In Michigan, signs of spring are everywhere this time of year. We feel it in the warming air temperatures, and we see it in flowering buds emerging from hibernation. But this year’s spring awakening has even greater societal importance as increased vaccine distribution offers hope that we may be nearing the end of our year-long COVID-19-induced economic winter.
With increased vaccine availability, long-cloistered members of our community are beginning to re-engage with local area businesses. This societal reopening combined with multiple rounds of fiscal stimulus is resulting in a broad-based surge in consumer demand. Employers look desperate to add employee headcount in hopes of capturing a portion of this increased demand, as U.S. job openings near all-time highs. Furthermore, the amount of stimulus has left many consumers flush with cash and poised to produce the fastest U.S. economic growth rate in nearly four decades.
The U.S has administered over 218 million doses of vaccine as of April 28th, 41 percent of the total population, 54 percent of adults, and 80 percent of seniors (65 and older) are at least partially vaccinated against the virus, according to the Centers for Disease Control and Prevention (CDC). This puts the U.S. third among developed nations, trailing only Israel and the United Kingdom, on a vaccination-per-citizen rate.
While COVID-19 concerns remain, rising optimism among consumers and small business owners is apparent in the recently reported consumer and business confidence numbers. Anecdotally, we can observe it in the reemergence of long sequestered members of our own families, who only now after being inoculated are feeling confident enough to re-engage with the broader community. For many, it’s been almost a year since they felt safe enough to dine out at a local restaurant, see a movie in a theater, or support their local farmer’s market.
The increasing level of safety and confidence is helping support a surge in consumer demand across many sectors of the economy. Businesses are the direct beneficiaries of this increased consumer demand. As a result, many employers are beginning to increase employee head count, which is evident by the number of “help wanted” signs dotting the landscape of our local area businesses.
According to the latest U.S. Bureau of Labor Statistics Job Openings Survey, there are over 7.4 million jobs available across the U.S. This represents the fourth highest job availability level ever recorded in the survey’s 20-year history. These openings reflect that employers are desperate for labor in order to capture their share of the COVID reopening surge.
The problem is despite job availability, approximately 4-million people have withdrawn from the U.S. workforce and now identify as “no longer seeking employment.” What remains to be determined is what portion of these workers have been lost permanently due to retirement versus temporarily due to COVID-19-related factors.
One of the factors impairing worker availability seems to be the level of enhanced unemployment benefits passed by Congress. Increased unemployment benefits appear to be creating a temporary disincentive for workers leading many to disengage from the labor force. This has manifested in a critical labor shortage at the exact time most businesses are attempting to recover lost earnings from the pandemic.
The demand versus supply mismatch is likely to increase labor costs in the short-term as employers are not only forced to compete with one another for qualified labor, but with the government’s enhanced unemployment benefits. Regardless, with a re-opening economy and the overwhelming amount of fiscal stimulus, business owners are likely to pass a portion of these higher labor costs onto the consumer.
The U.S. Bureau of Economic Analysis reports that Michigan’s economy shrunk by 5.4% in 2020, putting Michigan amongst the 10 most severely impacted states economically last year. For perspective, the U.S. economy as a whole contracted by 3.5%, making the country’s economic loss experienced during this COVID induced “economic pause” greater than the economic loss experienced during the 2007/08 global financial crisis.
The country’s economic loss would have been far greater if not for the $5.4 trillion in fiscal stabilization passed by Congress since April 2020. The various stimulus packages provided a necessary financial bridge for families and businesses most impacted by the COVID crisis. But for a large cross-section of U.S. households, especially those that retained full-time employment and received direct stimulus checks, these direct payments increased household savings and consumption significantly above pre-COVID levels.
In addition to the fiscal stimulus that helped support the U.S. economy over the past year, there remains a large stimulus overhang. This overhang can be measured by elevated U.S. Personal Savings Rates that have spiked above 27 percent versus the 7.2 percent level experience prior to COVID-19 and is likely to support elevated consumption levels for the remainder of this year. According to JP. Morgan Chief Economist Bruce Kasman, personal consumption will likely propel the 2021 U.S. GDP growth to 5.5%, which would represent the fastest U.S. economic growth rate in nearly 40 years. Not since 1984 has the U.S. economy grown faster than 5 percent for an entire year.
Increasing consumer demand during a period of constrained labor availability has led to large bottlenecks in our global supply chain, which in turn is driving goods prices higher and decreasing product availability. The issue of price and availability is noticeable across a broad array of product categories from lumber prices to residential appliance availability. Despite this, consumer demand remains robust as reopening optimism, combined with excess fiscal stimulus, will likely fuel economic growth through the remainder of the year. Just as spring time in Michigan reawakens the plants and animals from their winter hibernation, our emergence from the COVID economic winter will lead to a fruitful year for businesses and consumers alike.
Richard Consul is a senior portfolio manager for INCORE Capital Management’s total return and core fixed income strategies. Consul also serves as the product strategist for the INCORE team, responsible for developing and delivering strategy messaging for the team’s traditional fixed income and convertible strategies. Munder Capital Management was acquired by Victory Capital in October 2014 and the Munder Fixed Income team was renamed INCORE Capital Management on April 1, 2015. INCORE Capital Management is a Victory Capital investment franchise.
Consul has 15 years of investment industry experience. Prior to joining INCORE in 2010, Consul worked as a proprietary trader specializing in managing commodity and emerging market currency portfolios using cash and derivative positions for Bank of America proprietary trading team in San Francisco and London and for DTE Energy Service’s $1.5 billion energy hedge fund.
Consul earned a B.B.A. in finance with a minor in mathematics and an M.S.E. in financial engineering from the University of Michigan. He is a CFA charterholder, member of the CFA Institute and board treasurer for the CFA Society of Detroit.