William D. Johnston

Chairman

Economic Commentary

Progress has slowed in our country’s COVID-19 vaccination rate as of late. Data through June 1st reveals that our seven-day average vaccination rate has slipped to 1.6 million, a decline of more than 50% from our previous high of 4.2 million. Unlike early in the vaccination roll-out, the struggle to get our population vaccinated is now more about desire than access. All ages above twelve are now eligible, and in most communities appointments are not necessary. Some states and communities have reported unused supplies and the US is now exporting to other countries previously allocated vaccine lots from manufacturers. Currently, 40% (or 132 million Americans) have been fully vaccinated, and at least 62% have had the equivalent of one vaccination dose. Under our current seven-day moving average of vaccinations, our country’s goal of 75% Americans vaccinated will not occur until September rather than July. The combination of vaccinated and previously infected Americans should approach 263 million, or 80% of the population, by the beginning of September well in advance of the winter season.

While herd immunity resulting from vaccination and developed antibodies from infection is not likely until September, most Americans are moving on from COVID-19 restrictions. Many states have relaxed all restrictions, and those that haven’t now have targeted restriction reductions based upon vaccination/infection and hospitalization data within their states. The reduction in hot spots and daily infection/hospitalization and deaths data suggests strongly that COVID-19 is fading. It is reasonable to expect all restrictions being eliminated by September. We have always maintained that the economy would not fully recover until COVID-19 was defeated, and we are now seeing evidence of both the fading of COVID-19 and the continued incremental economic recovery. There is, of course, work that remains to be accomplished in both areas, but the trends in place are positive.

The Weekly Economic Indicator (WEI), published weekly by the New York Federal Reserve Bank, has been a useful tool in understanding the real time condition of our economy during the COVID-19 pandemic. The May 27 WEI revealed a very strong reading of +11.37%. As a reminder, the WEI is the compilation of other indicators measuring consumption, employment and production which are critical in understanding whether we are in expansion or contraction. The measure released each week is an indication of where we are currently in relationship to where we were one year ago on the same date. That measure can be misleading, because the comparison period could be unusually low or high. The May 27th release was comparing the same period in 2021 (incremental consistent recovery) to May of 2020 (significant consistent decline). What is relevant, however, is that the 13-week moving average of the WEI is +6.75%, providing a more consistent window into the direction of the trend in place. What is clear is that the WEI bottomed June 27, 2020 at -9.30% and has been steadily improving through the May 27, 2021 release.

Unemployment has fallen to 6.1% and hasn’t budged in three months, and though more people are working, the average work week has expanded by two hours and average wage has increased by $0.21. Payrolls increased by 226,000 and reflected a slight increase in the labor participation rate, which caused the unemployment rate to remain steady even in the face of improving labor statistics. The duration of unemployment remains at 26 weeks and, as we have often said, the reduction of unemployment rates below 6% will be incremental and occur over a prolonged period of time.

During significant economic hardship such as deep recessions, government spending takes the place of private sector employment. The stimulus packages administered during the pandemic and resulting recession are great examples of government standing in the place of private employment. The impact of the stimulus assistance is to keep consumption humming and consequently to create demand and growth of goods and services, which theoretically leads to increased employment. The transition from government assistance to private employer payroll increases is always more complicated than the issuance of stimulus assistance. We are seeing the complexity of this transition in the public dialogues and legislative debates surrounding unemployment and wage rates. Industry sectors that previously paid workers less than $15.00 per hour are finding it hard to fill the labor demand necessary to meet consumers’ demand for goods and services. Hospitality, food and beverage, healthcare support, warehousing and cleaning services are sectors with millions of job openings that are currently unfilled. Lobbyists for those respective industries are hammering legislators both at the Federal and State level to eliminate federal unemployment assistance so that jobs offering $12.00 to $15.00 per hour will become more attractive and thus fill the current labor shortage in those sectors. The base of their argument is that the combination of Federal and State unemployment provides the equivalent of $15.00 per hour and diminishes labor supply below and up to that rate of compensation. The more important question might not be if their assumptions are factually correct, but rather should those industries be attempting to legislatively control the labor supply through unemployment decreases and, more fundamentally, is their continued expectation to pay wage rates below $15.00 per hour realistic?

Prior to the pandemic and resulting recession, 28% of the labor force earned wages below $15.00 per hour. Sixty percent of the 42 million workers being paid below $15.00 per hour were women and 31 million workers were Black or Hispanic. In 2014, 61 million workers were paid less than $15.00 per hour. Nearly 50 million labor positions saw compensation increase to $15.00 per hour during the five year period between 2015 and 2019. During that same time span, unemployment declined from 6.2% to 3.4%. More people were working and more workers were earning higher wages.

Arguments about raising minimum wage rates have remained consistent for the past five decades. Increasing minimum wages will cause inflation and those wage increases will spill over to the next wage bracket, causing wage creep and greater inflation. The argument, while consistent, lacks supporting evidence. Through 2019 only two percent of wage earners were paid at the minimum wage rate and 80% of those earners were students and retired workers supplementing their earnings. It is hard to imagine that two percent of the workforce would create inflation if their wage rate was doubled from $7.25 to $15.00 per hour; however, their lives would be substantially better. It is also hard to imagine that increasing wage rates from $12.00 per hour to $15.00 per hour would create inflation for the balance of the 70 percent of workers already earning above that wage rate. (Through 2019 the average wage rate in the US was $22.00 per hour.)

There are very few substantive studies that prove that increasing wage rates at the lowest brackets cause inflation, reduction in employment or creates competitive disadvantages for businesses, and the reality is that most industry sectors pay wage rates in excess of $15.00 per hour. Studies that include cities such as Seattle and Portland that have $15.00 per hour minimums are short in duration, but have seen evidence of higher employee retention and better quality of performance.

What does seem to be evident is that many workers are demonstrating through their actions that while they can earn $15.00 per hour to support themselves and their families they will, even if that decision requires that they stay home. Federal unemployment assistance will terminate at the end of July, as will mortgage foreclosure prohibitions applied during the pandemic. Employers may see a greater thirst for jobs available, but those wanting the best workforce to drive success may need to rethink the real wage necessary to attract and retain the best possible team rather than holding dear to wage rates insufficient to fill their labor needs.

COVID-19 Updates

As of June 13

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