Tag Archives: Economy

Powell’s Econ 101: Jobs not inflation. And forget about the money supply

By Howard Schneider

WASHINGTON (Reuters) – In a congressional hearing dominated by talk of the pandemic and what may be needed to heal the economy from its effects, Fed Chair Jerome Powell on Tuesday had a subtle message for U.S. senators evaluating their options.

Toss out the college textbooks, because the world has changed.

The unemployment rate? Forget it. The Fed only cares about the number of people working and how to get it higher, not an age-old statistic that, for all its familiarity, overlooks a key group, namely those who stopped looking for work during the pandemic and need to be brought back.

Inflation? Not a problem anytime soon. Queried by Democratic U.S. Senator Mark Warner about the need to make “a sizeable investment” in U.S. infrastructure, Powell set aside classic concerns of hefty government borrowing driving up prices and responded “this is not a problem for this time as near as I can figure.”

The money supply? No longer relevant, Powell, 68, told Republican U.S. Senator John Kennedy, 69, about the once-important measures of cash and easily spent assets that was a central focus for the Fed in the past.

“When you and I studied economics a million years ago M2 and monetary aggregates seemed to have a relationship to economic growth,” Powell said, referring to one main measure of the money in public hands. “Right now … M2 … does not really have important implications. It is something we have to unlearn I guess.”

There has been a lot of unlearning these days at the Fed and the economic academy, on everything from basic economic relationships to the hazards – or not – of mountainous government debt. Even before the pandemic the central bank was reassessing one of its core ideas – that when the unemployment rate was low, inflation would be high, and vice versa.

The idea led past central bankers to worry whenever the jobless rate fell below a certain point, and to start itching for rate increases that would slow the economy and fend off the coming inflation. It also put people out of work.

That concept was pretty much thrown overboard as of August: Whatever drives inflation, the Fed concluded – and there is plenty of disagreement about what that is – a low unemployment rate is no longer considered part of it.

The unemployment rate itself may even have become passé. It measures the number of people working divided by the number of people working or looking for work. What it does not count, though, are the people out of the labor market – retirees, for example, but also, and of more concern, women who abandoned careers to care for family during the pandemic.

When the Fed considers its goal of maximum employment these days, Powell said, “we don’t just mean the unemployment rate, we mean the employment rate,” measured against the population as a whole and aspiring to “high levels of participation.”

(Reporting by Howard Schneider in Washington; Editing by Dan Burns and Matthew Lewis)

Pandemic led to U.S. housing boom, reduced credit card debt, New York Fed says

By Jonnelle Marte

(Reuters) – The coronavirus pandemic changed the way U.S. consumers use credit, as lower interest rates spurred a boom in home buying and refinancing and virus-related shutdowns led to a drop in credit card use and an increase in paying off debt, according to a report released on Wednesday by the New York Federal Reserve.

Total household debt last year increased by $414 billion to $14.56 trillion at the end of December, the New York Fed found in its quarterly household debt and credit report.

“The COVID pandemic and ensuing recession have marked an end to the dynamics in household borrowing that have characterized the expansion since the Great Recession, which included robust growth in auto and student loans, while mortgage and credit card balances grew more slowly,” New York Fed researchers wrote in a supplemental blog post published on Wednesday. “As the pandemic took hold, these dynamics were altered.”

Mortgage balances, which make up the largest share of household debt, grew by $182 billion in 2020 – the largest increase since 2007.

Home buying and refinancing took off last year after the Federal Reserve slashed its key overnight interest rate to near zero to fight the economic fallout from the pandemic, leading to lower mortgage rates. A massive shift to working and learning from home also bolstered the housing market, as some families searched for properties with more living space.

Credit card balances increased by $12 billion in the fourth quarter but balances were still $108 billion lower from a year earlier – the largest yearly decline since the report was launched in 1999.

The year-over-year drop is a sign that many credit card holders reduced spending and used pandemic relief checks to pay down their card balances, researchers said. That is in line with earlier research from the New York Fed that found 35% of direct payments received last year were used to pay down debt.

Meanwhile, auto loan balances increased by $14 billion during the fourth quarter and student loan balances rose by $9 billion, the New York Fed’s latest report showed. In total, all household debt not related to housing – including credit card debt, auto loans, student loans, and other debts – increased by $37 billion during the fourth quarter but was still below pre-pandemic levels seen at the end of 2019.

(Reporting by Jonnelle Marte; Editing by Paul Simao)

Biden’s immense economic challenge: Putting 10 million people back to work

By Jonnelle Marte

(Reuters) – President Joe Biden is presenting his plan on Friday for addressing one of the greatest challenges created by the COVID-19 pandemic – how to get millions of out-of-work Americans back on the job.

The labor market regained some minor ground in January when the economy added 49,000 jobs, according to a report released Friday by the Labor Department. But the report showed labor market growth is stalling, doing little to close the huge gap created by the pandemic

“At that rate it’s going to take 10 years before we get to full employment,” Biden said Friday morning from the White House.

Roughly half of the 22 million jobs lost at the height of the pandemic have been recouped. But that still leaves a hole of about 10 million jobs, disproportionately ones held by women and minorities in low-wage roles.

Here is a look at the people who may need the most help as the economy heals:

MINORITIES HIT HARDEST

As the economy reopened last year from widespread shutdowns, many office workers adjusted to working remotely and other industries called people back to their jobs.

But many Black, Hispanic and Asian workers who were overrepresented in the low-wage occupations most affected by the pandemic, including servers, bartenders, cooks and housekeepers, are still unemployed.

The overall unemployment rate dropped to 6.3% in January. But within that rate are huge racial disparities – over 9% of Black workers are unemployed, versus less than 6% of white workers:

WOMEN PUSHED OUT

Before the pandemic, the share of women either working or looking for work was rising, thanks to a record-long economic expansion.

The crisis reversed those gains, in part because the closures of schools and child care centers left working mothers with a weaker support system.

Some 2.5 million woman dropped out of the labor force during the pandemic, compared to 1.8 million men, according to data from the Labor Department.

Biden says he wants to help more women get back to work through policies that reopen schools safely and make childcare more affordable.

SECTOR BY SECTOR

Businesses that rely on travel or on people spending time close to each other indoors have rebounded the slowest, and many people who made their living by staffing kitchens, mixing drinks or cleaning hotel rooms are still out of work.

Employment in leisure and hospitality was down 23% in January from pre-pandemic levels in February 2020, more than any other industry.

Economists expect many of those jobs to return after coronavirus vaccines are distributed widely and consumers feel more comfortable spending money in restaurants, bars and other entertainment venues. But it’s not clear whether employment will return completely to previous levels.

LONG-TERM UNEMPLOYED

Job searches have stretched on for some people, including many in the leisure and hospitality industry.

The “long-term unemployed,” or those who have been out of work for at least six months, now make up about 40% of the total unemployed, or about 4 million people, up from about 20% before the pandemic.

Research shows people who are long-term unemployed can have a harder time finding new jobs, putting them at greater risk of facing pay cuts or of dropping out of the labor market.

Biden wants to create federally subsidized jobs in healthcare, clean energy and other fields that could help the long-term unemployed move into new roles.

ACROSS THE MAP

Designing federal policies to help the out of work may be especially challenging because job losses vary widely from one state to the next.

Employment in Idaho, Utah and Kansas had fully recovered to pre-pandemic levels by December. But the situation was more dire in New York and tourism-dependent Nevada and Hawaii.

This could lead to wide disagreements among lawmakers about how much more aid is needed to nurse the economy, and the labor market, back to health.

(Reporting by Jonnelle Marte; Additional reporting by Howard Schneider. Editing by Heather Timmons and Andrea Ricci)

U.S. private hiring rebounds solidly in January

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. private payrolls rebounded more than expected in January, suggesting the labor market recovery was back on track after the economy shed jobs in December as soaring COVID-19 infections hurt operations in the leisure and hospitality industry.

The ADP National Employment Report on Wednesday showed broad gains in hiring last month, though the pace was half of the monthly average job growth in the last six months of 2020. The stronger-than-expected rise in hiring was likely driven by the nearly $900 billion in additional pandemic relief provided by the government in late December.

“Recovery in payrolls is ongoing, albeit at a slow pace,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics in White Plains, New York. “However, contact-facing businesses continue to face downside risks from virus-related restrictions.”

Private payrolls increased by 174,000 jobs last month after dropping by 78,000 in December. Economists polled by Reuters had forecast private payrolls would rebound by 49,000 in January.

The ADP report is jointly developed with Moody’s Analytics.

Goods producers added 19,000 jobs in January, with employment in the construction industry rising 18,000. Manufacturing payrolls gained only 1,000. Hiring in the services sector rebounded by 156,000 jobs after falling 73,000 in December. The leisure and hospitality industry added 35,000 jobs after shedding 79,000 positions in December.

January was the worst month of the coronavirus pandemic since it started in the United States, according to data from Johns Hopkins University, forcing consumers to hunker down.

The bounce back in hiring last month as authorities started to ease restrictions on businesses has offered hope of faster job growth in the months ahead as the boost from recent stimulus package fully kicks in and the vaccines rollout speeds up.

“The rebounds suggest that demand rebounded quickly once the latest coronavirus wave passed its peak,” said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.

U.S. stocks opened higher after strong quarterly results from Alphabet and Amazon, and hopes of more stimulus. The dollar was steady against a basket of currencies. U.S. Treasury prices were lower.

SPOTTY RECORD

President Joe Biden has unveiled a recovery plan worth $1.9 trillion, though resistance from some lawmakers worried about the ballooning national debt could see the package trimmed. The Biden administration has pledged to speed up and simplify the distribution of vaccines.

Moody’s Analytics chief economist Mark Zandi said vaccines and fiscal stimulus could help to spur faster job growth.

The ADP report was published ahead of the government’s closely watched, and comprehensive, monthly employment report on Friday. Despite the solid ADP number, economists did not change their estimates for January nonfarm payrolls, noting its spotty record predicting the private payrolls count in the government’s employment report.

“We don’t think that the ADP report gives a very reliable signal about the Labor Department data,” said Daniel Silver, an economist at JPMorgan in New York.

According to a Reuters poll of economists payrolls likely increased by 50,000 jobs in January after declining by 140,000 in December, the first drop in employment in eight months.

Expectations for a rebound in hiring were bolstered by a report on Monday from the Institute for Supply Management showing that manufacturers hired more workers in January, though a flare-up in COVID-19 infections caused labor shortages at factories and their suppliers.

But the Conference Board’s survey last week showed consumers’ perceptions of labor market conditions deteriorated further in January.

The economy has recouped 12.5 million of the 22.2 million jobs lost in March and April. The Congressional Budget Office estimated on Monday that employment would not return to its pre-pandemic level before 2024.

(Reporting By Lucia Mutikani; Editing by Chizu Nomiyama)

COVID-19 wreaks havoc on U.S. economy; 2020 performance worst in 74 years

By Lucia Mutikani

WASHINGTON (Reuters) – The U.S. economy contracted at its deepest pace since World War Two in 2020 as the COVID-19 pandemic depressed consumer spending and business investment, pushing millions of Americans out of work and into poverty.

Though a recovery is underway, momentum slowed significantly as the year wound down amid a resurgence in coronavirus infections and exhaustion of nearly $3 trillion in relief money from the government. The moderation is likely to persist at least through the first three months of 2021.

The economy’s prospects hinge on the distribution of vaccines to fight the virus. President Joe Biden has unveiled a recovery plan worth $1.9 trillion, but some lawmakers have balked at the price tag soon after the government provided nearly $900 billion in additional stimulus in late December.

“The economy will never move further away from the edge of the cliff of recession unless there is a resurgence in final demand, meaning consumers have to come out in force to make the recovery a permanent one,” said Chris Rupkey, chief economist at MUFG in New York.

Gross domestic product decreased 3.5% in 2020, the biggest drop since 1946, the Commerce Department said on Thursday. That followed 2.2% growth in 2019 and was the first annual decline in GDP since the 2007-09 Great Recession.

Nearly every sector, with the exception of government and the housing market, contracted last year. Consumer spending, which accounts for more than two-thirds of the economy, plunged 3.9%, the worst performance since 1932. The economy tumbled into recession last February.

Delays by the government to offer another rescue package and renewed business disruptions caused by the virus restricted GDP growth to a 4.0% annualized rate in the fourth quarter. The big step-back from a historic 33.4% growth pace in the third quarter left GDP 2.5% below its level at the end of 2019.

The economy is expected to return to its pre-pandemic level in the second quarter of this year.

The Federal Reserve on Wednesday left its benchmark overnight interest rate near zero and pledged to continue pumping money into the economy through bond purchases, noting that “the pace of the recovery in economic activity and employment has moderated in recent months.”

With the virus still raging, economists are expecting growth to slow to around a 1.0% rate in the first quarter, before regaining speed by summer as the additional stimulus kicks in and more Americans get vaccinated.

“We foresee record-breaking consumer spending growth in 2021 with households benefiting from a watered-down $1.2 trillion version of Biden’s rescue plan, vaccine diffusion gradually reaching two thirds of Americans by July and employment accelerating this spring,” said Gregory Daco, chief U.S. economist at Oxford Economics in New York.

Stocks on Wall Street were trading higher. The dollar slipped against a basket of currencies. U.S. Treasury prices were lower.

K-SHAPED RECOVERY

The services sector, especially restaurants, bars and hotels, has borne the brunt of the coronavirus recession, disproportionately impacting lower-wage earners, who tend to be women and minorities. That has led to a so-called K-shaped recovery, where better-paid workers are doing well while lower-paid workers are losing out.

The stars of the recovery have been the housing market and manufacturing as those who are still employed seek larger homes away from city centers, and buy electronics for home offices and schooling. Manufacturing’s share of GDP has increased to 11.9% from 11.6% at the end of 2019.

A survey by professors at the University of Chicago and the University of Notre Dame showed poverty increased by 2.4 percentage points to 11.8% in the second half of 2020, boosting the ranks of the poor by 8.1 million people.

Rising poverty was underscored by persistent labor market weakness. In a separate report on Thursday, the Labor Department said initial claims for state unemployment benefits totaled a seasonally adjusted 847,000 for the week ended Jan. 23. While that was down 67,000 from the prior week, claims remain well above their 665,000 peak during the 2007-09 Great Recession.

Including a government-funded program for the self-employed, gig workers and others who do not qualify for the regular state unemployment programs 1.3 million people filed claims last week.

The economy shed jobs in December for the first time in eight months. Only 12.4 million of the 22.2 million jobs lost in March and April have been recovered. About 18.3 million Americans were receiving unemployment checks in early 2021.

“The labor market is struggling this winter, but better times are ahead,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

Lack of jobs and the temporary expiration of a government weekly jobless subsidy curtailed growth in consumer spending to a 2.5% rate in the fourth quarter after a record 41% pace in the July-September quarter.

But business investment grew at a 13.8% rate, with spending on equipment rising at a 24.9% pace. Spending on nonresidential structures rebounded after four straight quarterly declines.

Businesses also accumulated inventories last quarter, contributing to GDP growth. But the inventory build pulled in more imports, leading to a larger trade deficit, which subtracted from output. The housing market recorded another quarter of double-digit growth, thanks to historically low mortgage rates. Government spending was weak.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)

COVID-19, renewed benefits boost U.S. weekly jobless claims

By Lucia Mutikani

WASHINGTON (Reuters) – The number of Americans filing first-time applications for unemployment benefits surged last week, confirming a weakening in labor market conditions as a worsening COVID-19 pandemic disrupts operations at restaurants and other businesses.

The larger-than-expected increase in weekly unemployment claims reported by the Labor Department on Thursday was seen by some economists as driven by the recent renewal of supplemental jobless benefits, but nonetheless raised the risk of further job losses in January after nonfarm payrolls slumped in December for the first time in eight months.

“The economy clearly needs additional support from Washington because right now rising jobless claims tells us the labor market recovery has stalled and the direction is full-tilt down,” said Chris Rupkey, chief economist at MUFG in New York.

Initial claims for state unemployment benefits increased 181,000 to a seasonally adjusted 965,000 for the week ended Jan. 9, the highest since late August. Economists polled by Reuters had forecast 795,000 applications in the latest week.

Unadjusted claims shot up 231,335 to 1.151 million last week. Economists prefer the unadjusted number because of earlier difficulties adjusting the claims data for seasonal fluctuations due to the economic shock caused by the pandemic. Including a government-funded program for the self-employed, gig workers and others who do not qualify for the regular state unemployment programs 1.4 million people filed claims last week.

U.S. stocks opened higher as investors awaited details of Biden’s rescue plan. The dollar rose against a basket of currencies. U.S. Treasury prices were lower.

STRICTER MEASURES

The surge in claims last week also likely reflected reapplications for benefits following the government’s renewal of a $300 unemployment supplement until March 14 as part of the latest stimulus package. Government-funded programs for the self-employed, gig workers and others who do not qualify for the state unemployment programs as well as those who have exhausted their benefits were also extended.

“Not all individuals eligible for unemployment assistance actually claim benefits, and the supplementary payments add an incentive to file for benefits,” said Nancy Vanden Houten, lead U.S. economist at Oxford Economics in New York.

Authorities in many states have banned indoor dining to slow the spread of the coronavirus. The economy shed jobs in December for the first time in eight months.

The Federal Reserve’s Beige Book report of anecdotal information on business activity collected from contacts nationwide in early January showed on Wednesday that “contacts in the leisure and hospitality sectors reported renewed employment cuts due to stricter containment measures.”

The central bank also noted that the resurgence in the coronavirus was causing staff shortages in the manufacturing, construction and transportations sectors. The virus has infected more than 22.5 million people in the United States and killed over 376,188, the most of any country.

Though jobless claims have dropped from a record 6.867 million in March, they remain above their 665,000 peak during the 2007-09 Great Recession. Economists say it could take several years for the labor market to recover from the pandemic.

The claims report showed the number of people receiving benefits after an initial week of aid increased 199,000 to 5.271 million during the week ending Jan. 2. At least 18.4 million were on unemployment benefits on all programs in late December.

Labor market stress could curb inflation amid signs of rising price pressures. In a separate report on Thursday, the Labor Department said import prices jumped 0.9% in December after rising 0.2% in November. Import prices were boosted by higher prices for energy products and recent dollar weakness.

Economists had forecast import prices, which exclude tariffs, accelerating 0.7% in December. In the 12 months through December, import prices slipped 0.3% after dropping 1.0% in November.

(Reporting By Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)

Fed’s Bullard sees inflation rising, mum on QE taper

By Howard Schneider

(Reuters) – All signs are pointing to a rise in U.S. inflation, St. Louis Federal Reserve President James Bullard said on Wednesday, but though the economy may boom later this year, it’s too early to say when the Fed could take any steps to pull back on its super-easy policy.

The money supply has “exploded,” fiscal deficits are “off the charts” and a hot economy may either already be here or “just around the corner,” Bullard said in an interview at the Reuters Next conference.

And with vaccines going first to the elderly and others who are most at risk of dying from COVID-19, he said, daily deaths – now likely near their peak – will drop. “You are going to see that’s going to have big ramifications for the economy” as people worry less about the risks, he said.

“I don’t think there will be a spectacular date when you can say, ‘All clear.'” Bullard said. “I think what will happen is the disease will be less deadly…the virus is going to run out of victims.”

Still, Bullard said, labor markets still have a “long way to go” before they are healed. And even with inflation set to rise, the Fed won’t preemptively tighten policy in response. Inflation has underrun the Fed’s 2% target for the last decade, and has pledged to allow it to exceed 2% for some time to reestablish its credibility.

The Fed has kept rates near zero since last March and has signaled it will keep them there for years to give inflation time to do just that. The central bank has also vowed to keep buying Treasuries and mortgage-backed securities at its current pace of $120 billion a month until it sees “substantial” further progress toward its goals of full employment and price stability.

While a couple Fed policymakers have said they could see that bar being met later this year, Bullard said Wednesday he still needs to see how things develop.

“Labor markets have improved dramatically but still have a long way to go… you still need unemployment to drop, jobs to come back… certain sectors have really been hard hit and for them to come back we are going to have to get this vaccine rolled out,” he said. For the economy as a whole, “it’s possible you get a boom… but let’s wait and see if that actually happens.”

(Reporting by Howard Schneider and Ann Saphir; Editing by Chizu Nomiyama)

After months of inaction, U.S. Congress approves $892 billion COVID-19 relief package

By Richard Cowan and Andy Sullivan

WASHINGTON (Reuters) – The U.S. Congress on Monday approved an $892 billion coronavirus aid package, throwing a lifeline to the nation’s pandemic-battered economy after months of inaction, while also keeping the federal government funded.

President Donald Trump is expected to sign the package into law.

Following days of furious negotiation, both legislative chambers worked deep into the night to pass the bill – worth about $2.3 trillion including spending for the rest of the fiscal year – with the House of Representatives first approving it and the Senate following suit several hours later in a bipartisan 92-6 vote.

The virus relief bill includes $600 payments to most Americans as well as additional payments to the millions of people thrown out of work during the COVID-19 pandemic, just as a larger round of benefits is due to expire on Saturday.

The stimulus package, the first congressionally approved aid since April, comes as the pandemic is accelerating in the United States, infecting more than 214,000 people every day and slowing the economic recovery. More than 317,000 Americans have died.

House Speaker Nancy Pelosi, a Democrat, said she supported the virus relief bill even though it did not include the direct aid for state and local governments that Democrats had sought.  The bill, she said, “doesn’t go all the way but it takes us down the path.”

Republican Representative Hal Rogers, who also supported the package, said “it reflects a fair compromise.”

At 5,593 pages, the wide-ranging bill that also spends $1.4 trillion on an array of federal programs through the end of the fiscal year in September, is likely to be the final major piece of legislation for the 116th Congress that expires on Jan. 3. Congress included a measure continuing current levels of government spending for seven days, ensuring no interruption to federal operations.

MCCONNELL CLAIMS VICTORY

It has a net cost of roughly $350 billion for coronavirus relief, Republican Senate Majority Leader Mitch McConnell said, adding that more than $500 billion in funding comes from unspent money Congress had authorized.

Both Democrats and Republicans claimed victory but McConnell argued that the final bill came close to what Democrats rejected months ago as insufficient.

The measure ended up far less than the $3 trillion called for in a bill that passed the Democratic-controlled House in May, which the Republican-controlled Senate ignored.

“Compare the shape of this major agreement with the shape of what I proposed all the way back in late July. Yes, some fine details are different,” McConnell said in a statement after the vote. “There is no doubt this new agreement contains input from our Democratic colleagues. It is bipartisan. But these matters could have been settled long ago.”

A months-long impasse on relief that played in the background of the U.S. presidential election was broken after a group of centrist lawmakers from both parties put forward a proposal that served as a framework for the final bill.

Even so, the bill was so unwieldy that it caused congressional computers to malfunction. It includes a hodgepodge of tax breaks and other proposals that failed to pass on their own, including two new Smithsonian museums and limits on surprise medical billing.

The legislation also renews a small-business lending program by about $284 billion and steers money to schools, airlines, transit systems and vaccine distribution.

PUBLIC COMPANIES EXCLUDED

The small-business loan and grant program, known as the Paycheck Protection Program, would exclude publicly traded companies from eligibility.

State and local governments, which are struggling to pay for the distribution of newly approved COVID-19 vaccines, would receive $8.75 billion from Washington, with $300 million of that targeted at vaccinations in minority and high-risk populations.

The deal, worked out in a rare weekend session of Congress, omits the thorniest sticking points, which included Republicans’ desire for a liability shield to protect businesses from coronavirus-related lawsuits as well as Democrats’ request for a large outlay of money for cash-strapped state and local governments.

If signed into law, the bill would be the second-largest stimulus package in U.S. history, behind the roughly $2 trillion aid bill passed in March. Experts said that money played a critical role as social-distancing measures shuttered wide swaths of the economy.

(Reporting by Richard Cowan and Andy Sullivan in Washington; Additional reporting by Susan Heavey and Lisa Lambert in Washington; Writing by James Oliphant; Editing by Scott Malone, Matthew Lewis and Peter Cooney)

U.S. third-quarter productivity pared; unit labor costs revised up

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. worker productivity increased strongly in the third quarter, though the pace of growth was likely overstated as the sharp rebound in output from the COVID-19 pandemic recession has far outpaced employment gains.

The Labor Department said on Tuesday nonfarm productivity, which measures hourly output per worker, increased at a 4.6% annualized rate last quarter. The slight downward revision from the 4.9% pace estimated last month followed a 10.6% rate of growth in the second quarter, which was the fastest since the first quarter of 1971.

The economy expanded at a historic 33.1% annualized rate in the July-September quarter, thanks to more than $3 trillion in government pandemic relief for businesses and workers. That followed a record 31.4% pace of contraction in the second quarter. Strong productivity explains the divergence between GDP growth and the labor market.

The economy has recouped two-thirds of output lost during the coronavirus crisis, while only about 56% of the 22.2 million jobs lost in March and April. A wide gap between output and employment is not unusual during recessions, with a similar trend observed during the 2007-09 Great Recession.

Economists polled by Reuters had forecast productivity growth would be unrevised at a 4.9% rate in the third quarter. The COVID-19 downturn has decimated lower-wage industries, like leisure and hospitality, which economists say tend to be less productive.

According to Moodys’ Analytics chief economist, Mark Zandi, there has been a shift in economic activity to big companies from small and medium-sized retailers. Zandi also noted that big businesses across industries are taking advantage of the pandemic to aggressively implement labor-saving technology.

“The underlying rate of productivity has not shifted from what it was before,” said Zandi. “There is no fundamental shift in productivity growth going forward, but it means it’s going to take a while to recover all the jobs lost unless we have good policy in place.”

U.S. financial markets were little moved by the data.

Compared to the third quarter of 2019, productivity increased at a 4.0% rate instead of the 4.1% pace reported last month.

Hours worked rebounded at a 37.1% rate, rather than the 36.8% rate estimated in November. That followed a record 42.9% pace of decline in the second quarter.

Unit labor costs – the price of labor per single unit of output – plunged at a 6.6% rate instead of an 8.9% rate as previously reported. Unit labor costs rose at a 12.3% pace in the second quarter. They increased at a 4.0% rate from a year ago.

“The big swings in the unit labor costs data in recent quarters make it hard to detect an underlying trend, but overall we think that the shock to the economy coming from COVID-19 should weigh on employee compensation,” said Daniel Silver, an economist at JPMorgan in New York.

Hourly compensation fell at a 2.3% rate last quarter, instead of a 4.4% pace as previously reported. That followed a 24.3% rate of acceleration in the second quarter. Compensation increased at a 8.2% rate compared to the third quarter of 2019.

(Reporting by Lucia Mutikani; Editing by Andrew Heavens and Andrea Ricci)

Airlines set to lose $157 billion amid worsening slump: IATA

By Laurence Frost

PARIS (Reuters) – Airlines are on course to lose a total $157 billion this year and next, their main global body warned on Tuesday, further downgrading its industry outlook in response to a second wave of coronavirus infections and shutdowns afflicting major markets.

The International Air Transport Association (IATA), which in June had forecast $100 billion in losses for the two-year period, said it now projects a $118.5 billion deficit this year alone, and a further $38.7 billion for 2021.

The bleak outlook underscores challenges still facing the sector despite upbeat news on development of COVID-19 vaccines, whose global deployment will continue throughout next year.

“The positive impact it will have on the economy and air traffic will not happen massively before mid-2021,” IATA Director General Alexandre de Juniac told Reuters.

Passenger numbers are expected to drop to 1.8 billion this year from 4.5 billion in 2019, IATA estimates, and will recover only partially to 2.8 billion next year. Passenger revenue for 2020 is expected to have plunged 69% to $191 billion.

“That’s by far the biggest shock the industry has experienced in the post-World War Two years,” IATA Chief Economist Brian Pearce said.

The forecasts assume significant re-opening of borders by the middle of next year, helped by some combination of COVID-19 testing and vaccine deployment.

IATA reiterated its call for governments to replace travel-stifling quarantine regimes with widespread testing programs.

“We are seeing states progressively coming to listen to us,” de Juniac said, citing testing initiatives underway in France, Germany, Italy, Britain, the United States and Singapore.

While some governments and airlines such as Australia’s Qantas say passengers are likely to require vaccination for long-haul travel, the approach is unlikely to work everywhere, de Juniac said.

“It would prevent people who are refusing (the vaccine) from travelling,” the IATA chief said. “Systematic testing is even more critical to reopen borders than the vaccine.”

Air cargo, a rare bright spot for the industry as the grounding of flights pushes freight prices higher, will likely see global revenue rise 15% to $117.7 billion this year despite an 11.6% decline in volume to 54.2 million tonnes, IATA said.

Some $173 billion in government aid has left recipients with debts that threaten to hobble future investment, it warned, and more bankruptcies are likely. Norwegian Air became the latest casualty on Nov. 18, when it filed for bankruptcy protection in Ireland.

The average airline now has enough liquidity to survive another 8.5 months, while some have just weeks, Pearce said. “I think we will get consolidation through some airline failures.”

(Reporting by Laurence Frost; Additional reporting by Johnny Cotton; Editing by Mark Potter and David Evans)