The economy is a riddle, but clearly it’s having a harder time rebooting itself than had seemed possible in the spring.
Here’s a riddle: What is both too hot and too cold? The answer: the United States economy in the summer of 2021.
That is the common thread that comes through in economic data; shifts in financial markets; anecdotes from businesses; and experiences of ordinary people who are simultaneously enjoying higher incomes and facing higher prices and shortages.
In the mid-2021 economy, employers are offering higher pay to attract scarce workers; airports and car lots are bustling; and a G.D.P. report due out next week will probably show blockbuster growth. It is also an economy in which inflation is outstripping pay gains for many workers; the share of the population working remains far below prepandemic levels; and bond markets are priced at levels that suggest a high risk of returning to sluggish growth in the years ahead.
Essentially, the economy is having a harder time rebooting itself than had seemed likely in the heady days of spring, when many Americans were getting vaccinated and stimulus payments hit checking accounts.
The Biden administration and the Federal Reserve are betting that they can achieve a smooth transition to an economy that enjoys prosperity without frustratingly high inflation. But for that to happen, a huge mismatch — between economywide demand for goods and services, and the supply of them — will need to be resolved. It’s not clear how long that will take.
“I think we should have expected there to be frictions in getting the economy reopened after this unprecedented shock,” said Karen Dynan, a Harvard economist and a former official at the Federal Reserve and Treasury. “We’ve seen serious frictions, and it’s totally reasonable to expect those frictions to continue.”
Consumer demand for goods, and increasingly services, is exceptionally high, as Americans spend their pent-up savings, government stimulus payments and higher wages. Retail sales were 20 percent higher last month than in June 2019.
But businesses have had a harder time increasing production to fulfill that demand than forecasters were expecting in the spring. This has been particularly glaring in the case of cars, where a shortage of microchips has constrained production.
But supply shortages are evident across all sorts of industries. The latest survey of manufacturers from the Institute for Supply Management cites complaints from makers of furniture, chemical products, machinery and electrical products about the difficulties of fulfilling demand.
That is generating price inflation steep enough to make it ambiguous whether wage increases are truly leaving workers better off. Average hourly earnings in the private sector rose slower than the Consumer Price Index in each of the first six months of the year.
Because of the unique circumstances of the post-pandemic reopening, those numbers most likely understate the pay increase a typical worker has experienced, but the gist is clear: Workers are gaining higher wages, yes, but also paying more for the things they buy.
Much of this appears to be “transitory” inflation pressures that are set to diminish, and in some cases reverse. Bottlenecks are set to resolve — lumber prices have fallen sharply in recent weeks, for example, and used car prices may finally be stabilizing at high levels. But there are also slower-moving effects that could reduce a dollar’s purchasing power for months to come.
Rents are starting to rise sharply, according to a range of data sources. And businesses facing higher prices for supplies and labor may be in the early stages yet of passing on those higher costs to consumers. The Producer Price Index, which tracks the costs of the supplies and services that companies buy, rose 1 percent in June, an acceleration from April and May. This is a signal that inflationary forces may still be working their way through the economy.
“We call it a whiff of stagflation,” said Paul Ashworth, chief U.S. economist at Capital Economics, using the term for a combination of stagnant growth and inflation. “Real growth isn’t weak, but it’s just not as strong as we thought it was going to be. There was a lot of optimism, and now things are coming back to earth a little bit.”
The labor market is the clearest example of a market that is simultaneously too hot and too cold.
Businesses are complaining of labor shortages and offering all kinds of inducements to attract workers. Yet the unemployment rate is a recession-like 5.9 percent. And the share of adults in the labor force — either working or looking for work — has been essentially flat for months, failing to make clear progress to return to its prepandemic level. It was 63.3 percent in February 2020 but has bounced around between 61.4 percent and 61.7 percent for more than a year.
Individuals may be making rational choices for themselves not to work. Older workers may be retiring a few years early, for example, or families may be deciding to get by on one income instead of two. But in the aggregate, the depressed levels of labor force participation will limit the productive potential of the economy.
Hanging over it all is great uncertainty over whether the Delta variant of the coronavirus will create a new wave of disruptions to commerce — both domestically and overseas in places with less vaccine availability. That concern has helped cause big swings in global financial markets, which are increasingly priced in ways suggesting the years ahead will be less the roaring 2020s and more similar to the sluggish 2010s.
In the first three months of the year, longer-term bond yields soared and the yield curve — which charts the difference between shorter-term and longer-term interest rates — steepened. Those both tend to be indicators that investors expect higher growth rates ahead.
That has reversed in recent weeks. The 10-year Treasury yield was 1.22 percent Tuesday, down from 1.75 percent at the recent high at the end of March.
Where does all that leave the too-hot, too-cold U.S. economy? A lot of work has been done to enable the economy to reopen, and there is no shortage of demand from Americans who are feeling flush. But until the economy can find a new equilibrium of prices, wages, output and demand, things aren’t going to feel just right.
Canada's economy shrank for 2nd month in a row in May – CBC.ca
Canada’s gross domestic product shrank by 0.3 per cent in May, the second consecutive monthly contraction as most industries slowed down.
Statistics Canada reported Friday that most industries shrank, especially construction, manufacturing and retail.
Even Canada’s red hot real estate sector shrank for the second month in a row. The real estate and rental and leasing sector was down 0.4 per cent in May after falling by 0.8 per cent in April. That’s the first two-month streak of declines since March and April of 2020.
“As housing sales and construction levels gradually return to more sustainable levels, this area of the economy could be a drag on growth in coming months,” TD Bank economist Sri Thanabalasingam said.
Agriculture and forestry, mining and oil and gas extraction, utilities and the public sector all expanded slightly.
All in all, the total value of all the goods and services produced by Canada’s economy was just shy of $1.98 trillion during the month. That’s still two per cent below the slightly more than $2 trillion that the economy was worth in February 2020.
The numbers for May come at the time when Canada’s economy was on the downslope of the third wave of COVID-19, and much of society was on some sort of lockdown or reduced capacity. But there are signs that a rebound has happened since.
Preliminary data for June suggests the economy grew by 0.7 per cent during the month. And July may have been even better — credit and debit card data suggests that consumers returned to spending on high-contact services including in-person dining, recreation activities and travel that had long been restricted to them, Thanabalasingam said.
June’s uptick means the economy will expand by about 0.6 per cent in the second quarter overall. That’s about a 2.5 per cent annual pace — much slower than the 6.5 per cent pace the U.S. economy clocked in the same period, but much better than the 8.3 per cent contraction seen in countries that use the euro.
Thanabalasingam said the data for May and June show just how up and down the economy may go from here on out.
“It may not be smooth sailing for the rest of the recovery,” he said.
“The delta variant is wreaking havoc around the world, leading to a retightening of restrictions in some countries. Canada has so far avoided the worst of this virus, but cases are rising in some provinces. A fourth wave could lead to another stalling in the recovery, though with relatively high rates of vaccination a full reversal appears less likely.”
After Quickly Expanding, The Economy Is Expected To Slow – NPR
ARI SHAPIRO, HOST:
Today’s discouraging news about the pandemic comes after a spring when the U.S. economy reawakened. Vaccines were widely available, people went out to eat, and they started traveling again. In April, May and June, the U.S. economy grew by a healthy 6.5%. NPR’s David Gura joins us with more. Hi, David.
DAVID GURA, BYLINE: Hey, Ari.
SHAPIRO: So what does this 6.5% number actually tell us?
GURA: Well, it tells us the size of the economy is larger than it was before the pandemic, if you adjust for inflation. And that’s good news. That means the economy is now expanding. I talked to James Sweeney. He’s the chief economist at Credit Suisse. And I asked him how he interprets today’s numbers. Sweeney says it wasn’t as big as he expected it would be, but he’s still happy with it.
JAMES SWEENEY: The economy’s growing strongly, and we’ve got more growth ahead. This is the kind of negative miss (ph) that shouldn’t panic anybody.
GURA: And I’ll note here, it didn’t seem to panic investors on Wall Street. In fact, today the stock market once again hit some new records, Ari.
SHAPIRO: Yeah, what is driving the stock market growth over these last few months?
GURA: Yeah, the growth in the stock market and the economy – it’s been consumer spending, which is a huge part of the economy. The other day, I did some anecdotal research, anecdotal reporting – stopped by maybe a dozen small businesses near me just to see how they’re doing. And Melissa Ocampo (ph) is the manager of a toy store in Brooklyn. She told me things have gotten much better.
MELISSA OCAMPO: People seem to be back and running around and shopping for the kids and birthday parties and balloons.
GURA: Business has been steady, Ocampo (ph) told me, but she hopes it picks up even more. In the second quarter of this year, this transition happened, Ari. People who had been buying stuff – TVs, computers, yes, toys as well – started spending money at restaurants and on trips as vaccines became more widely available. And today’s GDP data reflect that big uptick in spending, which was larger than economists expected.
SHAPIRO: And yet this week there has been such a shift, largely driven by the delta variant – new mask mandates, vaccine mandates. What does the rest of the year look like?
GURA: Yeah, economists I talked to say they expect this growth to continue, but they are seeing potential risks to the recovery. So were small businesses. What worries Melissa Ocampo at my local toy store is the pandemic and the delta variant more specifically. She is afraid of what could happen to the store and to her if sales were to slow down again or if there were another shutdown. After the store closed temporarily last spring, Ari, Ocampo managed to find another job at a supermarket.
OCAMPO: I’m like, am I going to, like – am I not going to be with, like, a job towards the end of the year, or are we in, like, what’s just – it’s just uncertain and scary for sure.
GURA: Now, economists don’t think we’ll see the kind of shutdowns we saw at the beginning of the pandemic. For one thing, almost half the population now in the U.S. is fully vaccinated.
SHAPIRO: What else is keeping small-business owners up at night?
GURA: Well, inflation for one, how prices have gone up, problems with supply chains as well – that’s another issue. It’s gotten harder to get the products people want because of demand, and manufacturers are having trouble getting new materials. The supply chain issues show up in today’s GDP data. It was a big drag on growth in the second quarter. And one other worry among small-business owners is the jobs market.
SHAPIRO: Yeah, tell us more about that specifically.
GURA: Well, employers say it’s gotten harder for them to find workers. Some of them are worried about getting sick. Then there’s the lack of reliable child care. That’s a big issue. Ralph Elia owns a frame shop called KC Arts. He’s been in the business for about four decades. And he told me he’s had trouble hiring workers, which is something he blames on expanded unemployment benefits.
RALPH ELIA: I agree with it in the beginning, if you really needed it. But at some point, they should have slowed it down or cut it off, I’m sorry to say, because we need to hire people. People need to get out and work.
GURA: And that argument is what led about two dozen states to end those expanded benefits early, Ari. They’ll expire for all the remaining states in just a couple months.
SHAPIRO: NPR’s David Gura, thanks for the update.
GURA: Thank you.
NPR transcripts are created on a rush deadline by Verb8tm, Inc., an NPR contractor, and produced using a proprietary transcription process developed with NPR. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.
Saskatoon economy recovering but IMF warns of inflation, vaccine inequality – Global News
At least, for now.
The Saskatoon Regional Economic Development Authority (SREDA) calculates the economy of the province’s largest city is 67.8-per cent recovered from the pandemic as of Thursday (though most of the factors it takes into account are from much earlier in the month).
SREDA CEO Alex Fallon told Global News that agricultural exports, the housing market and consumer and retail spending is driving the bulk of the recovery right now. He said the hospitality sector is helping, with people taking staycations in the city, but is still dragging behind.
“The economic recovery in the Saskatoon region is probably a little bit better (than) we expected it to be,” he said.
He added that the rest of the recovery will depend on the continuing performance of the housing market, as well as home renovations and consumer confidence in the economy.
He predicted, albeit cautiously, that Saskatoon will recover fully by the end of the year.
A recent IMF report states any recovery is threatened by unequal vaccine distribution.
The IMF’s July World Economic Outlook predicts a 6 per cent increase in the global economy (which coincidentally matches the Bank of Canada’s most recent prediction for the Canadian economy) – if infections stay low.
“Vaccine access has emerged as the principal fault line along which the global recovery splits into two blocs: those that can look forward to further normalization of activity later this year and those that will still face resurgent infections and rising COVID death tolls,” the report states.
“The recovery, however, is not assured even in countries where infections are currently very low so long as the virus circulates elsewhere,” and so long as segments of the population remain susceptible.
It says a new, extra infectious or deadly variant would disrupt any recovery efforts because it is likely to spread around the planet.
The report also states developing economies are susceptible to advanced economies’ overcorrections targeting inflation.
The combination of both “would severely set back their recovery and drag global growth below this outlook’s baseline.”
The cause of the inflation, it says, are low commodity prices in 2019 and supply issues as the cause of rising prices this year.
It predicts inflation will likely subside by next year, though notes “uncertainty remains high.”
University of Regina economist Jason Childs is a little more assured prices will continue to rise in Canada.
How consumers respond to this momentary inflation “blip” as Canada reopens, he said, “will determine whether or not we get locked into an inflationary spiral.”
So, our reaction to inflation could cause more inflation.
As such, Childs is less optimistic about Saskatoon’s recovery, or any western Canadian city’s recovery.
He said the 67.8-per cent figure broadly represents similar cities east of Ontario.
(He said the pandemic was less of an issue for many smaller population centres that depend on natural resources. Last year the president of the Agricultural Producers of Saskatchewan told Global News the agricultural sector was unaffected by the pandemic.)
Childs told Global News the remainder of the recovery will depend on the hospitality and tourism sectors rebounding, which he said isn’t likely to happen soon.
He said a labour shortage in those sectors, which Fallon also identified as an issue, will further limit gains. And he said the labour shortage could be hard to solve.
“The longer you’re away from the job market and employment, the harder it is for you to transition back into that,” he said.
Overall, he was wary of any predictions.
The pandemic has been a nearly-unprecedented event and the planet has never been more integrated.
Historical examples then may not be as illustrative as policy makers might hope.
“The last time we spent like this – we’ve never spent like this,” Childs said.
© 2021 Global News, a division of Corus Entertainment Inc.
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