The speed of the U.S. economy's recovery from the damaging effects of the coronavirus pandemic has surprised a number of observers according to a Federal Reserve Bank of New York economist.
Andrew Haughwout, senior vice president and policy leader at the Fed, said national GDP took a “huge hit” from COVID-19 restrictions and shutdowns but is now in the midst of “very sharp recovery."
He said the latest figures show the national economy grew 1.6% in the first quarter of 2021, or 6.4% on an annualized basis, after falling almost 10% in the second quarter of last year.
“This figure underlines the dramatic drop the economy took in the second quarter of 2020 and the very rapid rebound since,” Haughwout said April 30 at CBIA’s Connecticut Economic Update 2021.
“This has been a much more V-shaped decline and recovery than we've ever seen.
"We've recovered a lot of losses that we incurred early on ... U.S. GDP is still below its peak ... nonetheless, this rebound has surprised a lot of people.
All Indications are that this is a much faster recovery than the Great Recession.”
As a result, most projections for GDP growth for the whole of 2021 have been revised up since last year, he said.
The Federal Open Market Committee’s Survey of Economic Projections in December projected 4.2% GDP growth in 2021. In March, it revised that number to 6.5%.
“All kinds of firms experienced a very sharp decline last spring,” he said. “Manufacturing recovered first and by April of this year, non-manufacturers finally showed improvement.”
“There’s still a long way to go. Signals from the labor market show there’s substantial slack in the economy.”
Haughwot also noted that fiscal policy, including state and federal relief funds, has supported much of the economy over the last year.
"The role of government has been unprecedented, at least in peacetime," he said.
Haughwout expects that as more people get vaccinated and children return to school, worker decision-making will shift.
“I think once we’ve made more progress on vaccinations, that will potentially allow economic decision-making to play the more dominant role again,” he said.
The pandemic had an unprecedented impact on the nation’s economy, Haughwout said, with 22.2 million people losing their jobs last March and April.
Connecticut has recovered 60% of the 292,400 jobs lost last March and April to restrictions and shutdowns, while U.S. employers recovered 62%.
“Of course, the pandemic is unprecedented for at least 100 years, and one of the manifestations of that is the dramatic economic consequences,” Haughwout said.
The unemployment rate is one measure of the economy, but Haughwout said the labor force participation rate—the share of adults either working or seeking employment—provides a more accurate snapshot.
Unfortunately, he said, it’s not a pretty picture right now.
“That number had been on a long downward trend, and it fell a lot again as the bottom dropped out of the economy in the second quarter of 2020,” Haughwout said.
“A lot of people left jobs and left the labor force. It’s rebounded a little, but it's far below the level it was just a year ago.
“But when there are plenty of opportunities to work at wages people are willing to accept, this will come back up.”
As the economy grows, the percentage of unemployed people should drop, he said.
Labor Market Recovery
U.S. unemployment was at historic lows in February 2020 when it hovered around 3.5%.
It skyrocketed to nearly 15% in April 2020, falling to 6% in March this year. Connecticut's unemployment rate is 8.3%, the highest of the New England states.
Haughwout said the April 2021 labor report, due May 7, represents one of the first major data points for the second quarter.
Meanwhile, he said, the Survey of Economic Projections is expecting a 4.5% unemployment rate by the end of 2021.
“If that happens, it will be amazing," he said.
“It took eight years for the labor market to recover from the Great Recession. This would be something like 18 months or two years, a much faster recovery.”
CBIA president and CEO Chris DiPentima asked Haughwout why many Connecticut businesses are struggling to find workers despite the state's high unemployment rate.
Haughwout replied that one of the factors behind the drop in labor force participation is that many women left the workforce to care for children or other family members.
“There have been changes in the non-economic part of going to work,” he said. “In this case there’s another dimension—the risk of getting sick. And also the responsibility of taking care of one’s family.”
So instead focusing on a paycheck and a good work-life balance, some people are more concerned about their well-being, he said.
“The virus has changed the calculus quite substantially in a lot of different ways, from one’s own health to childcare responsibilities,” Haughwout said.
Connecticut has felt its fair share of economic pain, Haughwout said.
But the pandemic may also have a silver lining for the state as home prices have surged in recent months as more people see value in suburban living.
“One of the things I find interesting is whether those big surges in house prices are reflecting a permanent demand for residential locations in Connecticut,” he said.
“That’s important for all kinds of things, including the robustness of the state’s economy as well as the tax base.”
Haughwot says it's too early to determine whether the influx of people moving to Connecticut marks a permanent trend.
Another factor in the economic recovery is whether people who saved money over the last year will spend it or keep it in the bank, he said.
Americans’ savings rate reached record highs during the pandemic, according to U.S. Bureau of Economic Analysis data.
“People actually had money but they couldn’t spend it, unlike usual economic downturns where people don’t have money to spend,” Haughwout said.
Haughwot wondered how those savings will be deployed.
“Will they come out all of a sudden, putting pressure on service providers to raise their prices, or will they trickle out over time?” he asked.
Haughwout also cautioned about the potential negative economic fallout when rent and loan protections put in place during the pandemic expire.
“That’s something we need to keep a lookout for,” he said.
The Connecticut Economic Update 2021 was made possible through the generous support of KeyBank with additional support from AVANGRID, Berkshire Bank, and JP Morgan Chase.