Economic Outlook, September 2021

Dr. Bernard Anderson, our Chief Economics Adviser, shares an in-depth look at the state of the economy. Here’s what the numbers tell us.

• The economy continues a steady, mixed path of recovery. $2 trillion federal government stimulus programs support household income and consumer spending; Federal Reserve monetary policy supports business investment.
   
• The demand for commodities and durable goods is strong, and services continue to rise in response to eliminations of restrictions on in-person business activity. But two developments threaten to constrain a rapid return to table, balanced growth: the uptick in inflation and labor shortages. The uptick in inflation stems from lagging production in some products markets due to supply chain bottlenecks. Sustained aggregate demand coupled with limited supply generates price increases. The housing sector offers a vivid example.
   
• Housing prices rose 18.6 % from June 2020 to June 2021 as many homebuyers searched for home selling at moderate prices. The median price for a single-family home was $ 359,900 in August.  It’s ironic that at a time mortgage rates are at a low ebb, housing affordability is beyond reach for many because of the widening gap between housing supply and demand.
   
• A number of employers complain about labor shortages as business activity drives job openings. Some employers report that workers who were laid off are reluctant to return to work, while others quit their jobs in search for higher pay and better work hours. Some employers raised wages to attract labor.
   
• There is little evidence that the elimination of supplementary unemployment compensation generated an increase in jobs.  The delay in workers returning to work is also explained by childcare responsibilities of women in low wage jobs, and the fear some workers of contracting the virus if they return to work. These conditions reflect the impact of the pandemic in creating the economic contraction, producing labor market adjustments not seen in a normal business cycle.
   
• The Federal Reserve is cognizant of these developments and is addressing the challenge with carefully considered plans to implement monetary policy aimed at achieving maximum employment and price stability. Chairman Powell thinks inflation is transitory and will decline as supply chain bottlenecks recede and production catches up with demand. The personal consumption expenditure index (PCE) declined from 5.4% to 3.2% in August. The core consumer price index (CPI) declined to 4.5%.
   
• The Federal Open Market Committee has a laser focus on the dual mandate with the intent of keeping interest rates low and market accommodation steady until the unemployment rate reaches the commonly thought level of maximum employment. Note that they do not use the term “full employment”. The unemployment rate thought to represent maximum employment is unknown, but the consensus is that it is about 4.0 %. It surely is not reached when there are nearly 8 million workers unemployed for more than 6 months, as in July. At the current rate of monthly job creation at or above 600,000, the unemployment rate should decline to 4.5 % in Q 2, 2022. That assumes that the labor force participation rate (LFPR) will rise as monthly job creation remains high.
   
• Vigorous job growth and declining unemployment has done little to close the racial employment gap. In July, the black/white unemployment ratio was 1.78, lower than the perpetual 2:1 ratio, but still unacceptable. The gap reflects several factors, including but not limited to the LFPR, the employment/population (E/P) ratio of black youth, and the greater frequency of labor market turnover among black workers compared with white workers.
   
• Bottom line: a high rate of job creation generated by monetary policy will not eliminate the racial employment gap. Enforcement of policies to eliminate racial discrimination in the labor market is necessary for assuring equal opportunity in the labor market.