Like the impending death of Mark Twain, the recent commentary suggesting that this economic expansion has lost its life is considerably overstated. Much has been said about the uptick in new claims for unemployment insurance, shown in the chart below, and its link to the restoration of restrictions by many governments in response to the COVID outbreak.
Meanwhile, the number of people continuing to collect unemployment insurance has leveled off after months of steady declines, shown next. This implies that the number of people leaving the unemployment insurance program has been about the same as those joining the rolls. It should be noted that the continuing claims data lag the new claims data by one week, and that technical adjustments to remove variations attributable to seasonal factors—such as the current holiday season—are particularly difficult around year-end. This is likely to be an even greater problem this year because many retailers are not ramping up hiring as they typically do in late November and December. In other words, weekly unemployment insurance data need to be treated with an even bigger grain of salt—and the labor market may be stronger or weaker than these charts suggest.
As highlighted in recent blogs on the economy, this expansion has been very uneven. Some sectors of the economy have done quite well since the onset of the pandemic while others have experienced major setbacks. Particularly hard hit have been those affected most by social distancing in the service sector—restaurants and bars, airlines, hotels, retail stores, and entertainment. Small businesses have been disproportionately represented in these sectors and have been set back the most by the pandemic.
Shown in the next chart, is the monthly small business optimism index published by the National Federation of Independent Businesses. The optimism index plunged in the spring but has mostly recovered since and stands above its longer-term average. The November downtick has been attributed to renewed uncertainty after the election and forthcoming COVID-related restrictions.
More insights can be gleaned from a recent survey of small businesses taken by the Census Bureau, shown next. It shows that nearly half of all small businesses surveyed experienced moderate negative effects of the pandemic while nearly one-third of the respondents experienced large negative effects. The remainder, one-fourth of small businesses, were unaffected or actually gained from the pandemic.
The next chart shows where small businesses have been affected most. These are the states that have imposed the most stringent restrictions—New York, New Jersey, Pennsylvania, Michigan, Illinois, New Mexico, Nevada, California, Hawaii, Alaska, and the District of Columbia.
Summing up, much of the small business sector remains upbeat despite the toll that has been taken by a substantial segment of its constituents. However, new restrictions in states where small businesses have already suffered the most will be threatening the survival of many.
The rest of the economy is well-positioned for solid expansion going forward, especially if new vaccines and herd immunity are able to bring the COVID threat under control. The wealth position of consumers—net worth in relation to disposable personal income, shown in the next chart—is very high by historical standards, and the personal saving rate remains well above historical norms, the following chart.
In these circumstances, consumers have the wherewithal to continue to open their wallets.
Furthermore, businesses have stepped up their orders for capital goods, as uncertainty about sales and employment growth has continued to diminish from the spring, next chart. Combined with lean inventories and the need to restock shelves, the production of goods is poised for growth.
With this, the labor market will improve further, overall. However, continuing to be left behind will be those in the service sector, affected most adversely by government restrictions. They are disproportionately at the lower end of the wage ladder and are least able to ride out the wait until COVID is no longer a threat.