From a high level, two years after the covid-19 pandemic hit, the numbers look great.
Total economic output has more than recovered from its 2020 lows. The unemployment rate is back below 4 percent, as it was in early 2020. Total employment is near its pre-covid levels.
But underneath the aggregate statistics, there are signs that the economy may never be the same, or at least that the economy will be in a kind of post-covid state for several years.
Before the pandemic, inflation was seemingly stuck below 2 percent a year, economists were enthusiastic about the economic benefits of people literally living near each other and worried about “left behind” places, and globalization was seemingly a fact of the world, where the vast global supply chains of components and the goods made out of them could maybe be disturbed only by tariffs.
Today, however, inflation is at 40-year highs, supply chain disruptions are driving up the price of goods, and urban cores are losing population while smaller cities, suburbs and even rural areas are getting new residents.
How much these trends will continue to persist of course remains to be seen, but it may be time to admit that as we “return to normal,” things may never be the same.
1. The supply chain ain’t what it used to be
Before the pandemic, buying a washing machine was no big deal. But now, “there are a lot of opportunities for bottlenecks to crop up,” Alex Williams, a research analyst at Employ America, told Grid. A washing machine might be manufactured in South Korea or China, but the steel and aluminum, and the semiconductors (yes, washing machines have semiconductors), might come from factories all over the world.
“Durable goods have gotten a lot more expensive over the pandemic,” Williams said.
One of the promises of globalization is that such goods could be produced in the place that would be able to make it the cheapest, not just in proximity to where people wanted to buy it. This globalized process led to some durable goods like washing machines getting cheaper and inflation in durable goods in general to trail overall inflation.
The pandemic changed all of this. There was upward pressure on prices from abroad as opposed to globalization bringing prices down.
When demand for these goods is consistent or even expands, these supply chain constraints can lead to large price increases. Spending on durable goods has consequently gone up; according to Census Bureau data, it has risen from $1.6 trillion to $2.2 trillion from February 2020 to now, an almost 40 percent jump. In that same period, all personal consumption in the U.S. has risen from $14.8 trillion to $16.7 trillion, a 13 percent increase.
Globalization used to be a force that would bring prices down, but the pandemic has turned it into — or exposed it as — a force that could bring prices up. With fresh, massive lockdowns in China as a result of its “zero covid” policy, the reversal looks to be persistent, at least for now.
2. The return of inflation
For more than a decade leading up to the arrival of covid-19, inflation tended to run below the 2 percent target set by the Federal Reserve. Covid — or at least the economic recovery from it — changed all that. From March 2021, it has been running at 2 percent or above. From the beginning of last year to now, inflation has risen from around 1.5 percent to 8.6 percent, the highest level since the Great Inflation of the 1970s and early 1980s. Over that time, the composition of inflation has changed.
Earlier, it was dominated by covid-induced changes in both the production of goods and consumption of them. A shortage of semiconductors led to spiking car prices; people confined at home or just choosing to go out less consumed more goods and fewer services, causing supply chain snarls and bottlenecks that drove up prices for goods.
Now, the inflation situation has started to change. Food and gasoline are more expensive, thanks partially to supply constraints induced by the Russian invasion of Ukraine. Inflation in housing and services is starting to show up in the overall figure, while items like used cars are seeing their prices decline. Some analysts have even predicted that “core” inflation — the price of everything besides food and energy, may have peaked, even if it’s now broader-based than it was nine months ago or so. In any case, there’s no clear path back to the price environment of the 2010s.
3. Work from home is for real
Perhaps the biggest organizational shift born from the covid era will have nothing to do with medicine or infectious disease control per se, but instead how people work. While work from home has leveled off since the height of the pandemic, it has likely established itself as a way of life for a wide swath of current and former office workers.
In a survey in the fall of 2020, a group of economists including Adam Ozimek found that “in October, 2020, 31.6% of this continuously employed workforce always worked from home and 22.8% sometimes or rarely worked from home, totaling 53.6%.”
While those numbers were obviously an artifact of a pre-vaccine time, some level of elevated work from home is likely to persist. That’s for two reasons: First, employers and employees were forced to embrace remote work, and second, they found out they liked it. In a survey of employees in 14 countries, Stanford economist Nicholas Bloom and colleagues found that employers typically wanted one day of work from home while employees wanted two.
Ozimek predicts that “about 20 percent” of full-time workers will ultimately be remote, along with 15 percent of part-time workers.
He expects employers and employees to converge on their plans for how many days they’ll be out of the office. In his own surveys, Ozimek has found “long run plans for permanent remote work, both sides want it to a significant extent.” In fact, Bloom’s work has shown that 15 percent of workers surveyed would even quit if work from home were not offered by their employers.
4. People are moving away from urban cores because of it
Workers have changed their lives with the expectation they’ll be able to work remotely. According to a raft of data from the census, Postal Service and other sources, there’s been a sizable migration induced by covid following a few general patterns: warmer, cheaper and more space.
In an analysis of census data by William Frey of the Brookings Institution, he found that between July 2020 and July 2021, the “aggregate size” of metro areas with more than 1 million people declined, while smaller metros grew and “nonmetropolitan America showed the greatest annual population gain in more than a decade.”
Combined, New York, Los Angeles, San Francisco and Chicago lost around 700,000 people, while Phoenix, Houston, Austin and Dallas gained about 300,000 people.
But beyond the shifting around major cities, where expensive and coastal ones lose population while cheaper, interior, warmer cities gain population, some of the most dramatic movements have been from cities to less crowded and less expensive areas in the suburbs and rural areas.
“Housing markets are suggesting the value of living close to downtown has declined and value of living farther out has gone up,” Ozimek said. “Those are the fingerprints of work from home, millions of people have moved because of working from home. If you look at house prices, rents or population changes, you see the same story.” In research done earlier this year for Upwork, Ozimek found that almost 5 million Americans “say they have already moved because of remote work since 2000,” while almost 20 million “are planning on moving because of remote work.”
Looking at the ZIP code level, economists have found that there’s a “donut effect” happening locally — downtown cores lose population while outlying areas gain. This could be due to hybrid working arrangements where employees will put up with lengthy commutes that they have to do only once or twice a week — or even less.
Ozimek said that when he looks at what’s associated with slow population growth or population declines in a metro area, it’s high cost of living and jobs that can be done remotely. “The interaction of the two is strong and significant as well; for population growth, it’s bad if jobs can be done from home and if housing is expensive — it’s really bad for population growth if both things happen.”
5. But not enough housing is being built — at least not fast enough
This reshuffling of the population has not put great stress on the housing market all over the country, for both renters and buyers.
For a while during the pandemic, low mortgage rates kept affordability in check, creating something of a Goldilocks effect — homeowners say the value of their homes increase (the Case-Shiller Index, a measure that tracks home prices, rose 34 percent between the onset of the pandemic and now), while the measure of housing affordability calculated by the National Association of Realtors started to decline only last fall.
But now, housing affordability has been brutally hit by the sharp rise in mortgage rates, driven by the Federal Reserve’s plans to stem inflation by hiking interest rates. Mortgage rates have risen almost two percentage points since the end of last year.
Furthermore, while housing construction has picked up off its pandemic-era lows, there’s now a substantial gap between housing starts and actually finished homes. This could be due to the widespread supply chain issues that have plagued the housing industry — from difficulty finding labor to difficulty literally finding garage doors.
A world of higher interest rates could also hit residential construction, which could be a double-whammy for a housing market that, while great for those who already own homes, has not had a level of building to support a growing population (at least affordably) since the Great Recession.
Thanks to Lillian Barkley for copy editing this article.