Macroeconomic & Geopolitical

The Rebound is Coming, But Beware of the Drag

February 2021 – 3 min read
Markets are pricing in a glorious summer recovery with good reason, but investors should remember that a rising tide won’t lift all boats.

The hottest question in Washington these days is how much more America should spend on recovery, and it's a classic data Rorschach test. Some stare at the falling unemployment numbers and see an economy well on its way to normal. Others worry they’re not falling fast enough and fear lingering scars will hurt long-term growth.

In fact, both groups may be right. The near-term recovery looks quite strong, especially if another stimulus package extends enhanced unemployment benefits into the fall. But as companies take advantage of the shock to introduce cost-saving technologies, and as consumers emerge from lockdowns with new habits, the same old jobs won’t all be there to fill. The crisis will leave more people settling for lower wages or prompt them to drop out of the labor force altogether, and it will take more than throwing money at the problem to heal the economic wounds.  

As shocking as the COVID-19 pandemic was for last year’s economy, the world's synchronized policy response was even more surprising. Central banks cut rates, finance ministries cut checks and an astonishing effort to find a vaccine has now delivered several highly effective options.

With all that money sloshing around the world, how can we not expect a sharp rebound? Even the seers at the European Commission upgraded its medium-term economic forecasts last week, following a trend set by their counterparts at the International Monetary Fund, the Organization of Economic Cooperation and Development and the Congressional Budget Office.

U.S. unemployment has more than halved from its 14.7% peak last March, while household savings are healthy and debts are low. Poorer households even report slightly higher incomes with that extra government support. Larger firms are awash in cash and banks have plenty of capacity to lend. As winter turns to spring, Americans are managing their cabin fever with plans for shopping sprees and exotic travel just as soon as they get that second shot.

Ka-BOOM!

Can it be that simple? In fact, the same labor data shows something far more worrying.

Specifically, the long-term unemployment rate—those Americans who have been out of work for more than 27 weeks—continues to rise in absolute terms and as a percentage of the overall unemployed. The labor participation rate has also taken a sharp spike lower, after just starting to recover following the global financial crisis.
 

SHARE OF LONG-TERM UNEMPLOYMENT

Source: Bloomberg. As of February 1, 2021. 
 

LABOR FORCE PARTICIPATION RATE (SA, %) 

Source: Bloomberg. As of February 1, 2021.
 

EMPLOYMENT, JAN-21 VS. FEB-20

Source: Bloomberg. As of February 1, 2021. 


Many of these lost jobs may indeed reappear when all those people head back to the mall. But many of these trends are part of a story that stretches back to the 1960s when men aged 25–54 (so-called “prime age”) began falling out of the workforce because of a complex brew of forces that included global competition, technological innovation and weakening labor unions. Some of these trends were only just improving when the crisis hit. Meanwhile, it has taken until now for us to begin to understand the shock delivered to working women. Even as the recovery takes hold, some 80% of those who left the workforce in January were female.

All recessions aggravate the mismatch between the jobs and the jobless, but this one may be worse. When crisis strikes, companies often add new technologies to cut operating costs. This time, though, there will be further disruption from new post-pandemic consumer patterns and preferences. When the recovery comes, as a study by the Federal Reserve Bank of New York points out, the new jobs won't fit the skill sets of those who were let go. It’s not that a flight attendant can’t get land work at an online retailer’s logistics center, but it’s hardly automatic or comfortable.

And it’s not just a question of training. If their former employer doesn’t call them back to work as demand recovers, the hunt will be even longer. If the former employer went bankrupt, it’s even harder. By one measure, nearly a third of small businesses have closed since last January. 

These are not issues that can be addressed easily even with another stimulus package. The long-term unemployed, in particular, need support that is sufficient without undercutting incentives to return to the workforce, as economist Marco Annunziata points out. Progress will require investment in training and education, too, and it may take a long time to deliver results.

For investors, the “good news,” if you want to call it that, is that these are long-standing trends that won’t likely threaten near-term market returns. The bad news is that, by many measures, America’s workforce continues to deteriorate with all sorts of implications for long-term growth, let alone political stability.

Christopher Smart, PhD, CFA

Chief Global Strategist & Head of the Barings Investment Institute

Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Any investment results, portfolio compositions and or examples set forth in this material are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this material No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments. Prospective investors should read the offering documents, if applicable, for the details and specific risk factors of any Fund/Strategy discussed in this material.

Barings is the brand name for the worldwide asset management and associated businesses of Barings LLC and its global affiliates. Barings Securities LLC, Barings (U.K.) Limited, Barings Global Advisers Limited, Barings Australia Pty Ltd, Barings Japan Limited, Baring Asset Management Limited, Baring International Investment Limited, Baring Fund Managers Limited, Baring International Fund Managers (Ireland) Limited, Baring Asset Management (Asia) Limited, Baring SICE (Taiwan) Limited, Baring Asset Management Switzerland Sarl, and Baring Asset Management Korea Limited each are affiliated financial service companies owned by Barings LLC (each, individually, an “Affiliate”).

NO OFFER: The material is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service in any jurisdiction. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This material is not, and must not be treated as, investment advice, an investment recommendation, investment research, or a recommendation about the suitability or appropriateness of any security, commodity, investment, or particular investment strategy, and must not be construed as a projection or prediction.

Unless otherwise mentioned, the views contained in this material are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Individual portfolio management teams may hold different views than the views expressed herein and may make different investment decisions for different clients. Parts of this material may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this material is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any service, security, investment or product outlined in this material may not be suitable for a prospective investor or available in their jurisdiction. Copyright in this material is owned by Barings. Information in this material may be used for your own personal use, but may not be altered, reproduced or distributed without Barings’ consent.