William D. Johnston

Chairman

Economic Commentary

The very nature of our business requires that we have a thirst for research and a constant desire to understand whatever is impacting our economic, domestic and geopolitical systems. We always approach that discovery from our clients’ side of the desk. What might our clients be reading or listening to? As a result of their interactions with popular culture media, what might they be wondering about? What relevant information might be important to them? This discovery process has always been one of the most stimulating parts of my career and I’m always thankful for the opportunity to engage in it. While the challenges are sometimes different in detail, each of the last three decades have offered what at the particular date and time might well have seemed like cataclysmic events certain to disrupt or perhaps change our economy and political system in seismic ways too difficult to resolve. The advantage of historical perspective is that the current disaster is likely to fade and a new one will take its place.

We began our relationship with the pandemic of COVID-19 recognizing that a playbook didn’t exist for its resolution, but that our economic recovery was dependent upon successful mitigation of the disease. Recent focus on what appears to be a stalled vaccination rate has given way to some assumptions that we are failing in our effort to combat the virus. I’d like to offer a different perspective based upon a perhaps different view of the data. While the US fully vaccinated rate is now at 53%, the rate fully vaccinated among the most vulnerable is significantly higher. Among those 75 years of age and above, 89% are fully vaccinated. The numbers are even higher for those 65–74 years of age where 94% have received two doses of the vaccine. The largest age demographic of active workers ages 25-64 have been vaccinated at rates ranging between 68% for ages 25-49 and 80% for those in the age category of 50-64. To my eye these rates of vaccine adoption are impressive. If these rates of success are accurate then why are we struggling at a 53% rate for our total population? You have probably already arrived at the answer, those 18 and under are far less likely to be vaccinated and those under 12 are not likely to receive vaccine approval until December 31 of 2021. Recent FDA full approval of the Pfizer vaccine (previously given under emergency authorization) is not likely to move the needle (no pun intended) for adult vaccination rates but might provide some greater comfort for parents when approval for those 12 and under is granted later this year. Recent polling has affirmed that most adults have settled in on their view of the vaccines and thus the results we see for those 18 and above are likely to be near the top of what we achieve longer term. It is likely that we will achieve an overall vaccination rate of near 75% when approval of vaccines for juveniles is granted though it is likely to be adopted along the same demographics as it currently exists. Unfortunately, one of our greatest successes in the vaccination rollout is to politicize the vaccination against the COVID-19 virus. The evidence of this politicization can be seen in the demographic data of who has and has not been vaccinated. According to CDC data and polling by the Kaiser Family Foundation, the majority of adults not currently vaccinated are under the age of 49, live in a suburban or rural location, are white, hold a high school diploma or less and identify as Republican. The importance of that data is the inference that when the vaccine is approved for those under 16 it will be the parent who will either make or heavily influence the decision for their child to be vaccinated. If that is the case then we can expect the under 16 demographic to mirror the vaccination rate of their parents which will make the total adoption rate of the COVID-19 vaccination substantially lower among school age students than polio, measles, mumps and whooping cough vaccinations. While the data also demonstrates that younger patients have better outcomes enduring and recovering from the disease, a lower adoption rate created by the politicization of vaccinations will add to disruptions in returning to normal classroom settings.

Our economic recovery from the pandemic recession continues. The New York Federal Reserve’s Weekly Economic Index (WEI) measuring consumption, production and employment data continues to show strength (+9.27 for the 13-week moving average as of August 26) even though it retracted from the 13-week moving average of +10.91 in late June of this year.

Unemployment improved to 5.4% and is a full 1% lower than at the beginning of 2021. Labor participation remained steady at 61.7% and long term unemployed at 27 weeks or more declined by 560,000, but remains 2.3% above the February low of 2020. Employment gains came in the expected areas of leisure, food and beverage, retail, education, hotel, arts and entertainment. The average work week held steady at 34.8 hours; however, overtime in manufacturing increased that category’s level to 40.5 hours.

We are beginning to get some initial data from the 26 states that eliminated or substantially reduced state unemployment benefits while Federal stimulus was being received. In some cases the states returned or refused the Federal stimulus and limited the benefit to state supplementary support. States implementing this strategy did so because their state legislators believed high job vacancies were the result of unemployed persons receiving a benefit higher than $15.00 per hour. Many state food and beverage as well as hospitality associations lobbied for this legislation. This type of legislation was recently implemented in June and thus, year-to-date we have only one month of data to examine and we always caution against conclusions based upon that little data. What is demonstrated though is that mixed results were achieved. States reducing benefits showed an increase in employment of 4.4% over states that continued to extend unemployment benefits. Workers in those states that gained employment earned $14 more per week than they received in weekly unemployment benefits; however, they spent $145 per week less than they had while unemployed. There will be much more analysis of data in future months, but on the surface we could say there was minimal change in jobs filled, minimal income benefit to those employed but a substantial change in consumption spending. Too early to tell the consequences of the action at this point.

Inflation has received a good deal of attention and was mentioned in Fed Chair Powell’s most recent testimony before Congress. While Chair Powell acknowledged that 5% inflation was above the Fed’s target, he urged both caution and patience at the near term view of year over year price increases. Instead, he spent time talking about a base effect of inflation that examines key components of inflation over a rolling 24-month period of time, particularly 24-month cycles that do not include recession or recovery cycles. He spoke at length about “recovery lag” and “pent up consumer demand” and the cumulative impact of logistical supply chain interruption. He also acknowledged that, while the US inflation rate was higher than the current G-7 rate, our stimulus investment was substantially greater than other G-7 countries. The overall message was that the inflation measured was transitory and heavily influenced but recovery lag pricing that will retract and be more normalized through base effect calculations spread over 24 months. Lastly, Chairman Powell called to attention that since 2001 we have been in a cyclical disinflationary time when GDP retraction cycles have been increasingly larger and recovery cycles increasingly weaker and urged that stronger growth, even when it included some transitory inflation, was much preferable to weak growth and weak inflation. I am always reminded that congressional testimonies by Federal Reserve chairs are viewed through a political lens. This time it was the Republican members of the committee that didn’t like his testimony, but I think he got it mostly right.