Dr. Robert Dye and his wife recently got on a plane to travel for the first time since the COVID-19 pandemic began. They also recently – again, for the first time in the COVID-19 era – had dinner with other friends from outside their home.
It felt, finally, like things were getting back to some semblance of normal.
And that’s where Dye, Senior Vice President and Chief Economist at Comerica Bank, thinks the U.S. economy is going to be around this time next year: Back to something resembling normal.
Dye, who holds a doctorate in Energy Management and Policy from the University of Pennsylvania, knows the path to normal isn’t going to be an easy one, that the economy still faces a bumpy road.
But with an infusion of cash from various federal stimulus packages and all 50 states having basically reopened their economies, Dye thinks the U.S. is on the right road.
“It’s not going to be completely smooth sailing, and I expect there to be hiccups along the way,” said Dye, who before joining Comerica was the senior economist with PNC Financial Services Group. “I expect there to be unintended consequences of the wind-down. But I’m looking for a year next year where consumer confidence is strong, where spending of consumers and businesses is very strong, and we start to feel like we can breathe again … like we can go about business in a more normal way.”
In Dye’s mind, it has already started, and is being driven in large part by consumers who’ve been aching to get back out into the economy since every state began COVID-19-related stay-home orders last year and shut local economies down.
While the reopening of the U.S. economy has come in staggered boosts – each state deciding on its own when and what to reopen – Dye believes that “pent-up demand” on the part of consumers has been a driving force in “moving the economy forward.”
Dye notes that states who’ve fully reopened – pretty much all of them now – has seen industries, particularly consumer-facing businesses like bars, restaurants and other service industries – picking up.
In the near term, he said, the country must “talk about monetary and fiscal policies,” but he’s optimistic.
“I think it’s a pretty strong impulse to push the economy forward through the remainder of this year and through most, if not all, of next year as well,” Dye said. “I think it has been a major benefit to the economy to open things up. California, the biggest state, has just recently rolled back all restrictions. When we get into the fall and we see business meetings starting to be scheduled in person, things like that, it should get even better.
“It’s by no means a normalized economy, but I think the rollback of COVID restrictions is really making a big difference heading into the fall.”
Of course, the economy has been prodded by trillions of dollars in stimulus money. President Joe Biden signed the $1.9 trillion American Rescue Plan Act into law earlier this year, and that was on top of other stimulus packages passed by the Trump Administration.
That money has obviously had a big impact, Dye acknowledged.
“That’s been a major support, particularly for low-income households and households with children,” Dye said “That’s where a great deal of the stress of the (COVID) lockdowns has really been focused, on those two groups. In my view, it’s been a lifeline for thousands of people and still continues to be.”
It’s not always going to be there, though. Biden had trouble getting the RPA passed – it made it through the Senate with no Republican votes – and many features of the stimulus bills passed before are going to disappear.
For instance, the additional $300 federal payment for unemployment assistance ends Sept. 6, and some states are ending it sooner. The country, Dye said, is going through another transition period.
“We’re looking at what does post-American Recovery Act look like for the country as it turns the corner from this year into next year,” Dye said.
Requests for first-time unemployment benefits have sunk in the last couple of months to pandemic-era lows (though they’ve remained higher than pre-pandemic numbers), although there have been a couple of upticks in recent weeks.
Dye called the unemployment rate “a very volatile number” and pointed out the trend has been “clearly down” the last several months, and he expects that trend to continue.
“If we saw 3-4 weeks of this in a row, I’d be concerned and I’d say this is marking a change in the labor market,” Dye said. “But just a one-week number … I’m not that concerned about it. With states rolling back enhanced unemployment benefits I think there’s going to be more motivation for people to get off unemployment and to get back into the work force sooner rather than later. The people collecting the enhanced benefits are well aware they’re winding down.”
Rising consumer prices have sparked concerns about rising inflation levels. According to the Bureau of Labor Statistics, inflation rose some 5% in a 12-month period that ended in May. According to InvestorPlace.com, that was faster than most economists figured, and was the largest jump since August 2008.
Economists say that’s pretty predictable, considering prices are returning after a pandemic-induced downward trend.
Daniele Antonucci, chief economist & macro strategist at Quintet Private Bank, told The Guardian that the Fed, “so far, looks relatively tolerant” about the spike.
“In part, this is because of past undershoots relative to the central bank’s inflation target: consumer prices have been subdued for quite a long time, despite monetary easing,” she told The Guardian.
With the CPI growth at more than 5% and the Producer Price Index more than 6%, Comerica’s Dye isn’t surprised by the rising inflation numbers, either. He pointed out the country is seeing “very broad-based” price gains right now, some due to the federal government pumping trillions into the economy, but also to supply chain issues driving product shortages and “all the other problems” getting products to market.
The good news, Dye said, is that he believes it’s going to be a “mixed bag,” because other prices – like lumber – are coming down.
“I don’t think we’re going to see it across the board … I think some prices are going to level out and retreat, and some prices are going to stay high,” Dye said. “This is a very complex phenomenon right now. We’ve had this huge disruption to the economy, with a huge amount of stimulus being applied. As we come out of this, my expectation is we’re going to see some unexpected and unintended consequences here for awhile.”
Quintet’s Antonucci said the Fed seems to be “relatively tolerant” of the rising inflation for the moment, and Dye thinks that’s probably the right attitude to take. Fed Chairman Jerome Powell said recently he didn’t see an interest rate hike coming until 2023. Te policy-making Federal Open Market Committee, which said back in March it saw no increases in its short-term borrowing rate until at least 2024, rolled that back last week, saying there could be at least two hikes in 2023.
Dye said that’s based on the Fed’s “dot plot,” which the U.S. Central Bank uses to signal its outlook for the path of interest rates. According to Dye, that shows the majority of the people on the committee are expecting to see higher interest rates down the road.
“It makes sense given the economy is performing well, but inflation is also higher than expected,” Dye said. “It makes sense to think the Fed is going to start raising interest rates a little bit sooner, tapping on the brakes of the economy, keeping things from overheating too much, keeping inflation under control.
“That’s the role of the Fed … to balance out maximum employment – labor market issues – with the price stability issues, the inflation issues,” he added.
The Fed, according to Dye has termed the inflation “transitory” without giving much guidance about what that means or how it’s thinking about inflation. Dye expects to hear more about that “later this fall.”
“It’s almost a cliché to say this these days but we’ve never seen an environment like this … It’s been a remarkable time,” Dye said. “The Fed was very quick to lower interest rates, they were very quick to ramp up asset purchases and other special programs, and I do think those were all the right moves.
“I think the Fed right now really needs to think about how it’s defining this word ‘transitory’ when it talks about inflation,” he added. “That’s what I’m looking for is some sense of what do they really mean as they start to gradually unwind all these special programs.”
The team headed by Dr. Gabriel Ehrlich, director of Research in Quantitative Economics at the University of Michigan, does four forecasts of the U.S. Economy every year. The team agreed with Dye and other economists that inflation is to be expected, but Ehrlich, who has a PhD in economics from U-M, urged people to “keep a little perspective.”
“We have a lot of demand, there are still supply bottlenecks in the economy,” Ehrlich said. “If you look back over the longer term, the inflation rates we’re forecasting aren’t out of the ordinary. Keeping a little perspective on that is important.”
While there is some “maneuvering room” for the Fed, Dye said there’s also the possibility of other fiscal programs — “I certainly hope we don’t need them” – if they become necessary later.
The ramp up in federal spending is one of the reasons Dye and other economists are expecting “very strong GDP growth” this year, in the range of 6-8%, a number Dye called “eye-popping” considering recent history. Consider that during the last expansion cycle in the 20-teens it was “maybe 2 or 2.5%.”
“This is a new economy,” Dye said. “Not only the fiscal stimulus, which gets into the system very quickly, but also infrastructure spending.” Biden had been pushing a near-$2 trillion bill; a bipartisan group of U.S. Senators recently reached agreement on a $1.2 billion deal, though it’s future is in doubt.
“That’s designed to be a longer term, not a quick infusion into the economy, but spent out over a number of years,” Dye said. “That will help keep the expansion going into the future.”
By some measures, the future is now. GDP for the second quarter of 2021, Dye said, is “just about where we were in the fourth quarter of 2019. So we’ve recovered that,” he said. “We look at a lot of economic data, they’re getting to very strong levels. The ISM Manufacturing index, non-manufacturing indexes have been very, very high.”
Not everything is back, of course. The unemployment rate is still well above pre-COVID levels, housing starts have stalled.
“There’s a variety of statistics that are saying that things are going in the right direction, but could and should and will get better as we round out this year,” Dye said. “I expect labor market data to really lead the way to show strong hiring through the summer and into the fall.”
Ehrlich and his team expect a “V-shapred recovery and kind of getting back on that prior growth trend.” A key point he believes people tend to overlook is that fact the U.S. economy was “fundamentally healthy” in 2019.
“I think a lot of people have been very surprised,” he said. “People think about the Great Recession … we had a pretty slow recovery from the Great Recession. We’re forecasting a substantially faster, more vigorous recovery from the pandemic recession.”
While pointing out that “any recession is a reset,” Jeff Korzenik, Chief Investment Strategist for Fifth Third Bank, said the fact this one was “triggered by an outside event” means the country may not have the “slow, grinding process of working through fundamental imbalances – like we did with the housing inventory at the start of 2008.”
“In theory, this would allow us to get back to the prior GDP peak quickly,” Korzenik said. “In practice however, this pandemic was highly disruptive – highlighting many dislocations that will take time to work through. As an example, there may be a need for more warehouse workers in order to support e-commerce, and fewer in-store retail employees. But even if the new jobs created are equal to the jobs that have been lost, differences in geography or skillset may still hinder smooth job transitions.”
So where is the economy going to be this time next year? Comerica Bank’s Dye thinks it’ll be going well.
“I think we will be feeling that the economy is strong, it’s starting to feel more self-sustaining,” he said. “Right now we’re on all this artificial stimulus from monetary and fiscal policy. So a strong, self-sustaining economy, but also an economy that is dealing with the wind-down of all this stimulus.
“It’s not going to be completely smooth sailing, and I expect there to be hiccups along the way,” he added. “I expect there to be unintended consequences of the wind-down. But I’m looking for a year next year where consumer confidence is strong, where spending of consumers and businesses is very strong, and we start to feel like we can breathe again, and feel like we can go about business in a more normal way.”
