Transcript

Charles Gerena: I'm Charles Gerena, online editor for the Research Department at the Federal Reserve Bank of Richmond.

Today, I am speaking with Ann Macheras, group vice president with responsibility for microeconomics and research communications. She manages the department's engagements with the community, including gathering regional economic information, providing financial education resources, and partnering on issues facing low and moderate income households.

In past episodes, we've reviewed economic conditions in Virginia, North Carolina and South Carolina. But what about the Fifth Federal Reserve District, which includes these states as well as Maryland, the District of Columbia, and most of West Virginia? Ann will give us her perspective on the state of the region's economy.

Thanks for joining us, Ann.

Ann Macheras: It's great to be here.

Gerena: So, 2020 was a challenging year for a lot of people, to say the least. How well did the Fifth District do?

Macheras: Yes, it was a rollercoaster ride that wasn't very much fun. Generally, the Fifth District reflected economic trends that we see broadly in the U.S.

In early 2020, most people who follow what's going on in the economy thought that the novel coronavirus was something that was far from us, in China [and] that could pose some risk to supply chains. But the virus wasn't seen as causing any real economic harm here, no more than a small drag on growth.

We started the year, 2020, with historically low rates of joblessness, with modest payroll growth. The unemployment rate was at about three and a half percent in the U.S. and 3.2 percent in the Fifth District. Job growth was 1.4 percent for the nation and a just a little over 1 percent for our region.

Of course, all of this changed very quickly. By mid-March, many states started imposing stay-at-home orders and other public health measures to slow the spread of the novel coronavirus. Firms sent workers home to work remotely. Plants, nonessential retail, and schools closed temporarily.

The government, in response, provided relief through the CARES Act, while the Federal Reserve did its part by holding interest rates down and ensuring liquidity in financial markets through a variety of lending facilities. These efforts helped many businesses and households.

Still, March, April and May were very tough months. Initial unemployment insurance filings in the U.S. went from 201,000 claims during the week ending February 1 to a record high of around 6.9 million claims during the week ending March 28. Likewise, in the Fifth District, initial claims skyrocketed from 13,391 in early February to a peak of 510,840 during the first week of April. The unemployment rate peaked in the U.S. and in every state in the Fifth District during April 2020.

Gerena: Economic conditions seemed to improve in the summer, as many states succeeded in flattening the curve and started easing restrictions.

Macheras: Yes, that improvement was reflected in declining unemployment rates and increases in payrolls. Then the fall brought surges in infection rates that negatively impacted restaurants, bricks-and-mortar retail, hotels and other travel-related industries. While people were freer to move around in some instances, many were reluctant to do so, and that slowed the recovery.

December data is not yet available at the state level, but by November 2020, the unemployment rate had declined to 5.7 percent in the Fifth District, well off its peak of 12 percent in April. For the U.S., the rate was 6.7 percent versus an April peak of 14.7 percent.

Meanwhile, Fifth District jobs in November were about 95 percent of their February level, before the pandemic spread throughout the country. U.S. employment in November was only 93 percent of its level in February.

It's worth mentioning other consequences of the COVID-19 pandemic. People aren't participating in the workforce to the extent that they did earlier in 2020. Many households face food insecurity or the threat of eviction. Students and their families continue to navigate disruptions in education as well.

Gerena: For sure, many people continue to face difficulties at the start of the new year. Have different parts of the Fifth District been affected differently by the pandemic?

Macheras: Yes, while the economic performance of the Fifth District is pretty similar to national trends, parsing the data by state or by industry sector reveals some significant differences.

For example, South Carolina has a high concentration of manufacturing and tourism-related economic activity. While the manufacturing sector has recovered all of the jobs it lost since February, the leisure and hospitality sector remains at 83 percent of its February level.

None of the major industry sectors in North Carolina were back to pre-pandemic levels as of November, although several were getting close. These include financial activities; trade, transportation, and utilities; and professional and business services.

Virginia and Maryland have a higher concentration of jobs in professional and business services. This had the effect of buffering these states somewhat from the worst of the downturn, since many workers in these sectors were able to work from home. The same is true of the government sector, which is more concentrated in Virginia, Maryland and the District of Columbia.

Even within a state, there were regional variations. Rates of COVID-19 infection spiked first in more urban areas, but eventually the disease spread to more rural areas. By year-end, businesses and workers were hurting in parts of West Virginia, southwest Virginia and western North Carolina and health systems in these areas were under stress.

Looking at the Fifth District as a whole, the construction sector is the only major industry to have regained all of the jobs it lost since February. It has also experienced growth over the year since November 2019, the only industry sector to do so.

Gerena: That's interesting. Were there are any other bright spots in 2020?

Macheras: There were definitely some bright spots, despite the hardships.

With interest rates low, this proved to be a great time for people who felt secure about their jobs to buy a home. The housing market got very tight and inventories, commonly measured by months' supply, are very low.

Related to home buying, sales of appliances were also very strong. Some new homeowners had to wait for weeks to get their preferred appliances.

Meanwhile, with people spending more time at home, they needed to make living spaces more suitable for work and school, or just more comfortable. So businesses that sell home improvement products did well and contractors were very busy. Also, more people were eating at home and cooking at home.

All this is to say that many businesses, such as restaurants, have struggled and some may not survive the pandemic. But other businesses may have just experienced their best year ever.

Gerena: On that note, let's wrap up by looking ahead. What will you be paying attention to in the coming year?

Macheras: For businesses that had to close, the question is, "How many will be able to come back?" The Richmond Fed conducts monthly surveys of business activity, and we have been asking business owners when they expect their firms to return to pre-COVID levels of employment. According to their responses, it seems like the third quarter of 2021 is most likely when things get back to, quote, normal.

However, as I mentioned briefly, labor force participation has taken a hit. This is particularly true among women and minorities. Will they be able to transition back into the world of work? If so, we don't know how quickly we'll return to a higher level of participation.

And, even when that happens, what have people lost in terms of their wage trajectory from being sidelined during the pandemic? Will there be a more inclusive recovery for people who started behind and now lag further?

Education plays a big role in boosting a person's earnings power. But what will disruptions to education mean for the development of our young people and the future productivity of our workforce? We will host a series of discussions on education called District Dialogues, starting on February 18, to address these questions.

I have been thinking about what the new normal might look like, particularly with respect to where people live and work. Many workers will want to continue to work from home, and many employers will tell you that it has worked well. What does this mean for demand for office space? Will people be able to live almost anywhere, and which geographic areas will benefit from that?

Lots of questions that hopefully we'll be able to begin to answer as we look forward to a post-pandemic future.

Gerena: Indeed. Well, thanks for sharing your insights with our listeners today, Ann.

Macheras: Thank you.