V-shaped? K-shaped? Va. experts predict economic recovery
Timeline will be impacted by vaccines, stimulus
What will the economic recovery from the pandemic look like and when will it take place?
Ask Virginia’s economic experts and they’ll tell you it depends on a number of factors, including the continued rollout of vaccines, the next round of stimulus and which sector of the economy we’re talking about.
Often, economists brand the trajectory of a recovery with a letter, labeling it after what the economy’s decline and improvement would look like on a chart. Regarding our current recession, economists often reference a V-shaped recovery — meaning a sharp decline and a sharp rebound — or a K-shaped recovery, meaning that different sectors of the economy are recovering at different times, rates and magnitudes.
Christine Chmura, CEO and chief economist for Richmond-based Chmura Economics & Analytics, says “the most important thing is getting to herd immunity, in terms of predicting the economy.”
Chmura’s company has conducted modeling for both the national and Virginia economy, and found that at the current rate of 1.6 million vaccinations per day, we’ll get to herd immunity by fall 2021. If that rate bears out, Chmura says we should return to pre-pandemic employment in the first or second quarter of 2022.
Still, just as the pandemic has had a varying impact on different sectors of the economy, recovery will also vary. Already, Chmura says transportation, warehousing and construction have returned or are close to pre-pandemic levels. On the other hand, food service and retail will take longer to come back, if they ever even return to pre-pandemic employment levels.
Chmura says that GDP growth will still be relatively slow because of social distancing in the first two quarters of this year, but she expects to see a “fairly strong” showing in the second half of the year, with 3% to 5% annualized growth in the GDP.
“Virginia has been tracking fairly close to the nation during the pandemic, in terms of economic activity,” Chmura says.
The recovery will also vary by region, with a slower return to normal for areas that are more dependent on tourism than ones dependent on manufacturing, for example. Northern Virginia, she says, has lower rates of unemployment compared with the nation because of its high percentage of office workers, and won’t have as difficult a time regaining its economic footing.
As for the shape of the recovery, Chmura says the GDP has “clearly been a V-shaped recovery,” but employment recovery will be more K-shaped. Though many workers in higher-paying fields have held onto their jobs, those in lower-paying sectors — such as retail and food service — will have a harder climb, as some reports predict that millions of these jobs won’t return.
Bruce Yandle, dean emeritus of Clemson University’s College of Business and Behavioral Science, Clemson’s alumni distinguished professor of economics emeritus, and a faculty member at George Mason University’s Capitol Hill Campus, agrees.
“We have a recovery underway, and, in a way, it’s sort of bifurcated,” he says.
Referencing data from the Fifth District of the Federal Reserve, Yandle says Virginia has fared better than the rest of the nation, experiencing a payroll employment loss of 4.35%, compared with the nation’s 6.17%. This data set, which compares December 2020 with the previous December, shows that Virginia’s leisure and hospitality sector has been hit hardest, with a payroll employment loss of 17.32%. Construction is the only sector that showed year-over-year growth in Virginia, at 5.56%.
Year-over-year change by sector in Virginia:
- Construction: 5.56%
- Education and health service: -6.94%
- Financial activities: -2%
- Government: -4.55%
- Information: -4.37
- Leisure and hospitality: -17.32%
- Logging and mining: -8.97%
- Manufacturing: -4.19%
- Other services: -3.9%
- Professional and business services: -2.3%
- Trade, transportation and utilities: -0.09%
Virginia’s metropolitan statistical areas saw the following payroll employment declines from December 2019 to December 2020:
- Blacksburg MSA: -5.9%
- Charlottesville MSA: -1.55%
- Lynchburg MSA: -6.34%
- Northern Virginia: -4.41%
- Richmond MSA: -4.57%
- Roanoke MSA: -3.37%
- Virginia Beach-Norfolk MSA: -3.39%
- Winchester MSA: -6.76%
Overall, Yandle says, Virginia’s economy is healthy. And since the state’s economy is “hitched” to the American economy, good news on the national front bodes well for the Old Dominion. As President Joe Biden’s proposed stimulus package appears poised to pass Congress in some form, experts say the windfall of cash will buoy the country’s economic outlook.
The Federal Reserve Bank of Philadelphia’s Feb. 12 survey of professional forecasters predicts 4% growth this year and 3% growth for next year. Economists polled by The Wall Street Journal predicted that GDP will expand 4.9% this year. Wells Fargo released a prediction of 5.3% growth this year and 5.1% next year, assuming Congress passes at least a $1 trillion stimulus bill in March.
Usually, growth upwards of 3% is considered good, Yandle says.
“If we do in fact see 5.3% growth for this year, it will be something we have not seen in this nation for a long, long time,” Yandle says. “That is an unbelievably strong GDP growth for the nation.”
As for the shape recovery will take, Yandle says if we start counting from the first quarter of 2020, he believes the recession “will look like a really big ‘U’ with a long bottom.”
Professor Vinod Agarwal of Old Dominion University’s Dragas Center for Economic Analysis and Policy says that Virginia has benefited from the fact that federal spending — including government employees and contractors —hasn’t been cut, as that funding has a large impact on the state’s economy. The upcoming stimulus should give “a significant boost to the economy,” and the state should expect to see growth on par with the nation. Agarwal says Virginia’s recovery will be impacted by fiscal policy adopted by the new administration.
“We are on our way to a decent recovery,” says Agarwal, who specializes in the economics of Hampton Roads. “I expect the Hampton Roads economy to do better than the national economy, because of the sustained level of federal spending, especially military [spending].”
Lisa Sturtevant, chief economist for the Virginia Realtors, says we’re in a K-shaped recovery, and that Virginia’s employment recovery has been happening at a faster rate than the nation because of our high concentration of government workers and professional and technical services jobs. She agrees that the economy will accelerate after Congress passes the new stimulus.
“It’s going to be a little bit of a start-and-stop year in the first half of 2021. It feels like the economic recovery is certainly picking up steam in the first quarter,” she says. “Seventy percent of the economy is driven by consumer spending, so when you put money in the hands of people, they spend it, and that’s good for the economy.”
Still, Yandle cautions that stimulus only works if people spend it.
“The stimulus payments that have come to us, about 60% of that has ended up in checking accounts and savings accounts, not spent, paying down credit card debt [and] so forth,” he says. “That’s a big chunk of money sitting on the sidelines.”
Tom Arnold, a finance professor at the University of Richmond, says those who haven’t lost their jobs will experience a V-shaped model, and those who have lost their jobs will experience a K-shaped model.
“In general, we are going to see a significant recovery, but it’s going to be pretty unequal,” he says.
Considering the high percentage of federal government employees and government contractors in Northern Virginia, Arnold says, has been a boon to the region’s economy, with additional funds going to IT and telecommunications efforts, for example.
“With all of these stimulus plans, the ones that have actually happened and the ones that could potentially happen, that’s created a lot of work,” Arnold says. “Northern Virginia is uniquely poised to benefit from that situation.”
Rural areas of the state — where a higher percentage of workers are self-employed, such as restaurant owners or farmers — have been decimated and will likely see a slower recovery.
“Anybody who really operates on a self-reliant mode has had a really difficult time in this pandemic,” he says. “[They] don’t have financial resources to spring back to life.”
Looking ahead, Arnold says we may see economic improvement in the second quarter of the year, dependent on coronavirus vaccine rollouts, and that we should definitely see improvement by the third quarter of the year.
“The faster that rolls out,” he says of vaccines, “that’s when the recovery starts happening.”
Overall, Chmura says, our economic picture looks bright.
“We should be optimistic that we will get back to more normal times,” Chmura says. “The United States is resilient, and we’ll get back to pre-COVID levels before you know it.”