December 2, 2020

Recovery on Fast Foward

By Michael McKeown, CFA, CPA - Chief Investment Officer

Recovery on Fast Foward

What is the difference between the last two economic recoveries? In 2008, we had an implosion of the financial system.  This time we had a shock outside of the system due to the pandemic.

Each cycle is different in its causes, conditions, and consequences.

In 2008, it took eight months until the government stepped in with programs and the Fed enacted emergency program.

In 2020, both the fiscal and monetary sides of the government responded in a matter of weeks.

The labor market improved in the last four months 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 when compared to the last economic recovery.

This likely means the labor market is going to be challenging for some employers, sooner than the last cycle. 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 last half-century.

While there were 8 job-seekers per job opening following the last recession, now there are only about 3. This indicates tighter labor supply available to companies.

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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