Courtesy Adobe Stock/sdecoret
sdecoret Courtesy Adobe Stock/sdecoret

The tailwinds for the U.S. economy have forecasters giddy with enthusiasm. The combination of taming COVID-19, increased savings, pent-up demand, and the revitalization of the service sector has led some to say we are in a “goldilocks” economy. However, things can still improve from here, as the economy claws back the pandemic-induced losses and significant positive momentum pushes us toward future growth.

The K-Shaped Recovery and the Coronavirus

To step back, as the COVID-19 pandemic upended the world in March 2020, the economy shifted from the lowest unemployment rate in 50 years to the highest level since the Great Depression in just a matter of months. Economists, analysts, and market pundits scrambled to make sense of the pandemic-induced recession and prognosticate on how the recovery might evolve. Ultimately, the economy unfolded in what is known as a K-shaped recovery, one that has winners and losers.

The goods economy, including retail, autos, and housing, all fall under the winners’ category in the top half of the K. This group captures people and industries that, after a brief pause, survived the depths of the pandemic and eventually thrived in the following months. The losers in the bottom half include the service sector of the economy such, as travel, tourism, conferences, concerts, restaurants, and bars. Over the past year, we’ve emphasized that the virus will determine the fate of the economy. As more Americans get vaccinated (over 100 million have had at least one dose to date), the revitalization of the bottom half of the K is expected to accelerate.

To say we are currently in a goldilocks economy is perhaps a bit too soon, but we are certainly heading toward one. The U.S. economy is improving in a rapid, healthy way, fueled by increased consumer confidence, as well as trillions of dollars in both fiscal and monetary stimulus. With the aforementioned top half of the K thriving, we are watching two main things in the coming months: pent-up demand and jobs.

The Return of Consumerism

The revival of the service sector is critical for a prosperous economy. During the worst of times last spring, spending in the service sector was down 20% year over year. Today, that figure is down 7% compared with the same month last year, according to the Bureau of Economic Analysis.

Real-time indicators capture a similar improvement and show the rebound is well underway but not yet complete. For example:

  • OpenTable reservations are off just 24% year-over-year nationally. This is a drastic improvement from earlier in the recovery when volumes were off 80% to 100% compared with pre-pandemic levels. This data is very location specific, however, with many top metros in Florida now fully recovered.
  • Passenger traffic at airports reached almost 1.6 million people in early April, the highest since the start of the pandemic. For comparison, passenger traffic was just 130,000 last year but was nearly 2.5 million during the same time in 2019.

Driving the growth is pent-up demand and widespread savings. Americans, both employed and unemployed, saved at unparalleled levels in 2020 and early 2021. The personal savings rate remains elevated at nearly 14% of disposable income compared with a pre-pandemic average of 9%. It is estimated that trillions of dollars in excess savings will flow into the economy in the coming months.

Labor Market Is Improving for the Hardest-Hit Groups

U.S. gross domestic product, the broadest measure of economic growth, is expected to return to pre-pandemic levels by the middle of this year driven by the increased consumerism discussed above. The labor market, however, has a much steeper climb. Total nonfarm payrolls are 62% recovered compared with last year, leaving 8.4 million people still out of work. Sectors like construction and trade are the most recovered, with hospitality and education among the least. The latter groups are the ones to watch, though, as they are expected to rebound the most in the coming months due to:

  • More in-person activity. The leisure and hospitality sector remains the hardest hit in terms of total job losses, with 3.1 million Americans in this category still out of work compared with prior pandemic levels. Job losses and gains in this sector are closely tied to trends associated with the coronavirus, and with the faster-than-expected vaccine rollout in the U.S. as well as demand picking up, we expect to see robust hiring throughout spring and summer.
  • Women back at work. The pandemic disproportionately impacted women in the workforce as schools and day cares closed or remained open but with limited capacity. Some women may choose to permanently remain out of the workforce, but, for those looking to return, the March jobs report offers some promising news; not only did employment in public and private education increase as states opened back up, but the unemployment rate for women dropped below 6% for the first time in 11 months.

In addition to seeing hiring where the economy needs it the most, job openings are also at the highest level since January 2019, with 7.4 million listed across many sectors, according to the Bureau of Labor Statistics. The fate of filling these openings will depend on two opposing forces, as those individuals eager to get back to work face competition in their job search, while others are either unqualified for select jobs or are reluctant to return to work for various reasons, including generous unemployment benefits.

Returning to our original question, while we are not there yet, the goldilocks economy is forming with broad-based enthusiasm for growth over the coming year. So far, spending in the goods economy is up 9% year over year, and real-time data shows that the service sector is not far behind, with certain markets significantly outpacing the national figure. With that said, risks undoubtedly remain. Unexpected changes with the virus, economic scarring, rising interest rates, slower growth than anticipated, and/or a waning of stimulus-induced spending could threaten a full recovery, but, as it stands, the good is outweighing the bad, and a goldilocks period is on the horizon.