A Bridge (To Nowhere?)

Speaking to Congress on Tuesday, Jerome Powell said it’s “premature” to pull back on support for the US economy.

He characterized additional fiscal stimulus as a “bridge” for the millions of Americans and thousands of businesses still reeling from the pandemic, and reminded lawmakers that the US hospitality industry has been “devastated” and needs additional support.

It was a familiar refrain. Indeed, Lael Brainard repeated it in remarks of her own Tuesday, calling more fiscal aid “essential to bridge past COVID’s second wave [and] avoid labor market scarring, reductions in crucial state and local services, and bankruptcies.”

It’s not quite right to say Fed officials’ pleas have fallen on deaf ears on Capitol Hill. It’s just that the timing is bad. Congress should have delivered more aid months ago, but pre-election jostling short-circuited the process, and besides, Mitch McConnell repeatedly made it clear that the kind of sizable, multi-trillion dollar package negotiated between Steve Mnuchin and Nancy Pelosi was a non-starter in the GOP-controlled Senate. Now, in the lame duck session, ambiguity around the Georgia runoffs and Donald Trump’s apparent disinterest in another relief bill, means a deal before year-end is unlikely.

In the meantime, as Powell emphasized, key sectors of the economy are still in dire straits, something I outlined last weekend in “America’s Economic Model Is Unsustainable. Empower The 4.”

That piece, while opinionated, was chock-full of indisputable facts and simple math, some of which Goldman’s Joseph Briggs touches on in a good new note about the “K-shaped” recovery. Tellingly, labor income for the $15-$22.50 per hour bucket remains the most depressed versus pre-pandemic levels.

That, generally speaking, is the same bucket to which I referred in the linked piece above.

Obviously, the lowest rung on the wage ladder suffered disproportionately too, but do note that the “< $15” bucket has actually recovered more than the $15-$22.50 per hour bucket. That could reflect a number of factors, but my guess would be it’s in part down to hourly, minimum wage workers being rehired amid the reopening push, while the second-worst-off group remains in limbo.

Indeed, Goldman confirms as much. “Employment declines among workers earning less than $30 an hour explain almost all of the drop in overall income,” Briggs wrote. Note in the figure below that the $15-$22.50 per hour bucket sticks out as disproportionately affected even as disproportionately affected groups go.

Over the weekend, I juxtaposed the leisure and hospitality jobless rate with that for manufacturing, and also noted the disparity between the average hourly wage for those sectors.

My own work was deliberately superficial — the idea wasn’t to conduct a granular analysis, but rather to make a simple point. The US economy is consumption-driven, and the services sector matters more than manufacturing. Because the services sector was hit hardest and has been the slowest to recover, the setup is dangerously self-referential, especially considering services sector workers came into the pandemic more exposed due to lower wages, less in the way of bargaining power, and, in many cases, nothing in the way of employer-sponsored retirement plans.

Goldman’s analysis fills in many of the gaps. “Wage growth has decelerated by 0.7pp for workers in the bottom earnings quartile, and, most strikingly, by 1.3pp for workers in the hard-hit leisure and hospitality sector,” Briggs wrote.

Coming full circle, transfer payments and other government assistance will be absolutely critical going forward to sustain spending in America’s consumption-driven economy.

As you’re probably aware, transfer payments quite literally replaced the sudden plunge in incomes during the pandemic layoffs. In that context, it won’t surprise you to learn that transfers made up a much larger percentage of lost income for lower-income households, which suffered a much bigger hit to wages and salaries in the second quarter compared to the rich and well-to-do.

“We estimate that transfer income for the bottom income quintile surged to almost 50% of the group’s pre-pandemic income at the height of the pandemic,” Goldman wrote.

“Going forward, we expect that fiscal support will continue to be targeted towards lower-income households,” the bank added.

Let’s hope so. Because, as I try to remind everyone whenever the opportunity presents itself, lower-income families have a higher marginal propensity to consume. And, again, the economy lives and dies by consumption.

On Goldman’s estimates, average disposable personal income rose by 35% versus pre-pandemic levels for the bottom income quintile over the second and third quarters, but just 3% for the top income quintile. Briggs elaborates: “While private labor income fell more for low-income than high-income households, total DPI including transfers did the opposite, rising more for low-income than high-income households.”

Hopefully, you’re starting to connect the dots. This at least partially explains why retail sales and personal consumption rebounded so strongly following the collapse in economic activity that played out in the second quarter. Those most likely to spend were provided with the capacity to do so when jobs typically associated with lower-income quintiles were summarily decimated by the pandemic. It just so happens that those same jobs are concentrated in the very industries that power the US economy.

This is why Powell and his colleagues continue to insist on a “bridge” for lower-income households and for various services sector businesses. The US economy is a kind of self-referential, services/consumption merry-go-round, and the pandemic threw sand in all the gears.

“The large rise in income for households at the bottom of the income distribution adds to evidence that income transfers were more successful at supporting spending and preventing hardship in the current downturn than in previous recessions,” Goldman went on to say, in the course of suggesting that another fiscal package and further labor market gains for the hardest-hit sectors will be key to ensuring that disposable personal income stays elevated next year.

Of course, if the pandemic has changed the world forever and some of the hardest-hit industries simply don’t come back or, if they do, are a just a shadow of their former selves, then this is just a “bridge” to nowhere.