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 Andy Bauer, vice president and regional executive for the Baltimore branch of the Richmond Fed. Andy gathers economic intelligence on three parts of the Fifth Federal Reserve District – Maryland, West Virginia, and the District of Columbia. He also works with community leaders other regional organizations to share research perspectives in areas of expertise related to the Bank's mission as well as regularly speaks about national and regional economic conditions and Federal Reserve policy to business, professional and trade associations, community groups, and the media.

Thanks for joining us, Andy.

Andy Bauer: Thanks for having me, Charles.

Gerena: Given the devastating effects of the COVID-19 pandemic and other continuing challenges, how is Maryland doing?

Bauer: While things are improving, I would have to say it is a very challenging time for Maryland overall.

The shock to the economy from the pandemic directly impacted a fairly narrow set of sectors, and those hard-hit sectors continue to struggle. As a result, there is a large number of Marylanders having a hard time making ends meet. At the same time, there are some sectors that have been little affected by the pandemic and others that have benefited, as individuals and businesses adjusted to living and working in a new environment.

Economists often refer to recoveries in terms of letters. I'm sure you've heard of this. For example, a strong recovery has been described as a V-shaped recovery because the economy bounces right back after the recession, tracing out the letter "V." A weak recovery, then, would be the case where there is little to no bounce back, so that would be an L-shaped recovery.

Some have described the current recovery as K-shaped. I think its's kind of interesting to think of it that way.

Gerena: Why is that?

Bauer: For part of the economy, there has been a definitive rebound that we can see in the aggregate statistics. For example, there was a sharp rebound in real GDP in the second half of the year and nearly 10 million jobs were recovered in the United States, 250,000 of those jobs in Maryland.

But there is also the lower part of the "K", representing the part of the economy that has yet to recover and continues to deteriorate. Many businesses are struggling to stay open, some have closed temporarily, and others have shuttered permanently.

Gerena: As the Richmond Fed's regional executive in Maryland, I imagine you have gotten an earful from your contacts about this K-shaped recovery. Can you share some of what have you heard?

Bauer: Sure. I spend a lot of my time talking with people — CEOs of large companies, small business owners, and leaders at non-profit and financial institutions. One of the things I have heard recently is that many businesses in a relatively strong financial position have been helping those businesses that are having a harder time. For example, banks are working with their customers, property owners are working with their tenants — both in the residential and commercial space — and large companies are working with their customers and suppliers.

Such support has been crucial during this challenging time. Several owners of restaurants and gyms have told me they would be out of business if it had not been for their ability to work with their bank or their landlord to defer payments into the future.

Still, many businesses are in survival mode. When the federal government announced that COVID-19 vaccines were going to be distributed by the end of 2020, at the time many business owners told me it gave them hope. They just had to find a way to get through the next three to six months.

Gerena: It's good to hear that there's a light at the end of the tunnel for businesses. What's happened on the household level?

Bauer: Again, it's the same story of a K-shaped recovery — for a lot of households that are not directly impacted by this [pandemic] and they work from home, for many of them not much has changed in terms of their financial situation and their income prospects.

But, due to job losses and continued high unemployment, many households are grappling with income loss and are struggling. The demand for services that support individuals and families has increased sharply, including rental assistance, food assistance, help with utility payments, and mental health services, including suicide prevention. Our contacts who provide these necessary services tell us that the current demand far outstrips their existing capacity.

The last thing I think needs mentioning in this regard, because it speaks so much to inequality, is how the pandemic has impacted children. Maryland public schools have been closed for almost a year now, since March 2020. Research shows that online education is not as effective as learning in person, and that in-person school conveys a lot of non-academic benefits to children.

On top of that, online school has been more difficult for some children, particularly those in low-income households. It has been a challenge for some students to have an appropriate learning space at home, an adequate computer and broadband Internet connection, as well as a parent available to help those students troubleshoot technology issues or submit assignments online as well as communicate with teachers.

For those parents that can work at home and have more flexible jobs, it has been difficult but more manageable. However for parents that have to leave the house for work — as is the case with many essential, lower paying jobs — the challenge has been considerably greater.

Gerena: Speaking of jobs, how does Maryland compare to the rest of the country when it comes to employment trends?

Bauer: The recovery of Maryland's labor market has been similar to what we have seen nationally. In March and April, employment dropped by roughly 14 percent, with leisure and hospitality experiencing the largest job losses. That is unprecedented. To put it in perspective, at its lowest point during the Great Recession, employment had fallen 5.5 percent in Maryland. And, this drop occurred over two years, not two months.

What has also been unprecedented is the rebound, which has been more rapid than most anticipated. Maryland has regained roughly two-thirds of its job losses, which is slightly better than the U.S. However, I think one has to remember that employment is still down almost 5 percent. And, remember I just said a moment ago that at the worst moment during the Great Recession, employment was down 5.5 percent. It took almost four years after that to recover all of that employment. So, I think there is still a long way to go.

The fact is there is a large segment of the working age population in the U.S. and in Maryland that doesn't have a job. The unemployment rate in Maryland was 6.3 percent at the end of 2020, slightly better than the U.S. rate of 6.7 percent. While this represents a dramatic improvement from the double-digit levels of unemployment earlier in 2020, it likely overstates the improvement in labor market conditions, unfortunately.

Gerena: Why does the unemployment rate currently underestimate the level of joblessness in the U.S.?

Many people have also stopped looking for work. In order to be counted as unemployed and in the labor force, you must be actively seeking a job. If you stop looking, you aren't counted anymore as unemployed – you're out of the labor force.

This is captured in the labor force participation rate, which has dropped to a level we haven't seen since the 1970s. While there was some modest improvement, the participation rate at the end of the year remained 3.2 percentage points lower than in February 2020.

Now why is this? There are a number of factors affecting an individual's decision to participate in the labor market. The probability of finding a job is a key one. Health concerns are another. And access to child care is very important. I've talked with many employers who are trying to navigate child care issues with their employees. For some workers, there are few options and, as a result, have dropped out of the labor force.

Gerena: Keeping these and other challenges in the past year in mind, you also mentioned earlier that there were sectors of the economy that fared better. Tell us more about that.

Bauer: There have definitely been bright spots, certainly.

The biggest, I think, is that the economy rebounded more strongly than anticipated. So, even with all of the challenges back in April and May, businesses were able to finish the year in better shape than they thought they would. "Better than they thought" might mean just breaking even for the year or ending the year with a slight loss.

Some businesses were able to pivot, offering new services or changing how they delivered services or goods. That enabled them to improve revenues and continue to move forward. There was a lot of resiliency, which I see as one of the bright spots.

Health care was a bright spot as well. It's difficult not to think of the healthcare industry without the pandemic for 2020. I talked with a number of hospital CEOs this year, keeping tabs on how things were going. There was a lot of learning and figuring out how to best handle an extremely difficult situation. They expanded their operations. They spooled up their capabilities such as testing, treatment, vaccinations and how to deal with quarantined workers. You name it. At the end of the day, they were able to deliver services and keep things going.

Finally, there were businesses that did well because of how economic activity shifted in 2020. Those were the sectors that you mentioned that did do well in contrast to others that were directly impacted by the nature of the pandemic. There was a shift away from services, especially those that involved travel — travel that involved getting on an airplane — as well as those kind of close contact services. There was a shift away from those to goods as well as movement from in person to online.

There were many manufacturers — especially firms involved in consumer goods production — that did very well. Consumer spending on goods was very strong in 2020, leading to more home deliveries and a spike in goods transportation and warehousing activity. Auto sales were very strong in the second half of the year and the housing market took off. Grocery stores saw their sales increase tremendously as people ate more at home. And technology firms were extremely busy as a result of moving so much activity online.

So, while it is true that there has been a lot of focus on the sectors and businesses that were hurt by the pandemic, the shift in activity benefited other firms as well.

Gerena: As we start thinking about a post-pandemic future, what issues are you looking at?

Bauer: Everybody is looking forward to the post-pandemic future. I think it's kind of tough to envision it yet. We're just still in the thick of it. What I am focused on currently is the transition from where we are now to something closer to normal, perhaps something closer to where we were prior to the pandemic.

I'm optimistic that the outlook for containing the spread of COVID-19 will continue to improve, with vaccines rolling out. It appears that cases peaked in January and hospitalizations should be improving as well. By the end of the spring, we'll hopefully be in a much better place which will allow for individuals and firms to view the second half of 2021 with more confidence. Obviously, there is a lot of uncertainty, and the next weeks and months will be very crucial. But I'm really hoping that by the end of the spring we'll have much better visibility as to where we are with the pandemic and what the rest of the year looks like.

I think there is a lot of pent-up demand to engage in activities that have been impossible to do because of the pandemic, like going to an indoor concert. I really think the second half of the year could be quite robust as people go out and do things they haven't been able to do for a while. But again, that all depends on the virus and whether or not we get the all-clear that it is safe to engage in such activities.

At the same time, firms that had their employees working remotely will be deciding whether to go back into the office. How businesses decide to organize and operate in a post-pandemic world will be very interesting. We've had a lot of conversations with businesses about this. Many employers have decided that having everyone in the office five days a week is no longer necessary, and many employees like having the flexibility of working from home. How much of this shift is permanent will have an impact on the commercial real estate sector as well as how we think about labor markets. With more flexible working arrangements and the ability to telework more widespread, labor market boundaries will become more national rather than local, and we're already starting to hear that.

I will also be looking at the labor market. How long will it take to regain the jobs that were lost during the pandemic? It reflects how the economy is growing and it also impacts how communities are going to improve. For those who became unemployed or left the labor market, how long will it take for them to find a job in a new industry, if it's the case that their job doesn't come back? Research has shown that the longer someone is out of a job, the more difficult it becomes for them to find work. So the pace of recovery in the labor market is a really important issue.

Lastly, I will be looking closely at the recovery in the education sector. Education was disrupted tremendously by the pandemic, K-12 public schools and higher education in particular. Research shows that lost classroom time results in a permanent loss in learning, so I and many others will be focused on students and is there a way to make up for this lost time. How will this trace out in the coming years?

Research also shows that once an individual has made the decision to forgo post-secondary learning right after high school, they are less likely to enroll in the future. So I will be closely watching enrollment in community colleges as well as four-year universities. We saw a very sharp fall-off in community college enrollment in 2020. The question then becomes, are we going to see some of that made up in 2021?

Overall, thinking about our post-pandemic future, the question is, "to what extent can we put COVID-19 behind us?" How much is this going to continue to impact how business operates [and] consumers engage in commerce? But again, it's one of those things we still don't know. There's lingering uncertainty.

Gerena: Andy, this has been an interesting conversation to have. Thanks for the update on the state of the economy in Maryland.

Bauer: Thanks, Charles. This was great.