Office and retail demand are lower this quarter.  While the increase in telework has decreased demand for office space, going forward, there remains uncertainty if and how telework will continue to impact demand. Meanwhile, demand for industrial properties is up due to e-commerce and micro-fulfillment facilities. Commercial construction is similarly mixed, as multi-family projects, warehouses, and logistics facilities are the main projects currently being built.

Agriculture conditions have improved moderately.

The number of acres of winter wheat planted this season throughout the District increased sharply relative to the previous year. Despite pessimism in early 2020, farmers expressed optimism after a strong finish in 2020, with prices and sales up well above what was expected.

Unemployment.

As of February 2021, the unemployment rate continues to improve with reductions nationally and in the State of Missouri.  Unemployment levels in Illinois and the St. Louis MSA would generally be considered stable from the November 2020 reporting period as shown below.

Recession

At the end of 2019, before anyone outside Wuhan had ever heard of the new coronavirus, many indicators pointed to a probability of the U.S. economy entering a recessionary period.  The National Bureau of Economic Research announced in February 2020 that the U.S. economy was officially in a recession.  It may seem obvious with double-digit unemployment and plunging economic output, but the standard definition of a recession is a “decline in economic activity that lasts more than a few months.”  The U.S. economic recovery remains uneven, still down nearly 10 million jobs almost one year later.  The pandemic forced the economy to contract sharply, ending the longest expansion on record.  A year after the coronavirus pandemic first drove the U.S. economy into the deepest downturn in generations, high-frequency economic indicators illustrate a strong rebound – yet there is still a long way to go.

As an aside, every recession since World War II has been preceded by an inverted yield curve.  An inverted yield curve has historically been reached 2 to 3 years before a U.S. recession is officially recognized.  This occurs when longer-dated yields are less than shorter-dated yields.  The yield curve inverted in May 2019 until mid-October 2019 returning positive thereafter.  Placing all attention on this one indicator may be somewhat misplaced as relationships between economic conditions in a global environment change over time.  However, it is an important aspect of the economy to closely monitor.  The pandemic escalated the response, but signals were in place indicating strain well before the pandemic was officially declared.

Data Sources:  The Beige Book, Eight District – February 2021; FRED Economic Data; Forbes; St. Louis Lambert International Airport 2021 YTD Air Traffic Activity Report (February)

Disclaimer: The views and opinions expressed are those of the authors and do not necessarily reflect the official policy or position of Saint Louis Bank.  Any assumptions made in the analysis are not reflective of the position of any other entity other than the author(s), and since we are critically thinking human beings, these views are always subject to change, revision, and rethinking at any time.  The information contained within has been obtained from sources we believe to be reliable; however, we have not conducted any investigation regarding these matters and make no warranty or representation whatsoever regarding the accuracy or completeness of the information provided.  While we do not doubt its accuracy, we have not verified it nor make any guarantee, warranty, or representation of any kind or nature about it.  The use of or reliance upon and resource provided is a tacit acceptance that the reader understands that the materials may be out of date, opinion-based, incorrect, or biased.  It is the reader’s responsibility to verify their own facts.

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