Economic impact of pandemic easing, but aftershocks may linger
The grip of the pandemic on the economy appears to be loosening. Job growth and retail spending were strong in January, even as coronavirus cases hit a record high. New York, Massachusetts and other states have started lifting indoor mask mandates. California unveiled a public health approach Thursday that will treat the coronavirus as a manageable long-term risk.
Yet the economy remains far from normal. The ways of working, socializing and spending, disrupted by the pandemic, have been slow to readjust. Prices are rising at their fastest pace in four decades, and there are signs that inflation is creeping into a wider range of goods and services. In polls, Americans say they feel gloomier about the economy now than at the height of shutdowns and job losses in the first weeks of the crisis.
In other words, it may be more than “the virus is the boss” – as Austan Goolsbee, an economist at the University of Chicago, put it. But the changes it triggered have proven both more persistent and more pervasive than economists had anticipated.
“I thought – totally naively – that once a vaccine was available, that we were six months away from a complete reassessment of the economy, and instead, we just grind it, “said said Wendy Edelberg, director of the Hamilton project. , an economic policy branch of the Brookings Institution. “A switch wasn’t flipped, and I thought it was okay.”
The resulting limbo is a challenge for the Biden administration, which has so far failed to convince a skeptical public that its economic policies are working, despite falling unemployment and a recovery that has outpaced the most projections. optimistic by most measures. And that’s a challenge for Federal Reserve policymakers, who have struggled to gauge how long the pandemic disruptions will last or how best to mitigate their effects.
It’s also a challenge for business owners like Katherine Raz.
Ms. Raz owns The Fernseed, a plant and flower store with two locations in Tacoma, Washington. Like many retailers, the business rode the Covid-19 roller coaster: after closing for two and a half months at the start of the pandemic, Ms. Raz was able to reopen and she even expanded the business in the summer of 2020 But a spate of cases later that year and a new round of government restrictions pushed the company to the brink and forced Ms Raz to fire one. of its seven employees.
In some ways, 2021 has followed a similar pattern. Business boomed in the spring as falling case levels and rising vaccination rates stoked optimism that the pandemic was coming to an end. Then the Delta and Omicron waves caused a drop in demand and created personnel problems.
This time, however, Madame Raz was ready. She had built up a financial reserve and invested in product lines that were less likely to suffer when cases spiked. She cut employee hours when business slowed, but avoided layoffs.
“I have a list of things, little levers that we can pull to make those adjustments to make the business more resilient,” she said.
Although Ms. Raz no longer cares about the survival of her business, she remains cautious. She would like to open a third location, in Seattle, and start offering classes and organizing events. She wants to hire a general manager to manage day-to-day operations.
Those plans are on hold while Ms. Raz grapples with continued disruption. Supply chain issues made it difficult to obtain key products, such as terracotta pots which she said were stuck somewhere in a shipping container. It stocked its inventory as much as possible, tying up capital for months longer than normal. And after two years of what she calls an “emotional whiplash,” she’s constantly on guard for another setback.
“I stopped pinning my hopes on this ending,” she said. “I prepare myself for the worst all the time and I don’t hope for the best.”
Some economists remain optimistic about the economy normalizing as the pandemic recedes, even if the process is taking longer than initially expected.
Mr Goolsbee, who served as chief economic adviser under President Barack Obama, was among those who argued at the start of the pandemic that the best way to revive the economy was to get the pandemic itself under control. Until that happens, he said, the recovery would be driven by the ebb and flow of case numbers and hospital capacity, variants and countermeasures.
He recently pointed to the relatively mild economic impact of the Omicron wave as evidence that consumers are becoming more comfortable.
“The reason the virus was the boss is that people were scared; they changed their behavior,” he said. “If this is a sign that the fear is easing, the virus will no longer be the boss and the economic pandemic will end.”
But others warn that the effects of the pandemic could outlast the pandemic itself, potentially leading to a shrinking labor force and faster inflation.
“It’s appropriate to start asking whether some of these changes are going to last at least to some extent?” said Michael R. Strain, economist at the American Enterprise Institute. “Things that happen over a two-year period, the chances of them sticking around are greater than those that happen over a one-year period.”
Fear of the virus may still affect consumer demand. Spending at restaurants plummeted in December and January as the latest spike in coronavirus cases kept diners at home. Air travel, hotel reservations and other in-person services have also suffered. And although employers added jobs in January, the total number of hours worked fell, in part because workers were sick at home, and most likely also due to reduced hours as demand increases. was decreasing.
But demand for services hasn’t fallen as far during the latest wave of coronavirus as it did at the start of the pandemic, and preliminary data suggests it has recovered more quickly. More comprehensive data through December show that the crisis-induced shift in consumer spending from goods to services is reversing, albeit slowly.
Supply disruptions were more difficult to resolve. Shortages of computer chips, lumber and even garage doors have delayed production of items ranging from cars to homes, while a lack of shipping containers has led to delays in almost everything transported from the foreigner. Some bottlenecks have eased in recent months, but logistics experts expect it will take months or even years for supply chains to function properly again.
Then there is the labor shortage. The pandemic has pushed millions of people out of the workforce, and while many have returned, others – including a disproportionate share of women – have not.
Diahann Thomas was at work at a Brooklyn call center in January when she received a call from her son’s school: her 11-year-old had been exposed to a classmate who had tested positive for Covid -19, and she had to pick him up.
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“There are all these moving parts now with Covid – one moment they’re in school, the next moment they’re home,” she said.
Ms Thomas, 50, said her employer refused to offer her flexibility while her son was in quarantine. So she quit – a decision she says was made easier by the fact that employers are eager to hire.
“It boosted my confidence to know that in the end it won’t be hard for me to pick up the pieces, and I have more bargaining power now,” she said. “There’s this whole shift in terms of the employee-employer relationship.”
Ms Thomas expects to return to work once school hours are more reliable. But the pandemic has shown her the value of being home with her three children, she said, and she wants a job where she can work from home.
Whether and how people like Ms Thomas return to work will be crucial to the trajectory of the economy in the months to come. If workers return to the workforce as school and childcare become more reliable and health risks decrease, it will be easier for manufacturers and shipping companies to increase production and deliveries, giving supply a chance to catch up with demand. This in turn could allow inflation to subside without losing the progress the economy has made over the past year.
“If you got an improvement in the public health situation, you would see economic improvements in terms of increased work, increased production, improved functioning of the economy,” said Aaron Sojourner, a University of Minnesota economist who has studied pandemic economics. “I think it’s a real constraint.”
But people who have taken early retirement or quit their job to care for children may not return to work right away or may choose to work part-time. And other changes may be just as slow to reverse: Companies that have been burned by shortages may hold larger inventories or rely on shorter supply chains, driving up costs. Workers who have benefited from flexibility from their employers during the pandemic may demand it in the future. Rates of entrepreneurship, automation and, of course, remote working have all increased during the pandemic, perhaps permanently.
Some of these changes could result in higher inflation or slower growth. Others could make the economy more dynamic and productive. All make it harder for forecasters and policymakers to get a clear picture of the post-pandemic economy.
“In almost every way, the economic ripple effects that we might have hoped were temporary or short-lived are proving more lasting,” said Luke Pardue, economist at Gusto, a payroll platform for small businesses. “The new normal is very different.”