The U.S. Economy’s Top Ten Trends in 2021
An Econ Weekly Special Feature
The U.S. Economy’s Top Ten Trends in 2021
1) The Vax Impacts, but Covid Attacks Back: Two companies, Pfizer and Moderna, delivered miracle vaccines that greatly raised hopes of ending the pandemic in 2021. Instead, two things happened: 1) only 60% of Americans elected to use the vaccine (compared to nearly 80% in Canada) and 2) the Covid virus mutated into more contagious forms, most importantly a Delta variant which stunted economic momentum in the fall. In December, an even more contagious Omicron variant followed, extending the crisis into 2022. The vaccines, for sure, allowed much of life and commerce to return to normal. Even the hardest-hit activities like air travel, restaurant dining, elective health procedures and public sporting events resumed. But two of the pandemic’s most troubling consequences persisted: 1) the capacity and functionality of the nation’s hospital network remained greatly stressed by the burden of Covid patients, the great majority of them unvaccinated, and 2) the virus continued to disrupt the labor market (see below).
2) Gobs of Open Jobs: About that labor market, demand, make no mistake, was extremely strong all year, especially for lower-income jobs in sectors like retail and leisure/hospitality. It was even hotter for transportation and warehousing jobs essential to running supply chains. But the supply of labor remained depressed, even after bonus unemployment checks ended in the fall, even after most schools reopened in the fall, and even after the Delta onslaught eased in the fall. In November, 155.2m Americans were working, down from 158.6m in November 2019. Employers had 11m job openings, up from 7.3m two years earlier. So why are so many able-bodied American adults electing not to work? One reason is that households have amassed large financial gains from sources other than work, including the value of their homes and stock portfolios. Some are not working because a spouse is earning more now that wages are up sharply—and yes, up significantly more than inflation for lower-income workers, if not for the U.S. workforce collectively. In the Sept. 27th issue of Econ Weekly, we presented other theories on why fewer Americans are working: generous government support, bonanza bets on cryptoassets, the opioid crisis, more young people living with relatives, etc. Most importantly, however, fewer Americans are working because of the virus. In November, according to the Labor Department, 1.2m said they couldn’t look for work due to the pandemic. They might be ill themselves or caring for a family member that is. Many surely fear contracting the virus. Quarantines are impacting the day-to-day availability of workers. Though most schools are now open, a possible return to at-home learning remains a factor when considering childcare needs. Many nursing homes have closed, complicating eldercare obligations. And so on. For the record, the unemployment rate—now 4.2%—is now nearly back to where it was just before the crisis (when it was 3.5%). But that only includes people working or actively looking for work, not the big increase in Americans now on the sidelines. One final note about two systemically important occupations currently experiencing extreme shortages right now: nurses and truck drivers. Both, it’s important to recognize, experienced shortages long before the pandemic started, made worse in recent years by declines in immigration.
3) A Crisis in Prices: For the first time since the early 1980s, inflation reached levels far above the Federal Reserve’s traditional 2% target. All year, economists debated the gravity of the problem, with some insisting the price pop was just temporary, or as the Fed liked to say, “transitory.” Others saw more persistent forces at play, a viewpoint that gained momentum as the year progressed. By November, the Fed itself changed course, dropping the term transitory and adopting a more aggressive winddown of its stimulative bond buying. It now enters 2022 poised to raise interest rates, hoping to quell inflation but potentially risking recession. Why, incidentally, did prices soar? There were four major reasons, each affecting one another: 1) heightened demand for durable goods, 2) supply chain shortages and bottlenecks, 3) surging commodity prices and 4) the labor disruptions referenced above. The virus, sure enough, bears much responsibility for all four reasons. But even once it fades, other inflationary forces might persist, including strong spending power (due to the giant fiscal stimulus) and permanently altered patterns of work preferences, international trade and supply chain risk management. And always keep in mind—when thinking about rising prices—the outsized role that health care, housing and higher education play in the U.S. economy. They’re giant categories with decades-long histories of discomforting price inflation that’s often obscured by widely used consumer price gauges. Their influence on prices were in fact subdued during 2021 but stand to reassert themselves in the years and perhaps months ahead. All three, importantly, are parts of the economy where free markets tend to malfunction, and where government spending and lending carry great weight.
4) Despite the Germs, Success for Firms: Throughout much of the Covid crisis, starting in the summer of 2020 and persisting through 2021, Corporate America counterintuitively achieved record profits. There were exceptions of course, notably firms tied to the travel industry (think Boeing and its airline customers). But last year was a strong year for most of the sectors central to the U.S. economy, including housing, finance, technology, agriculture, defense, freight transportation, selling (both retailing and wholesaling) and even health care, strains on hospitals notwithstanding. Energy did better after a rough 2020. Manufacturing did well too, even auto manufacturing notwithstanding a severe shortage of semiconductors that crippled production (the year made clear the strategic importance of Taiwan). All of Corporate America, indeed, faced vexing input shortages, supply chain headaches and cost inflation during 2021. But these were in most cases outweighed by strong demand and an ability to raise prices. In fact, pricing power might well be deemed a fifth cause of inflation, facilitated by years of consolidation within most industries—sentiment is now building for stricter antitrust enforcement.
5) Sam Lends a Hand to Demand: When Covid first struck the U.S. in March 2020, Uncle Sam reacted forcefully, with $2 trillion in fiscal support, alongside aggressive monetary support. A second spending bill worth nearly $1 trillion followed in late 2020. Then came another nearly $2 trillion in March of last year. The measures included forgivable loans to small businesses (to protect jobs), supplemental unemployment pay and direct checks to most Americans. The federal government also paused student loan repayments and imposed a temporary ban on housing evictions. Struggling state and local governments, meanwhile, saw their budgets stabilized with federal money (see below). The muscular federal response from both the Trump and Biden Administrations—and from both parties in Congress—led to a dramatic lift in fortunes for household finances. American families, which experienced a ruinous income and wealth disaster after the housing crisis of 2008-09, were this time empowered to spend heavily. They did so most forcefully on durable goods, demand for which soared, stressing railways, trucking capacity, seaports and freight transportation networks more generally. Demand for services, which accounts for a larger share of the overall economy, was still adversely affected as Covid disrupted activities from travel to restaurant dining to dental care. But overall demand was strong enough to set the economy back on the pace at which it was growing pre-Covid. The first half of 2021 saw especially rapid growth, cooled in Q3 by the Delta variant and the supply chain distress. (The Commerce Department will publish its first estimate of Q4 GDP growth on Jan. 27th).
6) Happy Housing: Amidst the goods demand surge was more specifically a jump in all things housing related—here again a stark contrast with the crisis of 2008-09. Buying a home, expanding a home, renovating a home, furnishing a home, working from home, home fitness, home entertainment… companies associated with any of these activities were sitting pretty in 2021. Homes represent the most valuable asset for most Americans (roughly two-thirds of families own a home). So as home values skyrocketed across the country, so too did the balance sheets of many U.S. households. Keep in mind too that housing sits at the center of so many other sectors, including finance (think home mortgages), construction and a vast ecosystem of retail and wholesale suppliers from Home Depot to the armies of contractors supplying appliances, electric, plumbing, hardware, heating, lighting and so on. But like the rest of the economy, homebuilders faced shortages of supplies… and shortages of labor too. Immigrants, by the way, account for almost a quarter of the entire U.S. construction workforce, according to the National Association of Homebuilders. During the year, the Chamber of Commerce and other organizations representing American businesses lobbied strenuously to allow more immigrants, a key they say, to addressing the current labor shortfall.
7) Stock on Roll: It wasn’t just housing. The stock market (about 65% of U.S. households own stock) greatly increased in value during 2021, perhaps excessively. Assessing the true value of a company’s shares was always an inexact science, made even murkier by the rise of the intangible economy (in which firms produce income from assets that accountants find hard to measure). How, for example, to value Facebook’s network effects? (The Big Five Tech companies of Silicon Valley and Seattle, incidentally, accounted for at times roughly a quarter of the S&P 500’s market cap this year). Tidal waves of passively invested money don’t make valuations any easier. Nor did the emergence in 2021 of retail investors gathering on social media sites, driving up prices of unloved “meme” stocks for amorphous reasons, among them an apparent desire to punish Wall Street short-sellers. At the onset of 2022, there’s a palpable sense that perhaps stocks have ascended too high, with some categories of equities (i.e., SPACs) already dropping. But with corporate profits still historically strong, plenty on Wall Street remain optimistic.
8) After early upward mo, interest rates stay low: Add bonds to the list of assets that performed well in 2021. To be clear, the price of U.S. Treasury debt declined from the start of the year to year’s end. Which is another way of saying that its yield increased. But to declare 2021 a year of rising yields—which would imply higher interest rates—would be misleading. Consider Uncle Sam’s closely watched 10-year bond. It started the year yielding just 0.93%. By late March, it jumped to 1.74%, triggering no small measure of disquiet about what such momentum could mean for the home mortgage market and federal debt obligations. The momentum, alas, stopped there. Just before Christmas, yield on the 10-year was back down to 1.50%, which incidentally triggered other questions, i.e., why are interest rates remaining so low amid a surge in consumer prices and federal borrowing? Remember again: When interest rates fall, the prices of all previously-issued Treasury bonds floating around increase. As for possible answers to the bond conundrum of low rates despite inflation, perhaps most compelling is that demand for safe assets like Treasuries remains extremely strong, for reasons other than pure financial return (i.e., central bank policy objectives and bank regulatory obligations).
9) Prime-Time for Crypto: It’s been more than a decade since the mysterious Satoshi Nakamoto invented a way to authenticate data on the internet (hint: it relies on cryptography and a worldwide network of validators with heavy duty computing power earning rewards for their efforts). From that emerged a digital currency called Bitcoin, its merits and flaws hotly debated ever since. During the 2010s, awareness of this new cryptosphere grew amid Bitcoin’s wild price fluctuations, along with the emergence of new cryptocurrencies (recall the initial coin offering, or ICO, crash of 2018). In 2021, however, cryptoassets started moving into the mainstream, attracting even institutional investors like Wall Street banks. Retail investors, all the while, plowed massive sums of money into cryptoassets—Bitcoin, yes, but more intriguingly blockchain-based platforms seeding a new cryptoeconomy, one with the potential to challenge traditional finance. The leading platform is Ethereum, on which others are building all sorts of financial applications, from sending money to lending money—remember, there’s no need for a third party to make sure no one’s cheating; that’s the beauty of the blockchain. The potential goes beyond financial services, with nonfungible tokens, or NFTs, entering the world’s vocabulary in 2021. These are ways of establishing ownership of digital assets other than money, including collectibles, songs, artwork and other intellectual property. This naturally has relevance to the growing creator economy, in which individuals earn a living through their digital creations, be they YouTube videos or newsletters like Econ Weekly (which is not yet on the blockchain but perhaps one day!). But back to the emerging cryptoeconomy, the discussion moved beyond topics like the usefulness of Bitcoin to criminals, or the philosophical merits of fiat money. In 2021, the conversation sounded more like those of the internet’s early days. How might crypto technology reshape corporate governance (through decentralized autonomous organizations, or DAOs). How might it disrupt traditional finance (through programmed contracts)? How, as mentioned, might it turbocharge the creator economy? How to properly regulate the cryptospace was certainly top of mind in 2021. Of particular concern are stablecoins, used for moving money between one cryptocurrency and another (or between dollars and cryptocurrency). The world has so much money parked in stablecoins right now, that a sudden mass rush to redeem them for real dollars could wind up looking like a traditional bank run (or a money market run, the more relevant reference in 2008). All the while, the Federal Reserve spent all year studying the wisdom of launching its own digital currency. In any case, the rush of talented developers, entrepreneurs, financial professionals and venture capitalists now rushing into the crypto space should make even the most skeptical pause.
10) Jubilee for SLG: The federal government gets most of the media attention. But state and local governments play an under-appreciated role in the U.S. economy and U.S. labor market—think public school teachers, police officers, firefighters, social workers, health care providers, judges, park commissioners, budget directors, city managers, etc. In November, state and local governments employed 19m workers. That’s 13% of the total U.S. labor market, and one which faced a perilous position at the onset of the pandemic. Tax revenue from income, property and sales appeared headed for collapse, at a time when many municipalities already faced fiscal strains from pension obligations, for example. Mercifully, the federal government—which funds roughly a quarter of SLG spending in normal times—stepped in to not just rescue the economy but also SLGs directly. The American Rescue Plan signed in March 2021—the third of three giant fiscal stimulus packages from Congress—allocated $350b to state, local, territorial and tribal governments. The money went to areas like housing, small businesses and public health. SLGs now stand to receive additional money in the coming years, thanks to a $1 trillion infrastructure bill President Biden signed in November. As the economy enters 2022, SLG employment is still down 4% from two years earlier.