Economic Take Podcast Transcripts

Welcome! Thanks for tuning in. I’m Jim Glassman, Head Economist for JPMorgan Chase Commercial Banking.

Over most of this past year, we have been distracted by the upheaval caused by the national lockdowns to control the pandemic. But the COVID-19 crisis is passing, thanks to vaccine successes, and there is a good chance that the economy shortly will be back where it was before the pandemic. And the economic focus will be shifting back to where we left it a year ago—on things like how many more years of expansion can we count on before we have to worry about the next recession, what’s the stock market outlook, and what’s going to fix America’s income divide.

The pandemic left a lot of trauma in its wake and it will take time for many to recover from that. But I think the future that we now face, at least for the next half decade, looks quite a bit brighter than what we imagined early last year, right before last year’s lockdowns. That assertion surely harmonizes with the stock market.

Two developments in particular point to a more favorable medium-term economic outlook. 

• Deflationary shocks tend to raise the longevity of the business cycle. Now it’s true that prices of lumber and many commodities have climbed a lot but this is likely to be temporary because it is a result of supply chain bottlenecks resulting from intense business caution in the middle of last year’s lockdowns. 
• The Federal Reserve has altered its approach—its “reaction function”—to managing inflation and this lessens the risk of a future overreaction to temporary inflation jumps that in the old days often triggered new downturns. This is a big deal and is the inverse image of the Volcker Era. 

You could include a third development, the proposal to boost infrastructure investment, although there are many political hurdles that need to be cleared for that to happen. 

What about the elephant in the room—the income divide that seems to lie behind America’s political polarization? The lockdowns that created so much upheaval for those working at small establishments seem to have added to the belief that something has gone wrong and that the economy is not working for everyone.

In fact, the uneven toll of the pandemic shed a little more light on the economic factors causing the income divide. Some have a mistaken idea that a striking slowdown in the economy’s underlying growth since the 1990s is the culprit. That’s what people mean when they talk about “secular stagnation.” And it’s true, that the economy’s growth machine has lost its mojo. From 1947 to 1999, real GDP expanded 3½% at an annual rate. But in the last two decades, growth has slowed to 1.8% annually on average, half the pace prior to the new millennium.

But slow growth isn’t the culprit behind the income divide, because:

• Prior to the crisis we saw unemployment plunge to half-century lows despite slow growth. 
• Even  in the pandemic, businesses struggled with no success to fill 7½ million vacant job postings. 
• The value of our stock market, which is the sum of all fears and hopes about the future, has climbed in the past decade to twice the size of the U.S. economy from roughly equal to the size of the U.S. economy for most of the past 75 years. 
• The key developed economies all grow at different rates and yet our living standards—GDP per capita—are all rising very similarly. 
• It’s  result of a slowdown in labor force growth, from 1.6% annually over most of the post-World War II Era to 0.6% each year on average since 1999.

The disruptive nature of technological innovation seems to be the main cause of America’s economic divide. 

It’s hard for economists to bad-mouth innovation because technology delivers so many economic benefits and raises the living standard of the nation as a whole. But we also know that technological innovation is socially disruptive. Fortunately, there were signs prior to the pandemic that the distribution of income was beginning to stabilize and the fiscal lifelines provided to  furloughed workers during the pandemic were helpful.

Shifting gears, for those trying to make sense of the state of the job market, we used to pay a lot of attention to the trends in jobless claims to figure that out. Something’s gone awry with claims, however, because they aren’t showing the same improvement visible in all other labor market indicators.

There are two things to know about jobless claims:

• Typically, only 45 percent of the people filing applications for unemployment benefits qualify for benefits. Anyone can apply but you really have to be laid off to qualify. Jobless claims were still useful in the past because the percentage of claims that met all the criteria was stable. In recent months, however, many more people are applying for unemployment benefits that don’t qualify for them. Recent Labor Department data show that only 25% of those who apply for benefits qualify for first-time benefit payments. So, until this situation settles down, jobless claims won’t be that helpful.
• Jobless claims don’t mean that much without reference to the number of people staying unemployed—that is, those receiving benefits. If claims are elevated but the number of people receiving benefits is not changing, that tells you there is a revolving door with as many coming in as are going out. 

Have a good week.

You can find more economic analysis at jpmorgan.com/cb.

Greetings! I’m Jim Glassman, Head Economist for JPMorgan Chase Commercial Banking.

February’s round of economic data proved to be as much of a downer as everyone expected. We didn’t expect much, because we knew that the bad weather that hit the Texas power grid was not your normal seasonal winter chill. 

Real GDP, which adds up all of February’s economic puzzle pieces that we know about so far, shrank by almost one percent in that month. And that set national output back to about four percent shy of the level we would have been had there been no COVID-19 pandemic. But we have been hopeful that spring would break for the better and last week’s round of March news didn’t disappoint:

• First off, last Thursday evening, we learned that dealers sold 17¾ million lightweight vehicles in March, far above expectations. That represents an annualized figure showing what the pace of sales would be in an entire year if every month in a year looked like March. 
• This was well above the 16¾-17-million pace we assumed was normal prior to last year’s lockdowns. 
• Consumer purchases have been pretty good. Not only are they back to normal, but most of the purchases that people deferred last year have been recouped. That hasn’t been the case for the business sales; fleet sales have been depressed because air travel has been hit so badly.

You’ve been hearing a lot about a shortage of microprocessor chips and how that is slowing production of cars and many other goods—there’s a lot of software in your car. That is happening because manufacturers probably froze in the middle of last year’s crisis and did not expect the kind of demand revival that we have been seeing. 

That bottleneck will even out pretty quickly, because businesses turned pretty optimistic not long ago. You might think that the shortage of chips would limit new supplies of cars on the lot. That’s possible, because like the real estate market at the moment, it is a seller’s market and it is said that there wasn’t much discounting to lift March’s robust vehicle sales. 

Also, air travel has been picking up noticeably in the past month, with 10 million now passing through TSA checkpoints each week compared with the usual 16 million, and maybe that’s starting to spur new business purchases.

Last week, we also learned that businesses restored 916,000 jobs that had been lost last year—1,072,000 if you count the upward revisions to previous employment estimates. And unemployment fell to 6%. Although the labor force sprang back by a hefty 347,000—as almost half of those who exited the job market last spring have returned—new hiring was far greater and that pulled people back who were still in the market and unemployed.

There’s a lot more coming—or, there better be a lot more coming. 

Here’s the best way to figure out how much more work we needs to be done to get back home, which I think will happen by the end of this year. 

For one, although with March’s progress, real GDP may be only 3% below where we would have been had there been no pandemic, the job market is not so lucky: nonfarm payrolls are 7%—or 10.6 million— shy of what the Fed thinks of as “maximum employment.”

You hear people saying that employment is 8.4 million below February 2020 levels. But February 2020 is an irrelevant reference point, because everything grows over time. If we could only get back to February 2020 levels, unemployment would be 2 million higher than it was before the crisis.

Also, six and a half million of the 10½ million jobs shortfall is in private and the public education, health services, and leisure and hospitality sectors of the economy, all sectors that were directly affected by social distancing closures.

So, how do we get home by the end of 2021? 

• There’s little argument that between the unspent money households have in the bank, the new fiscal lifelines passed in the last couple of months, and the fast-moving vaccination effort, aggregate demand has the power to get us back. 
• Washington has authorized the release of $6.8 trillion of support so far, according to the nonpartisan Committee for a Responsible Federal Budget, not counting the resources given to the Federal Reserve. This is not inflationary because national output is still shy of where it would have been and the federal money is just replacing lost private resources, temporarily.
• If the vaccination effort moves most states into the “yellow zone” and most restrictions are lifted, you’ll see most of the 6½ million jobs in health, education and leisure restored in a New York minute (actually, I’ve learned that an Oklahoma minute can be faster than a New York minute).

What about the other four million jobs? We’ll need to see about 450,000 jobs restored every month on average this year, on top of the 150,000-175,000 “normal” number we were seeing every month prior to the crisis, in order to get back home.

That’s a lot of wood to chop, but you’ve got to believe that March’s jobs report is just a down payment for what is coming over the rest of the year.

Have a good week.

You can find more economic analysis at jpmorgan.com/cb

Hey there! I’m Jim Glassman, Head Economist for JPMorgan Chase Commercial Banking.

Folks in the office building business are worried, because they are wondering if working from home in the pandemic era is a sign of future things to come. 

If so, there would be less need for office space.

I think it’s way too early to know what’s going to happen. But the need for office space depends on many other factors and one, in particular I’ll call “people in motion” holds a lot of promise.

First things first—what the future of work looks like. Maybe remote work is suitable for some. But for most people, working from home doesn’t really cut it.

Of course, there are a lot of plusses to working remotely. Not commuting frees up a lot of time. You don’t need as much of a wardrobe. And it’s a little easier to fit errands in when there’s a break in work.  

But there are even more plusses to working at the office. It’s not just about the camaraderie we have at the office:

• It’s a lot easier to pick up the tricks of the trade when you’re in the office, listening or catching people in the hall, than it is from the computer at your kitchen table. 
• You often have a lot of dead time at the office, but you never know when projects and work requests will pop up and if you’re not able to step in and do the work, it’ll pass to someone else. 
• Plus, it’s a lot easier to move up the ladder in your career when you’re around for people to see what you’re doing. 

Then too, virtual communications is great when you have few other options. And it sure beats flying all day to make a one-hour meeting. But body language and networking is an important part of communications with human beings. 

And nothing quite measures up to face-to-face meetings.

It’s really too soon to know what the future of work will look like, because, if the vaccine effort does the trick, you will be surprised how quickly things get back to normal. Companies are going to want us back in the office, the way we were, because most people are a lot more effective working closely as a team rather than stitched together cyber-ly.

Life will be different, of course, but not in a way that affects the demand for office space. After the 9/11 terrorist attacks on the World Trade Center and Pentagon, for example, security into buildings got a lot tighter. We may see similar kinds of things—checking our health status, including automatic temperature checks— like the technology some hospital systems are using when you enter the premises—or proof of vaccination.

There’s something else that may matter more for real estate, though.

 The U.S. population has been growing more slowly in the last couple of decades than it did before:

• From the mid-1960s to the late 1990s, the U.S. population grew about one percent annually. 
• Since 1999, population growth has slowed down to about one half percent annually. 

Ordinarily, when a country’s population growth slows, it spells trouble for a lot of businesses. A lot of other things slow down too—potential growth, business investment, infrastructure needs, office construction. If the population and the workforce is growing more slowly,  we don’t need as much business equipment to support workers and we don’t need to expand office space as much either.

Japan has been dealing with this for a while.

The U.S. situation is very different when it comes to real estate activity. Although the overall trend in population growth is slower, behind the scenes, a steady migration of people out of some of the urban regions south to the Carolinas, Georgia, Florida, and Texas and out of the West to the Mountain states is driving new infrastructure demand, including housing and office needs. After all, where people go, business infrastructure needs to go.

What’s behind this? Demographics:

• Two decades ago, 20% of the U.S. population was over the age of 55. But today, 30% are 55 years of age or older. That percentage will keep rising to about 35% over the next several decades. The retiring population is moving to warmer regions, the Southeast and Texas. 
• Another demographic twist—as the millennial generation comes of age after postponing many life decisions due to the housing crisis, the inflow to urban markets is starting to reverse.
  

Then there’s a couple of economic issues. The pricey markets in the booming tech centers out west have driven the relative price of housing in those areas to levels we’ve never seen before relative to the country’s average.

This is encouraging people to move from pricey markets like Seattle, San Francisco, and Los Angeles to the Mountain states region and Texas. And then there are other economic motivations that seem to drive some businesses to states like Texas and Florida.

Why does this matter for commercial real estate and office markets? Well if people are on the move, the infrastructure that supported them where they came from doesn’t usually migrate with them. So new infrastructure needs to be built where people go. Jobs and infrastructure follow the population where it goes. That means the real estate opportunities and need for office space will be robust in regions like the Mountain states, Texas, Florida, and the Southeast more generally.   

Bottom line: if the macro trend—slow population growth—seems like a headwind for real estate, the micro flows— migration from state to state—will be more than offsetting.

This week’s March jobs report will be the high point in the economic calendar. With local restrictions on activities in the hospitality sector lifting, life slowly returning to normal, and even air travel climbing back to almost two-thirds of what it was before the pandemic, we’re likely to get some more hopeful news than we’ve been getting since Thanksgiving.

Have a good week.

You can find more economic analysis at jpmorgan.com/cb.