Economic Outlook

September 28, 2021

Bruce McCain

Economic Outlook

Vaccines have begun to normalize U.S. economic activity, but the progress is taking longer than hoped. Some obstacles include hesitance towards taking the vaccine, questions around booster shots, and the vulnerability of new virus strains that evade the vaccines. The reality is that we remain locked in a race against time and do not know when we can overcome the residual impact of the virus.

In the meantime, economic progress has been both remarkably good and hobbled by a range of crippling shortages. The shortage of computer chips has stalled auto production and even threatened iPhone production. COVID outbreaks have caused problems in Malaysia. We are also finding that some supply chains are lean and efficient but not resilient. Going forward, the reliability of supply lines will need to be a greater consideration. That is particularly true for essentials such as medical supplies and other critical needs.

Perhaps the most remarkable shortage to date, however, is the broad shortage of labor. The shortage of nurses and other healthcare providers does not seem surprising in a pandemic, but restaurants and other businesses are limiting their hours of operation and the options they offer because of the lack of help. In addition, labor shortages stress existing staff to the point that turnover becomes more disruptive.

In December of last year, nonfarm payroll data showed we had 10 million fewer jobs than just before the pandemic. Hiring this spring reduced that number to just over 5 million fewer jobs. While that suggests a lot more people should be available for work, Federal Reserve Bank of Dallas President Robert Kaplan reportedly thinks that between 4 and 4.5 million people have either retired or are tied up with caregiving responsibilities. That would be a sizeable gap to fill quickly.

Prolonged labor shortages could also lead to broader inflation. Although the strength of inflation has surprised the Federal Reserve and many economists, most think that price increases will subside soon. They may be right, but the last time we saw a broad inflationary spiral, it was fed by strong wage growth. Eventually, labor shortages tend to spark wage increases, and faster wage growth tends to encourage stronger consumer demand. However, when producers cannot increase, or even maintain production, they tend to protect or expand profits by raising prices. Chip shortages and supply chain constraints can hopefully be resolved soon, which should reverse some recent price increases. To the extent that the labor shortages reflect longer-term demographic changes, however, the inflationary pressures from labor may be much harder to contain.

Real GDP hit a new high in the 2nd quarter. It has been a remarkable recovery from what once looked like it would be a disastrous economic decline – and the expansion continues. Consumers and businesses remain cautious, but that often helps avoid the sort of exuberance that ultimately brings cycles to an end. To be sure, the pandemic has not been fully conquered, shortages bedevil producers, inflation poses a worry and the massive amount of worldwide monetary and fiscal stimulus may yet have unintended consequences. Ultimately, however, economies are adaptive mechanisms, and for now the U.S. economy seems be adapting reasonably well.


Although consumer sentiment has recovered significantly from the pandemic low, consumers remain cautious. The University of Michigan Consumer Sentiment Index shows that sentiment recovered from a pandemic low scoring at the 14th percentile of the range of scores for that index since the year 2000, to a high in April of this year that would rank at the 51st percentile. Just before the pandemic, the reading ranked at the 95th percentile of the sentiment range. Recently, as the number of coronavirus cases has again risen, the sentiment index dropped back to where it was when cases spiked at the end of last year, around the 34th percentile.

Wages and salaries have risen at a compounded annual rate of 4.2%

Although many commentators found July’s job number disappointing, the strong economy has added roughly 5MM jobs during 2021

Financially, the consumer picture is much brighter. National data shows that, in aggregate, household incomes have recovered from the pandemic downturn. Off the peak prior to the pandemic, total wages and salaries have risen at a compounded annual rate of 4.2%, which exactly matches growth over the course of the last economic expansion. Although many commentators found July’s job number disappointing, the strong economy has added roughly 5 million jobs during 2021, and the strong need for more workers bodes well for continued jobs gains and stronger income growth.

In addition, the financial suffering normally associated with recessions has been mitigated by massive amounts of federal money. Total income from all sources, which includes government transfer payments (i.e., welfare, Social Security, financial aid), rose at a compounded rate of 6.3% off the pre-pandemic peak. For comparison, over the last economic cycle, total personal income grew only 4.3% ar (annualized return). In other words, as aggregate wages and salaries matched their pre-pandemic growth rate, total personal income rose almost 50% faster than it did in the last expansion.

While spending growth has not quite matched income growth since the pandemic began, it has nonetheless been robust. Consumption fell sharply in the initial months of the pandemic, but has bounced back strongly. The 17.9% annualized gain over the first seven months of 2021 completed the recovery that began in May of 2020. Overall, through July, consumption spending increased an annualized 4.9% off the spending peak before the pandemic began, which is a full percentage point better than the 3.9% annualized gain over the course of the last economic cycle.

Retail sales have done even better, growing 11.1% ar off the pre-pandemic peak compared with the roughly 4.3% ar retail sales grew over the last economic cycle.

The combination of strong wage recovery and massive federal spending has allowed consumers to both spend and save more. Government data shows that consumers have improved their balance sheets by about $2.5 trillion since the start of the pandemic. While all of that will not probably flow directly into spending, large savings cushions encourage spending growth. Beyond directly fueling spending, savings reserves also allow consumers to feel more confident spending other disposable income gains. That could be important if wage gains accelerate.

Business activity

The National Federation of Independent Business (NFIB) reports that small business owners have become less optimistic. Part of that likely reflects a deteriorating outlook for the economy, as 20% more small businesses now expect general business conditions to deteriorate over the next six months than expect them to improve. Over the last few years, the net percentage expecting improving conditions has typically been much more positive, with net scores as high as +50%.

Part of the reduced optimism may reflect the extreme difficulty smaller firms are having hiring and retaining qualified help. The NFIB reports that 50% of small businesses currently report having positions they cannot fill, compared with a historic average of 22%. In a September 2 press release, NFIB’s Chief Economist Bill Dunkelberg said, “Small employers are struggling to fill open positions and find qualified workers, resulting in record high levels of owners raising compensation.” He added, “Owners are raising compensation in an attempt to attract workers and these costs are being passed on to consumers through price hikes for goods and services, creating inflation pressures.” The NFIB also reports that 91% of firms trying to hire found few, if any, qualified applicants.

“Owners are raising compensation in an attempt to attract workers and these costs are being passed on to consumers through price hikes for goods and services, creating inflation pressures.”

– Bill Dunkelberg, NFIB Chief Economist

The profound shortage of labor extends across a broad range of industries and jobs. Shortages of both highly skilled and less-skilled workers are forcing employers to restrict hours or otherwise restructure operations. Some have blamed pandemic fears and caregiver complications. Others point to generous unemployment payments. The breadth of shortages, however, suggests that demographics may also be part of the problem. Total nonfarm payroll stands five million jobs short of the peak in early 2020. The Wall Street Journal recently reported that Dallas Fed President Robert Kaplan thinks the U.S. has “lost somewhere between 4 or 4.5 million workers” to retirement or caregiving responsibilities. Other estimates suggest that retirements may account for about half of that amount. Interestingly, the baby boom generation began retiring about ten years ago. Over that time frame, the NFIB data show the percentage of firms unable to fill positions started around 10% and has risen rather steadily ever since, to the current reading of 50%. A demographic perspective suggests tight labor markets may remain a major problem for some time.

Automation is one solution to labor shortages, so strong industrial and technological spending should help the economy adapt. Spending on computer and peripheral equipment has risen 16.1% ar since the end of Q1 2020, compared with an increase of 4.2% ar over the last cycle. Over the same time, software spending, up 9.5% ar, has also done well against its historic average of 6.6% ar. And some of the strong spending on industrial equipment (13.6% ar vs a historical average of only 4.4% ar) may provide automation that will reduce the labor required for future production.

Industrial production has also improved. After a brief pause earlier this year, stronger industrial growth has continued. Industrial production stands just below its level prior to the pandemic, while manufacturing is very close to its level in early 2020. For the year as a whole, both areas have grown at rates roughly five to six times their historic growth rates. Additionally, while oil and gas drilling still stands well below its prior peak, it continues to record extremely strong growth, rising 47.0% ar in the 2nd quarter alone.

Exports and international economies

Most developed economies struggled through the 1st quarter, and U.S. exports were comparatively weak. In the 1st quarter, the inflation-adjusted value of exported goods and services declined 2.9% ar. In contrast, the import of goods and services for the quarter rose 9.3% ar. The balance of imports relative to exports improved in the 2nd quarter, however, as growth strengthened for many major trading partners. The export of U.S. goods and services rose 6.6% ar, while the import of goods and services increased 6.7% ar. In total, for the 1st quarter, the net effect of exports relative to imports reduced overall GDP growth by 1.6%, while in the 2nd quarter the net drag on GDP was only 0.2%.

The pandemic continues to complicate international production and shipping. Hopefully, the constraints will ease as people around the world can receive vaccinations against the coronavirus. That will take time, but the developed world’s progress has been striking. Three months ago, most developed countries lagged the United States in vaccinations. Coronavirus cases were spiking, and officials struggled to get adequate vaccine supplies. Now, most countries have a substantial lead over the 53% of the U.S. population that has been fully vaccinated. While vaccination rates are not the only factor that affect economic growth, what once may have been a disadvantage for other developed economies has probably become a somewhat positive advantage.

Having been slow to negotiate deals for the vaccine and then suffering acute production problems just as the Delta variant began to invade, Europe had a difficult spring. But they now report that roughly 61% of the population in the major countries have been vaccinated. An economic decline of 1.3% ar in the 1st quarter reflects the difficulty of that time, while the 8.2% ar 2nd quarter growth suggests conditions have improved significantly. While the Markit PMI readings have moderated just a little, a reading of 61.4 for the Manufacturing PMI and 59.7 for the Services PMI suggest a strong outlook for the region.

Retail spending has grown 11.1% ar off the pre-pandemic peak versus 4.3% ar retail sales over the last economic cycle.


May 2020-Dec 2020


through July 2021

Having been hit hard by multiple waves of infection, the United Kingdom was aggressive about vaccinating its citizens and about instituting lockdowns. A strong 65% of their population has now been fully vaccinated. Still, that did not save their economy from a miserable 1st quarter, with a reported annualized decline of 56.4%. The large decline, however, did set the stage for a strong 81.1% ar rebound in the 2nd quarter. Looking forward, the outlook for manufacturing looks solid with a Markit Manufacturing PMI of 60.3. The outlook for the services sector has softened a little, with the Services PMI falling from 59.6 to 55.5, but the lower score still predicts solid growth.

Many in Japan undoubtedly wish their country had skipped the Olympics. The event was very costly and came at a time when coronavirus infections were rising and the country had not been broadly vaccinated, leaving a spike of coronavirus cases in its wake. Currently, about 48% of Japan’s population is fully vaccinated. Japanese growth declined 3.7% ar in the 1st quarter and rose a modest 1.3% ar in the 2nd quarter. The outlook also seems weak. A manufacturing PMI of 52.7 forecasts modest growth, but the sinking services PMI, now at 43.5, forecasts a decline of service spending.

China has also reportedly had trouble managing outbreaks of the Delta, although official statistics show no major problems. Initially slower to inoculate its citizens, China now reports 64% of the public has been fully vaccinated. Notably, however, most of that has been with China’s domestic vaccine, which some think is less effective against the Delta strain. There have been broad signs that Chinese firms have had difficulty getting all the workers they need, which has complicated global product deliveries. Nearer term, concerns about inflation have led authorities to limit government stimulus, but rising demand from the United States and Europe continues to drive China’s exports. A Markit Manufacturing PMI of 49.2 suggests manufacturing momentum may be waning. Conversely, a gain in the Services PMI, to a solid 54.9, implies domestic growth may help to pick up any slack.

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Bruce McCain
About Bruce McCain

Bruce McCain serves as a consultant providing perspectives on the economy and the market to both investors and business operators. He has appeared regularly on CNBC and Bloomberg providing market perspectives and has been quoted in The Wall Street Journal, Investor’s Business Daily, and MarketWatch as well as published articles on He retired from KeyBank in 2019 after 32 years.

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