Meeting the challenges to the U.S. recovery

The U.S. economy continues to rev up as the pandemic winds down. The latest evidence is June’s robust payroll employment boost of 850,000 jobs. Restaurants, hotels, entertainment venues, retailers, and schools and universities provided most of the outsize gains.

The improvement in education is likely somewhat overstated, since fewer school workers than usual left their jobs at the end of the academic year only because fewer worked through the pandemic.

Nevertheless, the economy is on track to regain the remaining 6.8 million jobs lost during last spring’s recession by next summer and return to full employment no later than early 2023.

This forecast may look a bit optimistic as the unemployment rate edged higher in June to 5.9%. Full employment would be consistent with an unemployment rate that is well below 4%. But unemployment is expected to decline quickly in coming months at the same time labor force participation is likely to increase significantly. Pushing up unemployment is the surge of workers quitting their jobs, emboldened by the record shattering number of open positions and better wages employers are offering to entice new job applicants.

Many of the unemployed are simply transitioning from one job to the next. Also adding to the unemployed is an increase in the number of re-entrants to the workforce who rightly feel this is the time to find a good job.

A question on confidence

Historically, the Conference Board’s consumer confidence survey questions about the strength of the job market have pegged the unemployment rate.

The difference between the percent of respondents to the survey saying jobs are hard to get versus easy to get has moved closely in tandem with unemployment. In the June confidence survey, the difference declined sharply to -43.5 percentage points.

This is lower than prior to the pandemic, when unemployment bottomed at 3.5%, and it is the lowest ever save for the period around Y2K, a time rightly deemed the high-water mark for the job market in the post-World War II period. The Conference Board conducted its survey online for the first time in June and increased the number of survey respondents, perhaps explaining part of the strong survey results, but only part.

There are challenges to a quick return to full employment. Most immediately are the impediments to getting the supply side of the economy fully up and running. Restoring production that shut down at the height of the pandemic, unscrambling global shipping routes, and restoring global supply chains have proven difficult.

The vehicle industry is the poster child for these problems and the economic fallout. U.S. domestic auto production, which prior to the pandemic hovered close to 2.5 million units annualized, came to a virtual standstill last spring. Production was briefly restored when the economy reopened last summer but has since slumped to near 1.5 million units annualized due to the severe global shortage of semiconductors, which are a critical component in vehicles.

Along with the pickup in demand, domestic auto inventories have evaporated with fewer than 200,000 cars on dealer lots, by far the fewest in stock since data became available 30 years ago. New- and used-vehicle prices have surged in response, crimping vehicle affordability and sales.

Vehicle sales fell to only 15.4 million units annualized in June. Households haven’t suddenly turned more cautious in their buying. Instead, there are few vehicles for them to purchase, and those available are prohibitively expensive.

We expect vehicle output and sales to begin normalizing this fall. The global supply of microchips will get a boost as new capacity is brought online at existing facilities, and by 2023 there will be several new plants.

Vehicle inventories will be replenished, prices will moderate, and sales will revive. We expect sales back well over 17 million units—our estimate of trend sales abstracted from the ups and downs of the business cycle—by early next year.

Given the significant amount of pent-up demand built up during the pandemic, we anticipate above trend vehicle sales through mid-decade. Not all the sales lost during the pandemic will be made up (vehicle miles driven and thus the need to replace vehicles declined significantly during the downturn). But many eventually will.

Foreclosure cliff

Another potential challenge to our optimism for a quick economic recovery is the fast-approaching foreclosure cliff.

The federal government has provided substantial financial support to households since the start of the pandemic. It put moratoriums on foreclosures on homes with government-backed mortgage loans and on rental evictions, and it provided forbearance on government-backed mortgage and student loan payments.

The moratoriums and forbearance have been extended several times as the pandemic dragged on, but policymakers now appear ready to allow them to expire.

The foreclosure and rental eviction moratoriums are currently set to end at the end of this month, and the forbearance on mortgages and student loans is set to end in September. This will be a meaningful adjustment for millions of households.

Particularly where forbearance rates are higher such as the broad New York City region, which the pandemic arguably hit harder than anywhere else in the country, and the southern U.S., where borrowers’ credit scores are typically lower than in the rest of the country.

Fortunately, the foreclosure cliff has become decidedly smaller in recent months due to the fading pandemic, improving job market, and substantial government support including several rounds of stimulus checks and enhanced unemployment insurance benefits.

According to the Mortgage Bankers Association, close to 2 million homeowners are currently receiving mortgage forbearance, equal to about 4% of households with a first mortgage. Approximately 2% of Fannie Mae and Freddie Mac loans and over 5% of FHA, Veterans Administration and USDA loans are receiving help.

While this is a substantial number of households, it is down by well more than half from the number in forbearance at the peak of the problems last summer. Moreover, the FHA, Fannie and Freddie have been working with mortgage servicers to ensure that homeowners losing forbearance receive appropriate support on how best to handle their financial situation, including potential loan modifications and additional deferrals.

And the rental eviction crisis, while still serious, is becoming less so. We estimate that the number of delinquent renters peaked at 9.4 million in January, equal to more than one-fifth of the nation’s 44 million renter households.

Collectively, these households owed $52.6 billion in back rent, utility payments and late fees. Things have improved significantly since then because of the rebounding job market and massive government support,

including $46.5 billion in assistance that is to go to troubled renters and their landlords. We estimate that as of last month there were 5.6 million delinquent renters, equal to 13% of all renters, who were $23.9 billion in arrears.

According to questions asked as part of the American Housing Survey in recent years, only about 6% of renters are typically delinquent. And with the bulk of the renter assistance yet to be distributed given the administrative difficulties of disbursing the money through many state and local government entities, the crisis should continue to abate as the funds get out.

The strength of the economic recovery may also be challenged if the pandemic re-energizes—a meaningful threat as long as the virus remains rampant in much of the rest of the world. Developing countries such as Brazil, Russia and South Africa, where vaccinations are going slowly and the especially contagious Delta variant of the virus is prevalent, are struggling the most.

But even the U.K. is having problems again. Here in the U.S., the southern and Mountain West regions, where vaccination rates are low, appear particularly vulnerable to more infections and the resulting economic disruptions.

The transmission of the virus is already much higher in these regions than in the rest of the country. And these are the same regions whose economies are making their way back from last year’s recession most quickly, according to our Back-to-Normal Index.

Florida is the only large state in the nation to have already fully recovered from the recession. It is hard to imagine a scenario in which the pandemic comes back with such virulence that it would force widespread shutdowns of businesses and schools, but of course the pandemic itself was unimaginable.

The economic recovery is on track to be among the strongest and quickest in history. We expect some 10 million jobs to be added this year and next, and it would take a lot to meaningfully dent this growth, let alone derail it. The recovery must overcome several challenges, including working through a mélange of supply-side disruptions, navigating the foreclosure cliff, and avoiding another eruption of the pandemic. But this is all very doable.

Mark Zandi is an economist and chief economist of Moody’s Analytics, where he directs economic research.