Economic Commentary

The recent surge in the Delta variant of COVID-19 informs us that while we might wish that the pandemic is over, it is not. Let’s set aside the headlines and examine some data to help us determine the state of our current condition. In March of 2020, our research team at Greenleaf Trust adopted the practice of focusing on the condition of the pandemic to help us accurately understand the economic circumstances that we were in. The recession created by the pandemic was severe and occurred with terrific velocity. It was clear that recovery from the recession would require steps to cause disease remission and government intervention to support the economy until organic growth could take its place.

Quarantine, masks and sanitation practices were the initial remedy until a vaccine could emerge to win the day against the COVID-19 virus. For 613,000 Americans who died as a result of the pandemic, these remedy steps were not sufficient or came too late. The vaccine rollout in January of 2021 created the catalyst for significant reductions in new cases, hospitalizations and deaths, and for many of us who had endured months of quarantine the hope of a return to pre-pandemic life. Signs of economic recovery were positive, and people began to gather in ways they hadn’t been able to for many months. Still, the reality of the condition we were in did not yet warrant a return to pre-pandemic practices. The goal of 70% vaccination rates by July seemed easily within our reach, as millions of Americans were being vaccinated each day and tens of thousands were recovering from COVID-19 with antibodies generated in their immune system. Surely the combination of both remedies could get us to remission by late summer. So where are we relative to this expected optimistic goal?

Headlines would lead us to believe we have failed to reach our goals, so let’s peel away the layers of the onion and see where we are. Did we reach 70% fully vaccinated by the end of July? No, we did not. CDC data reveals that as of the end of July 69.9% of Americans have received at least one dose of the vaccine, and that 165 million Americans are fully vaccinated (about 51% of our total population). Depending upon how you look at the data it is either a story of success or failure. When we examine the demographics of the population, we get a much more positive view of the condition of remission. For those who are 64 years of age or older, 80% are fully vaccinated and 90% have received at least one dose of the vaccine. For those 18 years of age through 63 years of age, 69% have received one dose of the vaccine and 61% are fully vaccinated, while only 21% of those under 18 years of age but not less than 12 years of age have received one dose of the vaccine. Currently our daily vaccination rate is 660,000 per day, which if held constant would not achieve 70% fully vaccinated until late December of this year.

In general, our vaccination coverage has protected the most vulnerable age demographic at an 80% level, and nearly 74% of all new cases are contracted by those not vaccinated. COVID-19 is still with us. Current and future variants will continue to place unvaccinated individuals at risk of infection, and depending upon the individual immune and health conditions of those infected, cause continuing hospitalization and, unfortunately, additional deaths. While we are not out of the woods, we understand the direction of the journey and are making what now seems like painstakingly slow incremental progress towards remission. The progress seems far more positive than the headlines suggest. So what economic condition are we in and what are the implications for continued recovery considering that we have not yet achieved remission of COVID-19? As always, we turn to the data.

The New York Federal Reserve Bank’s Weekly Economic Indicator (WEI) was reported on July 29 at 8.37%, which mirrored the most recent GDP data but was down nearly 3.5 points from the April 17 high of 11.83. Remember, the WEI measures in real time economic data around consumption, production and labor, so any data input that changes in any of those categories will impact the index, but in general a positive number is good and a higher positive number is better. The relativity of the index is that it is measuring economic activity against the same data exactly one year ago to the date it is released, resulting in a measurement that allows us to evaluate the current trend in place. As reported, we would say that activity surrounding consumption, production and labor is significantly better than last year and registering strong growth but with less velocity than during the first quarter of this year.

As we know, 70% of GDP growth is related to the consumption activity of the 335 million Americans, and the single largest factor in Americans’ optimism about consumption is employment. All of the historical data available on the relationship between GDP growth and consumer activity reveals that when consumers, their neighbors and relatives are employed their confidence about the forward period of time increases. When consumers’ confidence increases they spend more and save less, and when confidence decreases they do the opposite, thus is the very relative and elastic relationship between consumer activity and GDP growth.

Payrolls rose 850,000 in June and, as expected, much of that payroll growth was in leisure, hospitality, retail and business services. Manufacturing, construction, engineering and healthcare all held steady. The unemployment rate held steady at 5.9%, as did the labor participation rate of 61.6%. Much has been written about labor participation during the pandemic recovery, with a strong implication that federal stimulus, combined with state assistance for the unemployed, has deterred individuals from seeking employment and has caused labor shortages. Some states, through legislative action, have reduced or even refused Federal stimulus in order to reduce support for the unemployed, assuming that doing so would force the currently unemployed to seek employment. The target of this employment need was the $12.00 – $15.00 per hour wage rate. Without even commenting on the moral and ethical actions of those states that took this legislative action, let’s examine the latest jobs report to see if these assumptions are evidenced in the data.

Records of labor participation rates have been kept in great detail since shortly after World War II. The US labor participation rate peaked in 1998 at 67%, and has been in a slow incremental decline through the Great Recession of 2008, where it bottomed at 59%. Post recession, the rate gradually increased and returned to the 63.4% level in 2019, and thus the current 61.6% rate is 1.8% below the previous post recession high.

The current unemployment rate of 5.9% is composed of 9.5 million who claim to be unemployed. Our previous low benchmark for unemployment was in February of 2020 at a rate of 3.5% consisting of 5.7 million workers claiming unemployment status. Of the current unemployed, 6.2 million reported that they were unable to find work because their previous employer closed or lost their business due to the pandemic. Those responding to this category in the survey also indicated that transportation and childcare impacted their search for other employment opportunities and, as expected, they were in the category of last hired and first fired. In essence, they represent the lowest wage rate and were locally employed and often highly dependent on less than full time employment that was close to their home. Reducing their benefits will not cure the conditions that keep them from being employed. Restoring their work and childcare opportunities might.

Organic growth of our economy will replace government stimulus and will restore, over time, growth of small businesses in communities where others failed during the pandemic. The last hired and most vulnerably employed depend heavily on the locally owned small businesses that were devastated by the pandemic recession. The organic growth of these opportunities will not likely occur for some time.