Headwinds Turn Into Tailwinds
“Well, this should certainly teach us, should it not, never to repine, never to despair, never to allow the upper lip to unstiffen, but always to remember that, no matter how dark the skies may be, the sun is shining somewhere and will eventually come smiling through.”
—P. G. Wodehouse
The noise-to-signal ratio in economic data isn’t constant. It changes from week to week, month to month. On the face of it, February was a rough month for U.S. economic data. Personal income for the month, released last week, fell by 7% during the month after a 10% rise in January. We should start with a word of caution around these monthly change figures, as they are quite misleading. As they are reported, they aren’t even particularly useful. Let us explain why.
In monthly personal income data, as reported by the Bureau of Economic Analysis, each month’s data is annualized. That includes the one-time $600 checks, which appear to have been almost entirely distributed in January. That made for a massive January, and a nearly as massive decline in February. The chart below instead tracks the level of personal income, both with and without special fiscal stimulus, indexed to 100 back in January 2019.
February also saw poor consumption figures, with spending down 1% during the month (also annualized). This decline reflected a drop in income from checks not hitting accounts like they did in January, but also the severe winter storms that restricted activity throughout the U.S. and particularly the South. This will likely be the worst month for consumption in a while, and we have reason to believe significant rebounds are on the way.
Perhaps a better way to sort through the noise is to just quote how much extra cash households have on hand now than a year ago. Personal saving as of February was $2.4 trillion, a massive $1 trillion increase from a year ago. And most importantly, the total does not yet incorporate the new stimulus checks being sent out in March. This “dry powder” will fuel the economy as it reopens, as we may be starting to see already.
March has been a very different story from February. Restaurant traffic remains the easiest measure of COVID restrictions, and the online reservation service OpenTable helpfully changed its data presentation to show the change in traffic versus 2019 to avoid the wild base effects of comparing to 2020, as most areas had close to zero activity in late March through May 2020. The presentation shows traffic is on the rise.
March mimicked the reopening pace we saw late last summer and should likely make new highs as the pace of vaccinations means a spike in COVID cases isn’t as likely as it was last fall. Hiring averaged nearly 3 million per month in the summer of 2019, with about 1 million per month hired in restaurants, bars and hotels. Another hiring boom is likely on the way.
The Census Bureau’s biweekly "Household Pulse Survey" is showing this as well. Over 15% of the nonretired population was not working in early January, a number that has declined by over 3 percentage points in the few months since. While business changes — i.e., improving business conditions — account for some of the improvement, the share of workers missing work due to COVID has fallen even more sharply, again back to September 2020 lows.
The rate of improvement here is drastic and should eventually become zero, hopefully by the fall or year-end.
Similarly, new claims for unemployment insurance have also started to reflect the improving environment. Initial claims fell to 684,000 last week, the lowest since the onset of the pandemic. While this number remains higher than any prior week dating back to 1982, it is still an improvement. This decline means fewer and fewer people are losing their jobs each week, though there still remains a massive number of workers who haven’t been employed for half a year or more. Those diverging trends are shown below.
These long-term unemployed tend to be the last to return to work, typically not reemployed until after the short-term unemployed return to work. This is perhaps the best picture of the exorbitant amount of slack left in the economy, which will likely remain the case even after a few good months of hiring.
But with this improving backdrop, and with new checks hitting accounts in March, households are at least starting to feel comfortable about their economic situations again. As seen below, also from the federal "Household Pulse Survey," the share of renters at risk of missing rent has declined back under 30%. This is still a highly elevated level, but marks a sharp improvement from December, and should continue as we move deeper into 2021
The massive headwinds of 2020 are turning into tailwinds in 2021, and the economic and labor market rebounds should be sharp. But don’t forget that we’ve got a long way to go to recover what was lost.
CoStar Economy is produced weekly by Robert Calhoun, managing director and senior economist, and Matt Powers, associate director of CoStar Market Analytics in New York City.