Key Themes and Takeaways
• Strong employment growth in February and March, plus declining coronavirus case rates and increasing vaccinations, point to an accelerating pace of economic recovery in 2021.
• The March national employment gap is down to –5.4%, a shortfall of 7 million jobs relative to seasonally expected employment levels. Lost jobs remain concentrated in service sectors, especially Leisure and Hospitality. Construction and Manufacturing are recovering strongly, but both sectors face material shortages and supply chain bottlenecks.
• Unadjusted average weekly wages rose by more than 7% in 2020, in large measure because COVID-related job losses are concentrated among low-wage workers. Adjusting for the effect of COVID-related job losses on the wage distribution, average weekly wages rose by 3% in 2020 among workers who remained employed.
• Economic impact payments from two new federal stimulus programs enacted in December and March were distributed to households during the first quarter. Transfer payments have kept national household disposable income and savings above pre-pandemic 2019 levels. Strong household balance sheets provide wherewithal to drive a rapid rebound in discretionary consumption spending in 2021.
• About 30% of the United States population received at least one vaccine dose by the end of March, and vaccination rates are currently on the order of 3 million people per day. New coronavirus cases in March were down to about one-third of January’s rate. However, several states reported increases in cases and hospitalizations in late March attributed to a new and more contagious variant of the coronavirus.
• Job losses from a new COVID surge, if it develops, may be modest—like those during last winter’s surge, but much lower than in two previous virus surges in spring and summer 2020.

The Economic Outlook for Q1 2020

The Winter COVID Surge Abated as Vaccines Began to Roll Out

Last winter’s pandemic surge began in October and lasted through January. For the United States overall, more than 6 million new cases per month in December and January dwarfed the two previous surges in April and July. As coronavirus vaccines went into distribution, new case rates dropped in February and again in March.

Although March’s 1.8 million new cases are not much lower than new case rates in October and July 2020 that caused anxiety at those times, and well above the initial surge in April that sent the economy into lockdown, it is clear that perceptions have changed since last year. The two-month fall in coronavirus case rates, coincident with the appearance of new vaccines, has kindled optimism and a feeling that “this time is different, we have vaccines.” The expectation that new vaccines will bring the coronavirus pandemic under control by year-end, if not sooner, is itself a powerful driver for rapid recovery of spending and jobs in the United States—if that expectation is borne out in coming months.

Job Recovery Picked Up in February and March

The national employment gap for March was –5.4%, a shortfall of 7 million jobs relative to the seasonally expected level. After job recovery stalled out during the winter, employment reports for February and March point to an accelerating pace of job recovery. This is a welcome change from October to January when the employment gap hovered around –6.5% and the job shortfall seemed stuck above 8 million. In both February and March, national job gains were around 560,000—the biggest monthly increases since October.The QEB uses private nonfarm employment excluding government as its benchmark for employment reporting, and measures job gains (or losses) as changes in the employment gap. In its monthly job reports, the Bureau of Labor Statistics headlines monthly changes in nonfarm employment including government. The two employment metrics tell somewhat different stories. Nonfarm employment (including government) grew by 468,000 and 916,000 in February and March, suggesting that the pace of employment recovery accelerated sharply in March. However, gains in private nonfarm employment were more evenly balanced at 558,000 and 780,000, respectively; and accounting for expected seasonal variation brings the job gains in both months close to 560,000. Both data series show that US employment recovery picked up during the first quarter, but a focus on private employment in relation to expected seasonal variation indicates a smoother pace of acceleration beginning in February and continuing in March.

Other signs of economic optimism in the United States are:

• High levels of household disposable income (supported by two new rounds of stimulus payments in January and March following the first round of stimulus payments in April 2020)
• Improved sentiment among consumers and producers
• A growing expectation that the rollout of new vaccines will permit a return to normal economic activity soon—even immediately in states that recently rolled back coronavirus-related restrictions

Unemployment Is Falling More Slowly Than the Rate of Job Recovery

Although the seasonally unadjusted national unemployment rate dropped from 6.5% to 6.2% during the first quarter of 2021, March’s nearly 10 million unemployed is 80% above the pre-pandemic unemployment level in the fourth quarter of 2019, and 3.5 million unemployed via permanent layoffs is close to three times the pre-pandemic number.The QEB uses seasonally unadjusted measures of employment levels and employment gaps (relative to seasonal expectation) because these are better aligned with actual headcounts. Employment changes and unemployment rates reported on a seasonally unadjusted basis in the QEB will differ from those reported on a seasonally adjusted basis in other publications. Using seasonally adjusted data, the national unemployment rate fell from 6.7% to 6.0% in Q1 2021, a more dramatic decline.

Measured by the reduction in the employment gap, 1.5 million jobs were recovered from December to March that had been lost due to the COVID recession. But the number of unemployed fell by only 0.5 million over this period, one-third the number of recovered jobs. This comparison highlights an important difference between job counts and unemployment as indicators of the COVID recession’s progress and impact.

By definition, an unemployed person is someone who is in the labor force and not employed. To be counted in the labor force, a person must either be working or looking for work. People who lost (or quit) their jobs during the pandemic but did not immediately seek new work—perhaps because it was unavailable or because of childcare responsibilities at home—are considered to be out of the labor force, and therefore not unemployed. Labor force participation rates fell during the COVID pandemic. Laid-off workers in high-proximity service businesses have been hesitant to return to the workplace too quickly. And with schools and day care facilities closed, some parents who would ordinarily hold paid jobs—disproportionately women—have opted to stay home to care for children.

But as hiring picks up (and schools and daycares reopen), people who temporarily dropped out of the labor force are likely to rejoin and begin searching for new jobs, paradoxically adding to the number of unemployed as the recovery gathers pace. Coming out of the pandemic recession, and especially in the early stages of recovery, reduction in unemployment can be expected to lag the recovery of lost jobs.The “official” measure of unemployment is the Bureau of Labor Statistics’ U-3 metric described here. Alternative measures of the unemployment rate, such as the U-6, count as unemployed people who are working but would like more hours as well as people marginally attached to the labor force—so-called “discouraged workers.” Expanding the definition of unemployment produces a higher headcount of unemployed but does not change the underlying dynamic of the unemployment rate. Every measure of unemployment, from the U-3 to the U-6, is subject to similar inflows into and outflows from the labor force that cause the time path for the unemployment rate to diverge from that for job losses, especially during a recession. In the QEB, our primary focus is job losses and their recovery during the COVID pandemic. The unemployment rate offers a perspective that is complementary but by no means identical.

Highest Job Losses in Service Sectors; Construction and Manufacturing Getting Back to Normal

As throughout the COVID recession, over 80% of the national employment gap for March is concentrated in the Big Four service sectors: Leisure and Hospitality, Retail Trade, Professional and Business Services, and Education and Health Care. These sectors comprise a variety of services that involve high physical proximity and are relatively discretionary.

Although the Big Four’s overall contribution to job losses has been remarkably stable, the profile of job losses among these sectors shifted as the COVID recession progressed.

• Through winter into spring, Leisure and Hospitality increasingly dominates job losses. Alone among the Big Four sectors, its March employment gap at –18% far exceeds the national average. Together with its large employment share means that Leisure and Hospitality alone accounts for two out of five lost jobs (43%) nationally.
• Among other Big Four sectors, employment gaps in both Education and Health Services and Professional/Business/Other Services both receded below –5% in March. These two sectors now account for one out of three lost jobs (32%).
• Although prominent throughout 2020, Retail Trade is no longer a major contributor to national job losses. As of March, the employment gap for Retail Trade closed to –2.4%, in-line with Construction. And its 5% contribution to the national employment gap is less than the 7% contribution from Manufacturing.

With COVID-related job losses largely concentrated in several service sectors, one might also expect that as economic recovery proceeds, job recovery will increasingly be concentrated in these sectors as well. Comparing the last two quarters, this appears to be happening. Expressed as a reduction in the employment gap, the United States gained 1.3 million jobs in the fourth quarter of 2020, of which half (50%) were in the Big Four service sectors. In the first quarter of 2021, four-fifths (83%) of the national job gain of 1.5 million was concentrated in the Big Four service sectors. As the pace of job recovery picked up going from winter to spring, the service sectors most severely impacted by the COVID recession are also beginning to predominate in job recovery.

Leisure and Hospitality. The bellwether sector for the COVID recession is also the most volatile sector in its month-to-month employment changes. Expressed as changes in the employment gap, Leisure and Hospitality gained 645,000 jobs during the first quarter of 2021, mostly in February and March, after losing 496,000 jobs in December during the winter coronavirus surge.December job losses together with a tepid November gain of 62,000 jobs, both influenced by the winter pandemic surge, contributed to the net loss of 82,000 jobs in Leisure and Hospitality during the fourth quarter of 2020.

Leisure and Hospitality is particularly sensitive to state-specific restrictions such as capacity limits and quarantines for out-of-state visitors, and even more so to the willingness of consumers to resume discretionary leisure and travel activities deferred out of consideration for the COVID pandemic. More than any other sector, future employment recovery in Leisure and Hospitality is likely to be influenced by public sentiment about the pandemic and confidence that vaccines are bringing it under control.

So far in 2021, public sentiment is optimistic. Bookings for restaurants, gyms, salons, and spas were up in February and March, driving increased hiring in Leisure and Hospitality.“Economy Revs Up as Americans Increase Spending on Flights, Lodging, Dining Out,” The Wall Street Journal, March 19, 2021. Air travel is up, too. A recent report finds that traffic at smaller regional airports is recovering fastest and may even be above last year’s volumes. Best positioned are those locales “especially close to outdoor vacation destinations, and those serving communities whose residents are more willing to travel amid a pandemic.”“Air Travel Is Already Back to Normal in Some Places. Here’s Where,” The New York Times, April 1, 2021.

Construction. Nationally as well as in most states, employment among residential builders and specialty contractors recovered at or above pre-pandemic levels by mid-summer. More new houses were sold during the third and fourth quarters of 2020 than in any year since the housing boom that preceded the Great Recession. In contrast, employment losses during the COVID recession have been most concentrated in commercial construction.

The divergence between commercial and residential construction is likely to persist. High levels of personal disposable income and savings support the demand for new homes as well as home improvements. But with high vacancy rates for existing capacity, new construction of office buildings, restaurants, hotels, and entertainment facilities is likely to remain depressed.

In addition to supply chain disruptions that have plagued the construction industry throughout the COVID pandemic, a combination of high demand, wildfires, and tariffs on Canadian imports has created a lumber shortage, nearly tripling the price of building lumber in the past year through March 2021. Higher lumber prices add to the cost of new construction and pose a headwind for otherwise strong housing demand.

Manufacturing. Manufacturing lost employment through summer 2020 but recovered strongly in the third and fourth quarters. While this statement is true across the board, different types of manufactures have fared differently during the COVID recession to date. Manufacturers of transportation equipment, including automobiles, experienced both the biggest drop and slowest recovery in new orders throughout 2020. As consumers focused discretionary spending on items used at home, new orders to manufacturers of household durable goods were much less affected and recovered to pre-pandemic levels by late summer.

Three months into 2021, sentiment for demand recovery in every type of manufacture is high. The Institute of Supply Managers’ Purchasing Managers Index (PMI) for March came in at nearly 65%, the highest value since 1983. Among survey respondents across manufacturing and logistics businesses, frequently cited concerns are materials shortages and supply bottlenecks, as well as worker absenteeism and difficulty in filling vacant positions.Manufacturing PMI Report, Institute for Supply Management, March 2021. Supply chain chokepoints and re-hiring challenges are likely to be widespread as businesses shift from reverse in 2020 to forward in 2021, creating spot shortages as well as price increases in affected industries.

Job Losses Are Disproportionately Among Low-Wage Earners

Throughout the COVID recession, the Big Four service sectors suffered the most severe job losses. The Big Four have accounted for about 80% of all lost jobs in every month since April 2020, a percentage that has stayed remarkably stable over time and across states. The Big Four service sectors comprise a variety of businesses involving high interpersonal proximity—restaurants, hotels, retail sales, beauty salons, and entertainment venues. And front-line workers in these businesses—waiters, attendants, salesclerks, beauticians, and performers—are disproportionately low-wage earners, including many younger and less skilled workers. A theme of the COVID recession has been that employment losses have predominantly impacted low-income households, while higher earning households, especially in white-collar occupations, have been comparatively unscathed.

The chart above is updated from the previous issue of the QEB. It groups economic sectors by average annual earnings per worker, from lowest to highest, and shows the share of the February national employment gap contributed by each group.Earnings groups include two-digit NAIC sectors for which average annual earnings per worker fall within a $20,000 range. The lowest group includes sectors with average annual earnings between$20,000 and $40,000, the next group between$40,000 and $60,000, and so on to a ceiling of$100,000 average annual earnings for the top group. Workers in Accommodations and Food Services; Arts, Entertainment and Recreation (the two subsectors of Leisure and Hospitality); and Retail Trade earned on average \$25,000 per year but accounted for almost half of February’s job shortfall. Employment in the Big Four service sectors is predominantly in the lowest two earnings groups. Professional services and management workers fall in the top earnings group but account for only 15% of Big Four headcount.

Low-Wage Job Losses Complicate the Average Weekly Wage

The fact that job losses during the COVID recession have been heavily concentrated among low-wage workers affect average wage statistics and their interpretation. Annual average weekly earnings increased by 7.4% in 2020—double the rate of increase in previous years. However, after accounting for changes in the mix of workers, 2020 average weekly wage growth was 3.0%—on par with average weekly wage growth in 2019, when worker mix effects were small.In 2019, the overall change in the average weekly wage was 3.5% and the mix-adjusted change was 3.0%, implying a mix effect of 0.5%. For an explanation of how NCCI adjusts average wage changes for employment mix, see “Average Wages During the Coronavirus Pandemic,” Quarterly Economics Briefing, NCCI, October 30, 2020.

In short, the big jump in the average weekly wage in 2020 does not indicate big wage increases for workers but reflects instead that low-wage workers were less likely to stay employed during the COVID recession. The concentration of lost jobs among low-wage workers in service sectors skewed the employment mix toward higher-wage workers and pushed up the average wage.

Stimulus Packages Buoy Household Income and Savings

Income transfers from three stimulus packages (the first two enacted in March and December 2020, the third in February 2021) supported household income despite losses in employment income due to the coronavirus recession. Massive COVID-related transfers, via economic impact payments and federal supplements to state unemployment insurance, and on a scale comparable to Social Security, Medicare, and Medicaid benefits taken together, have maintained national personal disposable income above its pre-pandemic level throughout the COVID recession to date. For households that suffered severe earnings losses during the pandemic, income transfers supported as-if-normal consumption levels. For other households less impacted by the COVID recession, these transfer payments flowed mostly into increased savings.

For the nation overall, both household disposable income and savings went up during 2020—an unprecedented outcome during a recession. The national savings rate as a percentage of disposable income peaked at 34% in April 2020 when the first round of economic impact payments was distributed to households. It may have exceeded that level in March 2021 when the third and largest round of impact payments went out. On average, the household savings rate from April 2020 through February 2021, the latest data month, was 18%, well above the more typical 7% pre-pandemic savings rate.

Increased household savings balances, along with lower debt levels, provide an engine for rapid consumption recovery when households have the confidence and willingness to resume discretionary spending. Optimism about the future is in fact an important driver of economic recovery.

Coming Out of the COVID Recession, Why Is It Hard for Employers to Find Workers?

As new hiring begins to pick up across the board, and especially in service sectors hardest hit by job losses, employers are finding it difficult to recruit qualified workers. With the March employment gap still at 7 million nationally, and close to 20% of pre-pandemic jobs still missing in Leisure and Hospitality, why do offered jobs remain vacant at the same time that so many people are out of work? In fact, hiring bottlenecks coming out of the COVID recession make sense for several reasons.

Restarts take longer than shutdowns. While most businesses can lay off workers at will during a downturn, hiring them back later in a recovery is not so simple. During the interim, laid-off workers may relocate, take jobs in other industries, start their own businesses, or drop out of the workforce entirely. Following the Great Recession, the construction industry faced a shortfall in key specializations, like electricians, as former contractors left construction for other lines of work. A similar phenomenon is happening now. Taking employment from reverse to forward is not like flipping a switch. Layoffs can happen at an employer’s discretion, but new hiring needs mutual agreement between employers and workers. Some workers will have moved on or be unwilling to return to their old jobs at pre-pandemic wage rates.

Pandemic transfer payments let job seekers be more selective. All three federal stimulus packages to date provide enhanced unemployment insurance benefits to laid-off workers, as well as direct impact payments to individuals regardless of employment status. By reducing the opportunity cost of remaining unemployed for longer, both measures allow unemployed job seekers to be more selective about what jobs they accept, and when. Higher selectivity during job search promotes better skill matching for workers; it also makes it harder for employers to fill open positions (without raising wages). However, unemployment benefits in every state are limited in time and the stimulus-linked enhancements to them are extraordinary, one-time measures. Knowing this, job seekers understand that while they can afford to look longer, they must ultimately choose the best available job from those on offer. Stimulus payments strengthen the position of workers versus employers, but do not permanently alter the dynamics of supply and demand in the labor market.

Workers are (still) worried about COVID. The pandemic has fundamentally changed workers’ willingness to perform certain types of jobs, and it is not over. Especially in high-proximity service occupations hardest hit by layoffs, some workers are afraid to return to work for fear they will be exposed to infection. Some workers may be induced to return to these jobs by higher wages, enhanced safety measures in the workplace, or flexible work arrangements. But for others the risk—real or perceived—is too high. The COVID pandemic has seen a drop in labor force participation rates amounting to about 4 million people in March 2020, about half of the national employment gap. Survey evidence suggests that many people who stopped actively seeking employment during the pandemic came from high-proximity service occupations. While demand for high-proximity personal services appears to be coming back already among vaccine recipients, restoring employment in those services to something near pre-pandemic levels may depend on bringing the virus thoroughly under control in the population overall.

What if COVID Surges Again?

Vaccination Optimism Is Ascendent

For the first quarter of 2021, virtually all vaccine news has been positive.

• At the end of March, about 30% of the United States population had received at least one vaccine dose.
• The pace of vaccinations has steadily picked up: nearly 3 million doses are now being administered daily.
• As new vaccines roll out, vaccine hesitancy is coming down. By the second half of March, 16% of survey respondents said they will “probably” or “definitely” not take a vaccine, down from 22% in early January when vaccine distribution began.[Household Pulse Survey]{https://www.census.gov/programs-surveys/household-pulse-survey/data.html}, United States Census Bureau. Most of the reduction in vaccine hesitancy from January (Week 22) to March (Week 27) is among respondents who initially said they would “probably not” take a vaccine. The percentage of respondents who said they would “definitely not” take the vaccine was little changed from 8.6% in January to 7.5% in March.
• States are expanding vaccine eligibility, but access remains challenging. Some states have shifted away from mass distribution sites to more locally targeted distribution at pharmacies, churches, and similar venues.
• A report just published by the CDC cites preliminary evidence that vaccinated people do not transmit the coronavirus to others.“Interim Estimates of Vaccine Effectiveness of BNT162b2 and mRNA-1273 COVID-19 Vaccines in Preventing SARS-CoV-2 Infection Among Health Care Personnel, First Responders, and Other Essential and Frontline Workers—Eight U.S. Locations, December 2020-March 2021,” Mark G. Thompson et al, Centers for Disease Control and Prevention, April 2, 2021. This has been an important open question coming out of Phase 2 trials, which focused on vaccines’ ability to counteract the coronavirus in recipients but did not address whether they also prevented its spread to others.

And States Are Reopening

In February and March, many states relaxed COVID restrictions, while no states added new restrictions. As of this writing in April, 20 states are fully reopened—no mask mandate, no stay-at-home orders, and no quarantine restrictions for out-of-state visitors.

But a New COVID Variant Poses the Risk of a Fourth Surge

National new case data for March 2021 obscures an upsurge in several states in the second half of the month. In the last two weeks of March, new COVID cases rose to about 63,000 per day, comparable to late October but still well below peak levels from December and January. As of this writing, the biggest outbreaks are in the Northeast—Connecticut, New Jersey, New York—and the upper Midwest—Illinois, Michigan, Minnesota, and North Dakota. Florida also experienced a late March case increase, especially around Miami. Case rates in Southern and Western states remain low. The late March outbreaks are attributed to the B.1.1.7 variant, a more contagious and possibly more deadly COVID virus first identified in Great Britain. For recent time paths of COVID case rates by state, see “As Variants Have Spread, Progress Against the Virus in the U.S. Has Stalled,”The New York Times, April 6, 2021. For late-March COVID outbreaks in specific states, see “Cases in Florida, a National COVID bellwether, Are Rising—Especially Among Younger People,”The New York Times, March 29, 2021; and “Virus Surge in Michigan is a ‘Gut Punch’ to Hopes of Pandemic’s End,”The New York Times, April 1, 2021. Public health officials are now warning of a competition between vaccination coverage and the spread of new variants, with potentially severe consequences.“Biden Pushes Mask Mandates as C.D.C. Director Warns of ‘Impending Doom’,” The New York Times, March 29, 2021. Current estimates of required coverage for population immunity range from 70% to 90%. But even at these vaccination levels, the end goal of population immunity to the coronavirus may prove to be over-simplistic and unachievable.“Herd Immunity is Humanity’s Great Hope, and It’s Proving Elusive,” Bloomberg, April 22, 2021.

Will a Fourth COVID Surge Derail Employment Recovery?

The question is more subtle than it may appear. Looking back, the COVID recession is clearly driven by the COVID pandemic. Before the first COVID wave hit the United States in early spring 2020, the economy was humming along; by mid-April it had lost 21 million jobs—one out of six jobs nationally. However, the sensitivity of job losses to COVID case rates has dropped dramatically as the pandemic has progressed—not just in certain states and sectors, but in every state and all sectors. Consider these observations:

• The first COVID surge, with just under 900,000 new cases in April 2020, triggered widespread lockdowns and a national employment gap of –16.4%. The third COVID surge, with a seven-times bigger wave of 6.4 million new cases in December 2020, coincided with a national employment gap of –6.5%.National employment gaps for the Big Four service sectors in April and December 2020 were –20.3% and –8.1%, respectively.
• From October to December 2020, the national new case rate increased by more than 4 million per month. The employment gap in Leisure and Hospitality increased modestly, from –19.3% in October to –22.2% in December but stayed constant or decreased in other Big Four service sectors as well as in Construction and Manufacturing.

For a variety of reasons—including changes in the workplace environment, a shift from face-to-face interaction toward tele-commerce, big stimulus packages, and pandemic fatigue—the United States economy is more acclimated to the COVID recession now than one year ago. Looking forward, while future COVID surges may certainly affect the pace of job recovery, the degree of sensitivity of the nascent job recovery to a fourth COVID wave—if it develops—is likely to be on a scale commensurate with last winter’s experience and much lower than during the spring and summer of 2020.

To get a sense of just how sensitive future employment recovery might be to a fourth COVID surge, consider that the national new case rate was 1.8 million in March 2021 overall. The uptick in daily cases at month-end corresponds to a run rate of about 2 million new COVID cases per month. That is close to the monthly new case rates of 1.9 million in July and October 2020, but below 2.4 million one month previously in February 2021. It would take a three-fold jump—from 63,000 to 200,000 new cases daily—to turn the late March uptick into a new COVID wave as big as the winter surge from October 2020 to January 2021. The winter COVID surge modestly depressed job recovery in Leisure and Hospitality, the most COVID-sensitive sector, but did not negatively impact employment gaps in other sectors.

Looking forward, future COVID surges less severe than last winter’s surge are likely to have only minor impacts on the economic recovery that began to pick up pace in February and March. Barring a virus resurgence at least as severe and widespread as last winter’s, further recovery of jobs lost during the COVID recession may increasingly be independent of the future path of the COVID pandemic.