The Second Quarter Outlook: What's Next for the US Economy?
ADP's Chief Economist Nela Richardson shares her thoughts on what kind of workforce trends may be observed in the second quarter of 2021 as government spending ramps up, the economy shows signs of growth and companies consider the future of remote work.
As the vaccine rollout continues, we are seeing signs of life in the economy, such as the country creating more than 900,000 jobs in March. Is this the start of a sustained recovery, or are we still not out of the woods yet?
Nela Richardson, Chief Economist at ADP, shares her second quarter outlook on what she thinks might be next for workforce trends and the US economy.
Q. What's next for the economic recovery?
Richardson: "The expectation that I have is that the expansion will continue. The March jobs report showed the slump is starting to recede, as the COVID numbers to date have been improved by the vaccine rollout. COVID has always been in the driver's seat for this recession. As long as the number of cases, hospitalizations and deaths continue to decline , we should see some pretty strong jobs numbers in the near future.
With that said, even 916,000 jobs created last month only the start of a trend that needs to continue to get back to pre-COVID levels of employment. We are still 8.4 million jobs behind where we were before the pandemic. Remember, these aren't jobs gained but rather jobs recovered. The people coming back to work are those who were laid off during the pandemic.
We shouldn't plant the mission accomplished flag just yet. It hasn't been all good news, as jobless claims still went up to start the spring and though they've declined again recently there still way too high and a reminder of just how vulnerable the recovery may be.
There are reasons to be optimistic, though. The government passed $1.9 trillion in new spending this year, and they're already bipartisan discussions of more government investment in infrastructure improvements to strengthen the economy longer term. Savings rates are high and house debt is low compared to historical averages and there's plenty of pent-up consumer demand – which could lead to a jump in consumer spending in hard hit sectors like leisure and hospitality and travel. Once things improve around the pandemic, we'll see people spending instead of saving, which is good for the economy."
Above: Nela Richardson in MainStreet Macro: Half Full or Half Empty?
Q. What do you see for the economy long-term?
Richardson: "Even though economists expect strong growth and a rebound in 2021, this is not likely to be a long-term trend. Chances are good that 2022 and 2023 will return to the lackluster growth patterns of the previous expansion. In other words, we'll go back to being the tortoise, not the hare.
It's the gravitational pull of U.S. growth. We're dealing with demographic challenges of the Baby Boomers retiring, as well as struggling with productivity. Can we return this country to more than 3% of growth per year? While business investment has improved, even the tax cut passed in 2017 wasn't enough to get us back to 4% or 5%.
There's a production void that could be filled by more private sector investment or more government spending, and it needs to be filled if we're going to expand past 3%. That's where the optimistic view of the Biden infrastructure plan comes in, the ability to use government investment to boost the nation's long-term capacity."
Q. What's next for workforce trends?
Richardson: "We went from negative job growth in December to nearly a million jobs gained in March. The recent gains were widespread, so that should give folks some comfort that jobs aren't coming only in one industry. We're also seeing a lot of workers come back into the job market for roles that couldn't be done remotely, like in hospitality.
Employers should be watching the permanence of pandemic trends, such as the shift to spending online instead of retail. I don't think people will all go back to in-store right away. Some of the changes made during the pandemic might keep going. In other words, don't kill your Zoom app just yet.
Many industries had a seamless transition to working remotely. These employers now have a choice about whether they bring everyone back to the office. Does it hurt workplace productivity to keep everyone remote? Does allowing work-from home create a competitive advantage for hiring? These are some of the questions companies need to answer for their post-pandemic workforce plan.
Last, we know that inflation is going up as the economy improves. The debate is whether the economy will grow so quickly that it leads to tightness in the job market, causing wages spike too. That is not a concern I have. There might be a transitory increase, and we may see some prices go up for things like lumber and semiconductors that are in short-supply, but I think those prices will get slack as soon as production catches up. Any pickup in inflation will likely be moderate."
Q. What economic indicators should we keep an eye on?
Richardson: "Consumers are the engine of growth for the U.S. economy, and that hasn't changed during the pandemic. I'd be watching two things with consumers: First, retail sales. Make sure they keep improving and don't backtrack. We saw retail sales fall when COVID cases went up in December.
Second, watch consumer balance sheets, which currently look strong. Savings are high, and the ratio of disposable debt to disposable income is low compared to historical averages. While some people have been harder hit, the aggregate consumer is in good shape.
Something else to watch is the type of consumer spending. We've shifted purchases more toward goods like auto and luxury items because people couldn't go on vacation. I expect consumers to shift spending back to the services they had to cut back on: concerts, haircuts, baseball games, etc. Services are a bigger part of the economy, so we want to see a shift back to this type of spending.
We still don't know how many businesses will survive this pandemic. We'll need to count the casualties once this is all over. The PPP extension should be another lifeline until the full reopening helps firms return to full capacity."
Q. What do you find encouraging about the future outlook?
Richardson: "One thing I found encouraging was the recent increase in education hiring. We know the shift to remote learning was a real albatross for women staying in the job market. That spring hiring could lead to more women returning to the labor force, and having full childcare could help as well.
The Biden stimulus plan will be part of the discussion over the next three months. There's bipartisan support for spending — less support for paying for it. It won't be like the quick relief bill that we saw earlier. The last three presidents all tried to launch more infrastructure spending, but the real challenge in getting that across the finish line is how to pay for it.
The advantage of infrastructure spending is that it gives a short-term boost in jobs and also pays for something that could increase productive capacity in the future.
What's exciting about this infrastructure plan is that it's not just roads and bridges. It calls for 100% access to broadband. Whether you're in a rural area or a city center, you should be able to run your online business. I think that's a game changer for the economy and for parity, as the future is digital and in the cloud."
For more of Richardson's insights and updates on the most recent economic trends, you can visit her Main Street Macro blog.
