This will be a strange Christmas in America. Gloom at the virulence of the new outbreak of Covid-19 shares the stage with joy at the distribution of vaccinations that will ultimately beat the virus. Joy at the arrival of the holiday season is offset by warnings from politicians and the health-care bureaucracy that family gatherings can be super-spreaders of the virus. Stay home, away from loved ones, or get together, keep your distance and blow air kisses through face masks.
What really makes this coming Christmas so strange is the conflicting messages the economy is sending:
* The net worth of US households rose 3.2% in the third quarter, to a record high, while miles-long lines of cars formed at food banks, reminding us that a person can drown in a lake with an average depth of three feet;
* In anticipation of Christmas joy Americans bought a record number of Christmas trees and associated baubles, while clearing store shelves of antacids (Tums, Pepcid, other famotidines) to cope with added stress from job insecurity and enforced family separation;
* Sales of new houses are rising so fast that builders have already sold 90% of the homes they are planning to build – housing starts up a surprising 12.8% over last year – and could build more if they could find workers, while more than 10 million workers remain without jobs, and many drop out of the labour force.
* Consumer confidence is falling, access to stores is restricted, deliveries are disrupted by storms in the East, and in November retail sales of appliances, clothing and other items fell, while Americans bought so much stuff from China that imports (toys, electronics, masks) from our communist rival were up 46.1% in November over November 2019;
* New claims for unemployment insurance rose to 853,000 in early December, although the economy continued to grow, with Amazon alone adding almost half-million workers, including software and hardware specialists. Not counting 100,000 temporary employees and 500,000 delivery drivers who are contract workers.
* Failures of small businesses are at record levels, especially in person-to-person service industries (think neighbourhood spas, hair salons and restaurants), while formation of new small businesses hits new highs.
Federal Reserve Board chairman Jay Powell and his team have weighed the good (housing), the bad (a softening economy), and the ugly (the labour market), peered at their foggy crystal balls, and decided that the economy will grow at annual rates of 4.2%, 3.2% and 2.4% in 2021, 2022 and 2023, respectively. That should drive the unemployment rate from this year’s 6.7% to 3.7% by 2023. Inflation will rise at an annual rate of only 2% or less, permitting the Fed to keep interest rates low. Add the passage of a new trillion-dollar relief package, and only the very greedy could ask for more.
Or those who will be left out of that recovery. This is the best of times for some – Goldman Sachs estimates that the richest 1% of American households whose $21.4 trillion in equities account for 56% of the total equities owned by US households, have seen that portion rise from 46% in 1990, driven by a double-digit rise in house prices and a 15% jump in share prices this year.
And it is the worst of times for others. Between 2.4 and 5 million renters face eviction next month when the current moratorium expires. And the National Restaurant Association reports that 100,000 restaurants (1 in 6) closed in the first six months of the pandemic, laying off 3 million workers. The current, new wave of closures ordered by government officials with assured pay checks and pensions, will certainly increase that total, especially since it comes after some restaurants stocked up at considerable cost and re-opened only a few months ago.
In sum, we have a K-shaped recovery, with some on the upward pointing part of the letter, others on the downward part. It is that problem that Powell intends to address within the limits set by the Fed’s statutory powers. More important, because the powers of a treasury secretary to cope with inequality are substantial, Janet Yellen, nominated by Biden to that post and certain to be confirmed, has long spoken out about the need to address that problem. As treasury secretary she will have a great deal of influence on tax policy, which she will help Biden shape to produce the low unemployment rates that Powell has set as the goal of Fed policy. And to begin an attack on inequality by taxing high earners without slowing growth. Yellen has the wit and authority to help Biden persuade reluctant Republicans that such taxes need not stifle economic growth.
Few things help low earners more than full employment, which Yellen believes exists only when joblessness is so low that many economists fear inflation is about to rear its unlovely head. Which is why she kept interest rates lower for longer when chair of the Fed, and will support Powell’s reappointment when his term as chairman expires in 2022.
“Everything’s coming up roses” warbled the exuberant Ethel Merman in the Broadway hit, “Gypsy”. Powell said more or less the same thing, in a more subdued manner. He promised that “not until the recovery is complete” will the Fed “put its tools back in the box.” Yellen will help him keep those tools unboxed until lives improve for those who will find a lump of coal in their stockings this Christmas.