Why this economic recovery from Covid is so different?

The Brookings Institute published a paper last month about the economic recovery post Covid pandemic. Overall message from the paper is that there has been a sharp and quick recovery to pre-pandemic levels aided by fiscal support however there are notable signs in inflation, wage growth, inventory supplies and spending patterns that make this recovery look very different from the previous economic recoveries.

1. A distinguishing feature of the recovery has been the sharp rebound in economy and jobs fueled by the massive fiscal stimulus; the study notes that the US economy has been back at pre-pandemic levels since Q2 2021. Further, the Congressional Budget Office (CBO) now forecasts that real GDP will grow 7.4 percent from the fourth quarter of 2020 to the fourth quarter of 2021 which is a very impressive uptick.

2. While economic recoveries usually have lower inflation, in this recovery inflation through August 2021 was 3.1 percent and is higher than any period since 1990’s on annualized basis. However the impact of inflation has been offset by increase in real wages; wages for those in the bottom quartile of the wage distribution are up 7.0 percent from pre-pandemic levels.

3. As lot of studies have noted the impact of Covid was unevenly distributed and even with GDP back to to pre-pandemic levels the employment is still down 5.3 million jobs from February 2020. The loss in jobs has disproportionately hurt women, non-white workers, lower-wage earners, and those with less education who are employed primarily in services sector where employment is still down 4% from Feb 2020.

4. There is a contradiction playing out in labor market not seen in other recoveries with job attrition and job openings both trending higher than pre-pandemic levels. Along with a decline in total labor force since Feb 2020 this is causing pressure on wages and adding to the inflationary pressure (point 2). Interestingly, contrary to popular view the Unemployment Benefits have not been a driver of decline in labor force as the data shows that cancellation of Unemployment Benefits since Sept has not led to significant increases in aggregate employment.

5. As a result of government benefits as well as lesser spending during pandemic last year, in contrast to previous recessions households have roughly $2.5 trillion more in savings than if income and spending had grown in line with trend rates prior to the pandemic. Moreover, home prices and stock market prices have surged unlike prior recesssions, leading to large increases in household wealth.

7. In 2021 purchases of durable goods have averaged 25 percent higher than pre-pandemic spending while spending on services (many of them with face to face transactions) have yet to recover to pre-pandemic levels. This spending pattern is in contrast to prior recessions.

8. Retail inventory-to-sales ratio is very low compared to historic trends; production has not yet recovered to pre-pandemic levels and the situation has been made worse by increase in demand for goods (point 7).

9. New business applications are highest since 2004 and a third of them are in online opportunities given the pandemic. There have been fewer bankruptcies compared to previous recessions due to fiscal support and unemployment benefits.

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