If the U.S. economy resembled any object, it’d likely be a broken traffic light.
That’s because the financial system has made significant progress at rebounding from the coronavirus pandemic-induced plunge in March 2020. Not only that, but the U.S. economy by sheer size is bigger today than before the outbreak began, with economists expecting the fastest rate of growth in decades — a clear green light for the financial system.
The question, however, is how long that pace can be sustained. The International Monetary Fund in October downgraded its global growth forecasts, referencing supply chain disruptions, waning fiscal stimulus and threats from the Delta variant. That comes nearly three weeks after the Fed, too, waved a yellow caution flag by revising their own forecasts lower.
Meanwhile, fears are also growing that inflation could burn red hot, as Americans pay higher prices on everything from airfares and hotels to rents, housing, groceries and vehicles.
Americans are greatly impacted by the U.S. economy because it influences their employment outcomes and how much they pay for goods and services.
Here’s four key measures that are worth paying attention to right now and how it could impact your wallet.
1. Job market: Employers are showing record demand for hiring, but not enough people are taking the bait
At first glance, the job market should be booming: Employers in August had a near record number of jobs to fill (10.1 million), and those outnumbered the jobless (7.7 million), according to the Department of Labor. The quits rate — the share of workers who voluntarily separated from their positions, a measure generally seen as a sign of economic confidence – soared to new heights in August (2.9 percent).
But take a look at other measures, and the story changes. Unemployment in September was still at elevated levels (4.8 percent) compared to before the outbreak, and close to 5 million positions are still missing from the economy. That’s after the pandemic leveled the job market, costing 22.3 million positions and causing joblessness to skyrocket to its highest level since the Great Depression (14.8 percent).
Economists reference changing worker priorities, leading to supply challenges rather than low demand for workers. Virus fears could be keeping workers on the sidelines. Remote learning, schools with quarantine protocols and child care restraints are weighing on Americans’ job prospects. Some workers may have retired, while elevated business formation in 2021 suggests others could be going into business for themselves. The Delta variant could also be inspiring workers to stay out of work. Workers who are on the job hunt might not have the skills that match up with available positions.
Illustrating those factors is a shrinking labor pool, with 3.1 million fewer people working today than in February 2020. Labor force participation in September also declined by 183,000 workers.
Another primary factor: Individuals are reevaluating what they want out of work. The industries most fragile to the pandemic have the highest quit rates, starting with food service and accommodation (6.8 percent) — part of the leisure and hospitality industry, which has a quits rate of 6.4 percent — while retail trade (4.7 percent) trails closely behind.
“That plays into the reassessment side of the story,” says Rhea Thomas, senior economist at Wilmington Trust. “The risks are higher in terms of contracting a virus [in those industries], and it’s part of the reason why people with those skills may not necessarily be able to easily into other industries, creating some of this friction in terms of being unable to match employees up with where employers are seeking more help.”
Meanwhile, the highest percentage of job openings are also in leisure and hospitality (16.4 percent), accommodation and food services (14.3 percent), and retail (11.4 percent), suggesting difficulties in replacing the workers who’ve left.
A Bankrate poll from August found that more than half (55 percent) of the labor force plan to look for new employment at some point over the next 12 months, with workers prioritizing flexible work arrangements such as remote work or adjustable hours, as well as higher pay and job security.
Companies are already having to hike worker pay, among them retailers and restaurants such as Target, McDonald’s, Under Armour and Chipotle. Average hourly earnings in September rose 4.6 percent from a year ago, according to the Department of Labor.
2. Inflation: Prices are heating up across the board, and experts aren’t sure when that pace will abate
It’s no secret that consumers have been paying higher prices this year. Almost nine in 10 Americans (or 89 percent) said they’ve paid more for goods and services this year, while two-thirds (66 percent) say it’s negatively impacted their finances, according to a separate Bankrate survey from August. Year-over-year consumer price increases have been at 13-year highs for six straight months, rising by 5.4 percent in September.
But what’s noteworthy is where the inflationary pressures are coming from. Prices aren’t just increasing on things like hotels (24.1 percent, on a 12-month basis), apparel (1.9 percent), meals at restaurants (4.7 percent), or concert and sporting event tickets (6.3 percent) — areas that would be more closely linked to the reopening of the economy. Americans are also having to pay more for meat (16.7 percent), gasoline (41.8 percent), rent (3.3 percent) and used cars and trucks (21 percent).
Home values: Prices are soaring for both owners and renters
Even more high-frequency measures tell the same story. The median one-bedroom rent is up 10.7 percent since March 2020, according to data from apartment rental site Zumper. Meanwhile, the median sale price of U.S. houses has soared for five straight months and reached a new record in the second quarter of 2021, rising by 16.2 percent from a year ago, according to the Census Bureau.
Economists say that once shelter prices are up, they tend to stay that way — and considering that housing is the biggest line in most Americans’ budgets, that could come as a detriment to consumers’ wallets if wage gains don’t compensate.
“We certainly see an environment where inflation could run above 3 percent through 2022,” says Jordan Jackson, global market strategist at J.P. Morgan Asset Management. “The shelter piece and wage pressures are probably going to be the primary drivers of what causes inflation to settle down at a higher run rate.”
That highlights the ultimate question when it comes to inflation: How long it will last. Consumers theoretically will work through all their pent-up demand and eventually spend all of the extra money that Congress awarded them through stimulus checks and fiscal stimulus. Yet, supply chain bottlenecks are lingering longer than expected, as virus cases continue to shut down factories across the globe and worker shortages reduce production.
“There’s a global traffic jam of goods affecting cargo ships, shipping containers, trucks and railroads. That’s leading to price increases,” says Mark Hamrick, Bankrate senior economic analyst. “Resolution of these complicated supply traffic jams doesn’t seem to be in the cards any time soon.”
3. What else to watch: Economic growth, consumer spending and inequality
Make no mistake: 2021 is going to be a record year for growth. Officials at the Federal Reserve are expecting that the financial system will grow 5.9 percent this year. That would be the fastest pace of growth since 1984. Even in 2022, the economy is geared up for above-trend growth, surging 3.8 percent in the year according to Fed forecasts, which would be the fastest since 2004.
By sheer dollar amount, the U.S. economy is now bigger than it was before the pandemic despite ongoing labor market troubles, rising by an annualized pace of 6.7 percent in the second quarter of 2021. That was in part thanks to record demand. Spending surged 12 percent, as consumers dined out, traveled and shopped again thanks to reopened businesses, vaccinations and leftover stimulus money. Record federal spending has also helped prop up growth this year, rising by an annualized pace of 4.2 percent in the first quarter of 2021.
But that growth pace is expected to slow by the third quarter of 2021, with the Atlanta Fed’s GDPNow tool putting growth at 1.3 percent in the quarter, with waning fiscal stimulus, production shortages and the Delta variant to blame. Fed officials have already downgraded their forecasts for the year to 5.9 percent from 7 percent growth, referencing those restraints in records of their September meeting.
“Growth here in the U.S. is still overall solid, but you did have Delta throwing a temporary wrench into the recovery and slowing some momentum that might have otherwise been there,” Thomas says. “Even without Delta, you would’ve expected that slowing pace of growth moving into next year. That fiscal boost is not expected to be here next year.”
Even as the economy heals, the recovery is feeling uneven for some of the country’s most vulnerable. Black unemployment is nearly twice that of whites (7.9 percent versus 4.2 percent), while 6.3 percent of Hispanic workers are jobless. Meanwhile, low-wage jobs declined more rapidly during the pandemic than middle- and higher-income positions, with employment in the lowest-paying jobs about 20 percent below pre-pandemic levels, according to the Fed’s May 2021 monetary policy report.
“The pandemic-related downturn exacerbated income and wealth inequality,” Hamrick says. “Even with a relatively rapid decline in the headline unemployment rate, now below 5 percent, the jobless rates for Blacks, Hispanics and teens remain elevated.”
4. The Fed: Officials are gearing up to back away from extraordinary accommodation
That tale of two economies could make the Fed’s job even harder, as officials want to avoid overheating the economy while also giving the labor market plenty of time to run.
Officials, however, are judging that it’s time to start backing away from stimulus. That will come in two parts — first by slowing its bond buying and second by eventually hiking interest rates.
The Fed’s asset purchase slowdown — a process known as taper — appears all but locked in, with officials in records of their September meeting judging that tapering could begin sometime in mid-November or mid-December and finish by the middle of next year. The Fed looks like it could reduce how many Treasury securities it’s buying each month by $10 billion and how many mortgage-backed securities it’s purchasing each month by $5 billion.
That matters for consumers because the Fed’s asset purchases have kept a lid on record-low mortgage rates. To be sure, the Fed would still be in a stimulative stance, just not as much as it was at the onset of the pandemic.
When it comes to rate hikes, the Fed is also growing less patient, with officials in September divided on a rate hike as soon as 2022. Investors are already bracing for them, with the majority of market participants betting on at least one rate hike by September 2022, according to CME Group’s FedWatch.
What to do with your finances
Tighter labor markets might incentivize employers to increase wages, but that’s only good news if inflation doesn’t outpace your raises.
If you’re a homeowner, one of the best ways to free up some cash to help backstop your wallet against inflation is refinancing your mortgage.
Given that no one can see the future, it’s important to remain focused on recession-proofing your finances. That includes prioritizing savings and building up an emergency cushion of cash in the event that you unexpectedly lose your income. Paying down debt and eliminating some discretionary items from your budget can also help free up some breathing room in your wallet.
“In some ways, the action plan for individuals or consumers at this stage of the recovery remains the same as ever,” Hamrick says. “Higher rates, absent out-of-control and lasting inflation, would be reflective of a more nominal economy. That’s another way of saying, a normalization of rates should be a welcome sign that some things are returning to, or at least closer to, normal.”