Economic outlook: inflation, labor, fiscal policy top of mind for seniors housing owners

Angela Mago, President, Key Commercial Bank and KeyBank Real Estate Capital, November 2021

Economic outlook: inflation, labor, fiscal policy top of mind for seniors housing owners

The seniors housing and healthcare sector showed remarkable resilience following 18 months of managing a pandemic that was especially devastating for their residents. However, recovery in 2021 is being hampered by compounding macroeconomic factors – including inflationary pressures, supply-demand imbalance, a tight labor market, and shifting federal policy. To help owners, operators and investors make sense of the disruption and what it may mean for their sector, the National Investment Center for Seniors Housing & Care (NIC) brought together leading economic minds at its 2021 Fall Conference.

Angela Mago, president, Key Commercial Bank and KeyBank Real Estate Capital, led a conversation between Lawrence H. Summers, former Secretary of the U.S. Treasury during the Clinton Administration, and Paul Krugman, economist and New York Times columnist, about the outlook for the economy and the capital markets. The experts discussed the prospects for rising inflation, labor market challenges and the direction of interest rates and fiscal and monetary policy.

The impact of stimulus on inflation

Mago asked Krugman and Summers to level set the impact of the pandemic federal stimulus programs versus their expectations. Both agreed that no one could predict with any surety the current situation. For Krugman, who was somewhat less concerned about the inflationary impact of the stimulus, he didn’t foresee the extent of the supply constraint or the unusually tight labor market – given that total employment is still below pre-pandemic levels, you wouldn’t expect employers struggling to fill open jobs. “I think that it was right to say that the stimulus was not going to cause an enormous overshoot over what we thought was going to be potential output, but potential output, at least for the moment, does not seem to be as high as one would have expected,” he said.

Summers, on the other hand, had his concerns about the effect of the stimulus confirmed, “It’s fair to say that the warnings I was giving last February that we would have substantial inflation coming into the end of the year have proved out. The administration’s budget called for 1.7% inflation over the 12 months of 2021, and the figure is likely to be closer to triple that.”

Regarding price increases, Krugman pointed to a “wild shift” away from services towards goods, without the logistical capacity to handle that shift. “At its peak, durable goods consumption in real terms was 34% above pre-pandemic levels, and now it's down to something like 10% above the pre-pandemic level. The supply chain issues just from that alone are likely to alleviate over the next few months.”

Summers noted that the demand for goods is running ahead of pre-COVID trends because household incomes have been enabled, and during the pandemic, using additional stimulus funds on vacations or other experiences or personal services was not possible.

Will inflation continue or reverse course?

Mago asked where they saw things trending in the fourth quarter and beyond, given that in the second quarter 2021, gross domestic product (GDP) was up 6.7%, and then amid disruption dipped to 2% in the third quarter.

“Right now, we’re looking at an economy with a record-level of vacancies, a record level of workers quitting, near record low interest rates…along with a substantial continuing boost from fiscal policy, plus a substantial overhang of wealth waiting to be spent,” said Summers. “I think that's a prescription for inflation staying at problematic levels both in product markets and asset markets.”

Krugman is more optimistic. “There are a lot of straws in the wind suggesting that third quarter was an air pocket.” He points to the microchip shortage and Delta variant as particularly disruptive, with the latter decelerating now. “If you think that the recovery is over, that’s not right, there’s still substantial growth coming.”

The ‘Great Resignation’ – when will the labor market even out?

The big question confounding economists and employers alike is when the labor market will start to stabilize. Despite 4.6% unemployment and 10 million open jobs, record numbers of workers are resigning or not yet returning to work1 – representing a mismatch of more open jobs than people looking said Mago.

Summers pointed out that though there are fewer people working, productivity measures are higher. “Making a judgment about what’s going to happen next depends upon whether we’re really getting productivity benefits, or whether we’re going to get signs of people who’ve been working unsustainably hard, have built up some assets and are going to leave. Nobody can know for sure what the right answer to that is.”

“Probably a lot of what we’re seeing is not people planning to be permanently out of the workforce, but people just searching longer and harder for a good job and that in itself is pro productivity,” responded Krugman. “Lack of cash has in the past led to people taking jobs too soon and not seeking their most productive occupation. So there may be a productivity gain that comes out of all of this.” 

He notes that the fact that real GDP is back to pre-pandemic levels whereas real employment is not as evidence of this scenario. 

Mago asked what the seniors housing industry – which was already facing a labor shortage pre-COVID – can do to lure back some people who went into early retirement or quit jobs during the pandemic. Krugman says COVID fears are still playing a role in reluctance to return to work, particularly for frontline jobs in seniors care.

“I am of the belief that the biggest single solution to everything that’s going on is vaccination. As more people get vaccinated, people become more willing to consume services, and people get more willing to supply services as well, which takes pressure off the supply sector as well,” he said.

“Some people are going to run out of money, feel less nervous about COVID, and they’re going to tend to go back to work,” said Summers. “On the other hand, some have rethought their lives, adjusted to retirement, and they’re not going to go back. I’m less optimistic from the point of view of labor supply about how that is going to play out.”

He believes “the cure for high prices is high prices,” and wages will have to be pushed up. He says other incentives such as hiring, retention and referral bonuses that many employers tried to leverage will no longer be enough. Krugman agreed, “There was a period there when employers in general tended to say, ‘We should be able to find ways of getting workers without raising base wages.’ And that era is coming to an end.”

What will the Federal Reserve do with interest rates and monetary policy?

With the Federal Reserve recently announcing the tapering of quantitative easing (QE) policies2 beginning with reducing its assets purchase program, Mago asked what changing monetary policy meant for interest rates. “As we think about short-term rates, I think the futures market would suggest two 25-basis-point increases over the next year,” she said.

“Announcing the taper is a signal that – barring something very unlikely – they will not raise rates before the middle of next year,” said Summers. “I think the market's forecast that interest rates will go up twice next year, and then very slowly after that, are too optimistic in terms of interest rates staying low.”

Krugman said, “Two years down the road, we are very likely be back where we were before the pandemic, which was a world of savings, all dressed up with nowhere to go. Real interest rates were at a historic low, and even that was not enough to generate enough investment. We were basically only able to have anything like full employment with a combination of deficits and rock-bottom interest rates.”

He says the danger in moving too quickly to raise rates is that we end up with a weak economy heading back into the return of secular stagnation. “We know how to deal with inflation. We don’t actually really know how to deal with secular stagnation.”

Summers would like to see the Fed move more quickly, “I think there's no reason why the taper shouldn't be a three- or four-month effort, rather than a nine-month effort so as to preserve substantially more flexibility.”

He notes that when you look at five-year budget forecasts, some of the secular stagnation is priced into the market. “Those forecasts are that we're going to have a 6 or 7% of GDP deficit and with a real interest rate of negative 50 basis points. And those forecasts are that the economy is going to kind of be growing normally.”

Economists’ view on the Build Back Better Plan

Both Summers and Krugman expressed disappointment that the paring back of the “Build Back Better” infrastructure and budget reconciliation bill would be viewed as failure, when, in fact, the bill still represents a significant achievement with important actions for the climate, healthcare and social safety programs.3

“If life gets better and children are being taken care of, and infrastructure is improving, that’s what people will notice,” said Krugman.

Final thoughts

Mago asked Summers and Krugman to sum up what gives them reason for optimism as this uncertain year comes to an end. “I would rather be playing the hand that the United States has than the hand of any other major country in the world,” said Summers.

Krugman expressed similar sentiments, “I think in the end, the quality of policy is going to be a lot better than seemed likely a year ago. And so that's a source of hope. And of course, this is America. We have always managed to come back. We have always managed to reinvent ourselves and you know, our luck may not always hold, but I think it will hold this time.”

For more insights and counsel on how national economic trends and Federal Reserve policies are affecting seniors housing and healthcare finance, reach out to your mortgage banker, or connect with Kevin Murray and Matt Ruark.


NPR: “The labor market is back on track after 531,000 jobs were added in October,” November 5, 2021.


Reuters: “Federal Reserve’s taper: How does it work?” November 3, 2021.


New York Times: “House Narrowly Passes Biden’s Social Safety Net and Climate Bill,” November 19, 2021.

This document is designed to provide general information only and is not comprehensive nor is it tax or legal advice. If legal advice or other expert assistance is required, the service of a competent professional should be sought. KeyBank does not make any warranties regarding the results obtained from the use of this information. This may contain forward-looking statements, which involve risk and uncertainty. Actual results may differ significantly and speak only as of the date they are made or will be, and Key does not undertake any obligation to update the forward-looking statements to reflect the new information or future events. is a federally registered service mark of KeyCorp. KeyBank is Member FDIC. Credit and lease products are subject to credit approval and may be subject to collateral approval.

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