AFTER THE FIREWORKS

The July 4 holiday offered a preview of normalcy after a 17-month hiatus interruptus with changing rules and infection ebbs and flows. The confluence of increased vaccination rates, supportive monetary and fiscal policy, strong balance sheets and increased confidence have resulted in strengthening activity.

Output has regained the pre-recession peak and is on to new highs. Employment has been increasing with some volatility -269,000 net gains in April, 583,000 in May and 850,000 in June, but remains 6.8 million below the February 2020 peak.

Job openings are at a record 9.2 million, but the fraction of the population in the labor force (Employed Plus Unemployed) has fallen 1.6 percentage points since February 2020. There would be about 4.3 million more workers if the participation rate had stayed the same.

Some leavers are older boomers who have reached retirement. Others may have dropped out due to fear, a re-assessment of priorities, school closures, child care issues or unemployment benefit levels. The latter three are or will be diminishing over the next couple of months. The current environment is not simply a reopening-replay. There are different skill sets, other industries, new ways of operating, different locations that will test the flexibility of the labor market and challenge individuals and firms.

The headlines have been filled with inflation stories as the Consumer Price Index rose 5% over the year to May, and the Fed’s preferred measure rose 3.9%. A jump was inevitable one year after the disruption of the spring of 2020 when energy prices, hotel rates and air fares cratered.

There have been other shocks such as fires in a chip plant and the Texas storms, which disrupted petrochemical production. Surges in demand for wood products and construction supplies with the housing boom sent lumber prices soaring and double-digit gains in used car prices accompanied crippled new car production.

The Fed and many others believe that these are transitory shocks to the price level that will recede in time with increased production and more favorable year over year comparisons. Time will tell.

The Federal Reserve has a new untested policy that it will tolerate inflation over its 2 percent goal after a period of below target performance to keep the average near 2 percent. As of this writing there has been no change in the policy buying $120 billion per month in securities and keeping the Funds target at 0-.25%.

The fiscal arena has seen the American Rescue Plan, a $1.9 trillion spending package that sent funds (borrowed or created) to people with less than $150,000 in income, to state and local governments, to homeowner and rental assistance programs and for an expanded child tax credit amongst other things.

Other proposals that have not been approved include The American Jobs Plan and The American Families Plan with accompanying changes in taxes collected by business, taxes on high income individuals and ending the step-up basis at death. The plans conjure images of LBJ’s Great Society Programs of the 1960s or FDR in the 1930s.

Consumption, business investment, housing and the rebuilding of inventories will help drive activity in 2021. The Federal Reserve is facing questions about when to dial back its activity. Is two targets — low inflation and low unemployment - are potentially in conflict if the inflation proves not to be transitory.

Late this month we may hit the debt ceiling that was temporarily suspended. Neither party has worried about spending amidst the pandemic, but the day is approaching when this will be a problem as we near capacity.

Idaho has remained one of the strongest states in the nation measured by employment. It was the first state to experience year over year gains in employment in 2020 and employment is setting new records. All states are now experiencing year over year gains since the trough of last spring.

Coeur d’Alene employment in May was up 10.2 percent over the year and at record levels. It is palpable as one looks around the community with its abundance of help wanted signs, entry level wages far above the state minimum, nation-leading home price gains, and traffic laden streets.

Idaho personal income rose at a 70.3 percent annual rate in the first quarter of 2021 driven by a 771.6 percent jump in transfer payments (Remember the Checks or Deposits!) that will not be repeated.

A continuation of the expansion is the likely path for the rest of 2021. The risk of a renewed covid surge with the Delta variant in areas with low vaccination rates globally and in the US remains.

Policy makers are nearing the point where stimulus measures will have to be tapered, which will pose economic risks and political difficulties. The new post-covid and post-election rules and the altered economic landscape will disrupt our old normal.

The Fourth is over, but the excitement is not.

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Press contributor John W. Mitchell was a professor of economics at Boise State University for 13 years before joining U.S. Bancorp in 1983. He was Chief Economist of U.S. Bancorp until July 1998 and served as Economist Western Region for US Bank until July 2007. A resident of Coeur d'Alene, Mitchell has been making economic presentations on the nation and the region for almost 50 years.