Recovery on Fast Forward

What is the difference between the last two economic recoveries? In 2008, we had an implosion of the financial system from the inside. In 2020, we had a shock outside of the system due to the pandemic. Economic cycles are different in their causes, conditions, and consequences.

In 2008, it took eight months until the Congress stepped in with fiscal spending and the Fed enacted emergency monetary policy. This time, both the fiscal and monetary sides of the government responded in a matter of weeks.

The labor market improved in four months of 2020 as much as it did in four years following the 2008 recession. The chart below shows the sharp rise and fall in the unemployment rate.

Vaccine news continues to be positive. Some experts predict that by mid-2021, a large portion of the population will be vaccinated, the expectation being that the second half of 2021 will see a normalization of activity.

This bodes well for the unemployment rate, which should continue to fall. It is already at the levels of late 2013 compared to the last cycle, which took four years to reach following the economic recovery that began in 2009.

This likely means the labor market is going to be challenging for some employers soon. As shown in the next graph, about one third of companies are having trouble filling positions. This is near the highest levels seen in the past half-century.

While there were eight job-seekers per job opening following the last recession, now there are only about three. This indicates tighter labor supply.

If the labor market remains tight and continues improving as expected, we can also expect to see wage growth. In turn, this could trigger inflation and put pressure on the Federal Reserve. The Fed’s new policy framework allows inflation to run hot (above the 2% target for a period of time, to make up for the shortfall in recent years). There are tools the Fed can use to keep a lid on interest rates if inflation begins to surprise on the upside sooner than later.

While the future can always bring surprises, the current path looks promising for the economic recovery.

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