As a result of the far-reaching and rapid spread of Covid-19, state and local governments’ pandemic-mitigation policies are becoming more restrictive and consumers are again limiting their consumption of in-person services. The Oxford Covid-19 Government Response Stringency Index, which accounts for measures like school and workplace closures and travel bans, increased for the United States during the first half of November and has remained at elevated levels since then. The added restrictions limited the ability of households to go out and spend.
Consumption, which makes up about two-thirds of the economy, was already down 0.4% in November, after six straight months of increases: Spending on restaurants and bars was down 4%, for example. The winter decline could be even worse.
The economic weakness is filtering into the labor market. The number of initial claims for unemployment has been trending upward. And in December, for the first time since April, the number of jobs in the US economy declined. Shrinking employment may continue over the rest of the winter, especially for the industries that suffered the most from the pandemic thus far, like restaurants, travel, accommodation, out-of-home entertainment and personal services.
But while the outlook for the winter is bleak, the US labor market should get much stronger in the second half of 2021, mostly because of the impact of the vaccination campaign. According to some estimates, by August or September, the United States could reach herd immunity, preceded by very low rates of new infections in late spring. Herd immunity means that a large enough percentage of a population, 70% to 90%, has become immune to Covid-19, thereby reducing the likelihood of infection for people who lack immunity. This would allow local governments’ social distancing policies to become less stringent and the economy to recover as consumers feel more comfortable engaging in in-person services.
And many US consumers will be ready and able to spend. Since March, households’ average saving rates have been historically high, and their housing and stocks portfolios have been rapidly growing. Overall, many will likely emerge from the pandemic with stronger personal finances than they had before. It should be noted that within this aggregate positive financial outlook, many households have been financially ruined by business closures and layoffs caused by the pandemic.
As a result, in the second half of 2021, a strong US economic recovery is likely to take place. Economic activity is likely to be about 5% above the first half of the year, according to The Conference Board. The recovery will be especially strong in the hardest-hit industries, where employment levels are still very depressed compared with pre-pandemic levels.
We cannot expect a full employment recovery in early 2022, because automation and corporate reorganizations permanently eliminated many jobs. But barring a major slowdown in the vaccination campaign, I project that 3.5 to 5 million new jobs should be created in the United States by the first quarter of 2022.
When the unemployment rate almost reached 15% in April 2020, few expected it to return to its natural rate of about 4.2% to 4.5% in the foreseeable future. But the unemployment rate should dip below 5% in the first quarter of 2022 and perhaps even reach 4.5% by year’s end.
This is partly due to the strong employment growth, but also due to very weak growth in the labor force, driven by the massive number of Baby Boomers reaching retirement age. For the first time in US history, the population of working-age people (those between the ages of 16 and 64) is declining. This trend is likely to continue in the coming years. The unemployment rate will also be held down by the disappointing trend of declining labor force participation of other populations, especially men without a college degree.
Growing demand for and a stagnant supply of workers will lead to a tight labor market within two to three years, and in some blue-collar occupations, maybe even sooner.
So as dark as these days are, hold on — a much better labor market is around the corner.