By Howard Schneider

WASHINGTON, (Reuters) – A year ago the U.S. was at its worst. With job growth stagnant, over 10 million people out of work, unemployment benefits dwindling, and warnings about a fall back into recession, it was in a deep funk.

Some measures of the economy now reflect pre-pandemic levels, and policymakers have shifted from fighting a crisis of health to trying to determine which problems remain in the context of the pandemic.

This question, which touches on sensitive issues such as racial unemployment gaps, as well as the complicated path of inflation will be central to Federal Reserve and other political discussions about where economic and monetary policy should go next and how they can mesh with one another.

Fed’s main focus is on the high inflation. The Fed hopes it will be mainly related to pandemics and that it will decrease without raising interest rates. The President Joe Biden is focusing on the $1 trillion infrastructure bill and its follow-up $1.75 trillion bill that focuses on education, health and climate change.

Nela Richardson (chief economist, payroll processor ADP) said that while we have focused so much on the short-term, “it’s not about going back where we started. It is actually taking inventory of where are at and what structural changes have been made by COVID.”

This could be due to a shrinking workforce, changing work preferences, and decreasing immigration. It also might result in inflation that is persistently higher, because the global free flow of goods, she stated, “is not as good as it used to be.”

Is THE RECOVERY COMPLETE

November 9, 2020 Pfizer Inc (NYSE: ) said its COVID-19 vaccination was working. A Oxford Economics “recovery tracker”, a measure of recovery, showed that the score stood at 80.5. This is nearly 20% below the level when the pandemic began. As the virus spreads and companies lose jobs unexpectedly, it would drop to 72.

It passed 100 late last month, which means that the economy, based on a variety of indicators of production, consumption, and health, was back to where it began before the coronavirus.

(GRAPHIC: Oxford Economics Recovery Index – https://graphics.reuters.com/USA-ECONOMY/OXFORDINDEX/jznvnyedlpl/chart.png)

It doesn’t mean all metrics have risen to the starting point. But, for every weak spot (hotel occupancy), there are things that can offset it such as an increase in restaurant visits or increased public transit use.

The remaining gaps in the labor market are also glaring. In February 2020, there are approximately 4.2 millions fewer Americans on payroll than they were in February 2020.

However, the desire to keep job gains going seems strong with increasing job openings and rising wages. People are willing to take a job that is better, probably because they see it as a way of achieving more.

(GRAPHIC: Unemployed to job openings – https://graphics.reuters.com/USA-FED/JOBS/egvbkmeoepq/chart.png)

Fed officials, economists, and many others believe that it will only take a year before the economy reaches full employment. The Kansas City Fed’s labor market index shows that the market is well ahead of its long-term average, with even more upward momentum.

(GRAPHIC: Kansas City Fed labor index – https://graphics.reuters.com/USA-FED/JOBS/mopanjoqmva/chart.png)

PANDEMIC FISSURES OR OTHERS?

This index seems to be in line with the actual facts outside of the Kansas City Fed. According to September’s data, Missouri had a lower unemployment rate than Kansas and Kansas, compared with 4.6% nationwide.

According to Bureau of Labor Statistics, Kansas has a higher employment rate than Missouri in February 2020. Missouri is not far behind.

This is not the case everywhere. From the mid-Atlantic to the industrial Midwest, employment has dropped as high as 9% from pre-pandemic levels. California and New York are about 5% behind the largest states, respectively.

(GRAPHIC: A still disjointed recovery – https://graphics.reuters.com/USA-ECONOMY/JOBS/jnvwexybwvw/chart.png)

There may have been tradeoffs in earlier pandemics. For example, stricter state health laws in certain states were used to suppress the virus. However, this tempered the recovery process. In other states there was less restriction. These restrictions allowed faster job growth at the expense of subsequent outbreaks.

However, it is difficult to understand.

Do the poorer states need more time to recover from the effects of the pandemic or are they still affected? Are their economies now restructured to accommodate new industries and technologies, which require fewer workers?

Similar concerns surround the stagnant labor force participation rate. It is still around 1.7 percentage points lower than its pre-pandemic peak, an area of approximately 3 million people who are neither looking nor working.

Jefferies (NYSE 🙂 research has shown that even for the lowest income households, there is at most two months of extra cash from tax rebates and stimulus payments. This may allow them to be more selective in their work choices.

Full employment could arrive earlier than expected if people are out of work permanently. If the workforce needed for new programs or infrastructure becomes more costly or hard to find, this could have implications for the Fed as well as the Biden government.

There has not been a consistent increase in job opportunities across all industries. Moving goods businesses now have more employees than ever before, thanks to an increase in demand after the coronavirus decimated concert halls, sports venues, and other areas where most people would spend their money. The core service sectors like hospitality and leisure are down nearly 10%.

(GRAPHIC: Jobs by industry – https://graphics.reuters.com/USA-FED/INDUSTRY/qmypmdoolvr/chart.png)

Uncertain is whether this happens when the spending goes back to services. Or if there has been a shift in occupational mix.

The recovery hasn’t ended and inflation is still at its highest point in 30 years. However, it will drop as people spend less and return to their normal spending habits.

However, if there is something more going on – such as a mistakenly made short-term supply chain disruptions or pandemic interruptions due to a change of how inflation works – this could present major risk.

“The risk is that (Fed officials) panic and chase down inflation” with faster and higher interest rate increases that could, Grant Thornton Chief Economist Diane Swonk wrote recently, “end our relationship with inflation but at a hefty price. If those interest rate increases reverberate in developing countries, it could lead to a severe recession or even worse.

(GRAPHIC: Alternate inflation measures – https://graphics.reuters.com/USA-FED/INFLATION/znpnekxmdvl/chart.png)