For release on delivery
12:50 p.m. EDT
September 27, 2021
Navigating Delta Headwinds on the Path to a Full Recovery
Remarks by
Lael Brainard
Member
Board of Governors of the Federal Reserve System
at
"Shocks, Shifts, and the Emerging Economic Landscape"
2021 Annual Meeting of the National Association for Business Economics
Arlington, Virginia
September 27, 2021
It is a great honor to join the community of NABE Fellows, and I want to express
my appreciation to the Board of Directors of NABE.1
Given the unprecedented nature of the pandemic shock, it should be no surprise
that the recovery is not proceeding in a straight line. The economy continues to make
welcome progress, but the Delta variant has been more disruptive than initially expected.
The headwinds from Delta are a reminder that the virus continues to pose downside risks
to the outlook. Delta highlights the importance of being attentive to economic outcomes
and not getting too attached to an outlook that may get buffeted by evolving virus
conditions.
Indeed, Delta disrupted both demand and supply. Many forecasters have
downgraded consumer spending in the second half of the year, as Delta has limited the
acceleration in services spending that had been anticipated to help offset the drag on
activity from fiscal support shifting from being a tailwind to a headwind. Although the
retail sales print for August was stronger than expected, the level of spending in August
was not much changed from June. High-frequency data indicate that consumption of
discretionary services, such as restaurants and travel, stalled or may have even moved
lower in some categories since July. This development doesn't appear to be sensitive to
regional variations in vaccinations, perhaps reflecting the high transmissibility of Delta.
For example, the consumption of food services has declined recently even in states with
relatively high vaccination rates and low case counts.2
Delta has also prolonged supply bottlenecks. Single-family home construction
permits declined again in August for the third consecutive month despite very strong
housing demand, as builders faced shortages of materials. Auto production was paused at
a number of North American plants in early September following COVID-induced
shutdowns of semiconductor production in Malaysia and Vietnam. Industry contacts
have highlighted the unusually low elasticity of global shipping such that COVID-
induced port closures in China ripple through the interdependencies in shipping supply
chains and magnify backlogs.
All told, private sector forecasters have revised down growth projections for 2021
over recent months by slightly more than 1 percentage point on average.3 Even with this
Delta downgrade, I anticipate that growth this year and next will be sufficient such that
by the end of next year, average annual growth since the onset of the crisis should exceed
pre-crisis trend growth.4 The strength of the recovery despite the unprecedented
challenges associated with COVID reflects powerful fiscal and monetary support and the
resilience of American workers, businesses, and households.
Delta has also slowed progress on employment. Payroll gains in leisure and
hospitality unexpectedly fell to zero in August following average monthly gains of
3
For example, between the June and September publications of the Blue Chip Economic Indicators survey,
the consensus estimate for real GDP growth in 2021 fell from 6.7 percent to 5.9 percent. Wolters Kluwer
(2021), Blue Chip Economic Indicators, vol. 46 (June 11 and September 13), via Haver Analytics,
https://www.haver.com/our_data.html. This decline is similar to the revision in the median of FOMC
participants' projections in the June and September Summary of Economic Projections.
4
The median real GDP Q4/Q4 growth rates in the SEP of 5.9 percent for 2021 and 3.8 percent for 2022
imply an annualized growth rate from the fourth quarter of 2019 through the fourth quarter of 2022 of
2.4 percent, above the median SEP estimate of the long-run real GDP growth rate of 1.8 percent and above
the top of the interquartile range of estimates from the most recent Survey of Primary Dealers by the
Federal Reserve Bank of New York. See Federal Reserve Bank of New York (2021), Responses to Survey
of Primary Dealers (New York: FRBNY, July),
https://www.newyorkfed.org/medialibrary/media/markets/survey/2021/jul-2021-spd-results.pdf.
375,000 over the previous three months. Delta-induced spending declines for travel,
recreation, and other discretionary services likely reduced the intensity with which
employers in these industries sought new hires. The data reported by "Indeed" show job
openings moving sideways from July through August before edging up again in early
September. Similarly, the number of households reporting in the Current Population
Survey that they were unable to work because their employer closed or lost business due
to COVID ticked up in August after falling significantly through July.
As of the end of August, payroll employment remains over 5 million below pre-
COVID levels and nearly 81⁄2 million below where it would have been in the absence of
COVID. Roughly one-third of the gap to pre-COVID employment levels is concentrated
in the frontline leisure and hospitality sector.
While the headline unemployment rate declined to 5.2 percent in August, the
unemployment rate adjusted for COVID-related nonparticipation remained elevated at
7.5 percent.5 The employment-to-population (EPOP) ratio for prime-age workers stood
at 78 percent in August-2.4 percentage points below its pre-COVID level.6
So overall, the labor market is making progress, although at a slower pace than
earlier in the year.7 Relative to December, payrolls have closed nearly 50 percent of their
5
This alternative measure adjusts for the misclassification of some unemployed workers as employed but
not at work (as reported by the Bureau of Labor Statistics) and for diminished labor force participation
induced by the pandemic (as estimated by the Federal Reserve Board staff). Like the U-3 unemployment
rate provided by the BLS, the adjusted rate is also at a post-pandemic low. This broader measure of labor
market slack encompasses 12.8 million individuals in July 2021, as compared with the official 8.7 million
unemployed workers reported by the Bureau of Labor Statistics.
6
While the EPOP ratio has shown little net progress since April for white prime-age individuals, the EPOP
ratios for prime-age Black and Hispanic workers have remained well below that of white individuals but
have seen more consistent improvement in recent months, including a strong 0.7 percentage point
improvement for Black individuals in August.
7
See Lael Brainard (2021), "Assessing Progress as the Economy Moves from Reopening to Recovery,"
speech delivered at "Rebuilding the Post-Pandemic Economy," 2021 Annual Meeting of the Aspen
Economic Strategy Group, Aspen, Colo., July 30,
https://www.federalreserve.gov/newsevents/speech/brainard20210730a.htm.
gap to pre-COVID levels and the prime-age EPOP ratio has closed around 40 percent of
the gap to pre-COVID conditions.8
In contrast, the labor force participation rate of 61.7 percent in August has shown
little progress so far. Some observers argue that labor force participation has moved
permanently lower, and the labor market is already tight, such that we should not expect a
return to pre-COVID employment conditions. But the decline in labor force participation
appears to reflect COVID-related constraints that have been prolonged by Delta rather
than permanent structural changes in the economy. For instance, the number of
respondents to the Census Household Pulse Survey indicating they were not working due
to either being sick with COVID or caring for someone sick with COVID more than
doubled between late July and early September, returning to levels seen early this year.9
While I am hopeful for improvements in the September employment report with
the return to in-person education, the effects of Delta have likely prolonged caregiving
constraints. For example, last week there were just over 2,000 school closures for
COVID across nearly 470 school districts in 39 states.10 While the disruptions last just
under six days on average, the possibility of further unpredictable disruptions could cause
8
The gap of payroll employment to pre-COVID trends is the gap between the current level of payroll
employment and the level that would have occurred had total nonfarm payrolls grown at a constant rate of
168,000 per month (the average growth rate in 2019) beginning in March 2020. The references in this
paragraph to percentages of gaps closed describe the fraction that remains in the current data of the
difference between pre-COVID conditions and the conditions that existed in December 2020. For example,
the unemployment rate was 3.5 percent in February 2020 and 6.7 percent in December 2020, a gap of
3.2 percentage points. In August, the unemployment rate was 5.2 percent, implying a gap to pre-COVID
conditions in this metric of 1.7 percentage points, meaning that a little under 50 percent of the
3.2 percentage point gap that existed in December 2020 had been closed by August 2021.
9
The Census Bureau estimates that the number of non-employed individuals citing one of these factors as
their main reason for not working rose from 2.0 million in wave 34 of the Household Pulse Survey
(reflecting data collected from July 21 to August 2) to 4.7 million in wave 37 (reflecting September 1 to
September 13). For more information, see
https://www.census.gov/programs-surveys/household-pulsesurvey/data.html.
10
These data are reported by Burbio through September 20. For the most recent update, see
https://info.burbio.com/school-tracker-update-latest.
some parents to delay their plans to return to the labor force. Similarly, COVID-related
challenges have reduced the availability of day care, preschool, and after-school care,
further complicating parental return-to-work decisions.11 Research has shown that the
pandemic has taken a significant toll on the labor market status of many mothers,
particular Black and Hispanic mothers, mothers with younger children, and mothers with
lower incomes.12
With record-high job openings and an unemployment rate just above 5 percent,
the headline vacancy-to-unemployed (V/U) ratio has risen above 1 vacancy per job
seeker and is now at pre-pandemic levels. Some cite this ratio of job openings to job
seekers as indicating we are close to full employment. But virus conditions may be
driving an important wedge between labor supply in the near term relative to the medium
term.
It is instructive to consider the period 2017 to 2019 when the V/U ratio remained
in a tight range around a value of 1.2, similar to its July value. Although prime-age
unemployment declined by less than half a percentage point over this period, that modest
decline was accompanied by a 2 million increase in the prime-age labor force, which
raised the prime-age EPOP ratio about 11⁄2 percentage points.
11
See, for example, Claire Cain Miller (2021), "'Can't Compete': Why Hiring for Child Care Is a Huge
Struggle," New York Times, September 21, https://www.nytimes.com/2021/09/21/upshot/child-care.html.
12
Recent research found that women with very young children, who accounted for 10 percent of the
prepandemic workforce, accounted for almost one-fourth of the unanticipated decline in employment during
the pandemic. See M. Melinda Pitts (2021), "Where Are They Now? Workers with Young Children
during COVID-19," Federal Reserve Bank of Atlanta, Policy Hub, No. 2021-10,
https://www.atlantafed.org/-/media/documents/research/publications/policy-hub/2021/09/01/10--where-arethey-now--workers-with-young-children-during-covid-19.pdf. Previous research also indicates that
participation for mothers in households with an annual income below $50,000 per year declined nearly
9 percent relative to pre-pandemic levels, while participation for mothers in households with incomes
above $100,000 fell a little under 2 percent. For more information, see Olivia Lofton, Nicolas
PetroskyNadeau, and Lily Seitelman (2021), "Parents in a Pandemic Labor Market," Working Paper Series 2021-04
(San Francisco: Federal Reserve Bank of San Francisco, February),
https://www.frbsf.org/economicresearch/publications/working-papers/2021/04.
So, the headline V/U ratio may not be as informative when there are substantial
lags in the recovery of labor force participation. Lagging participation is likely to be
particularly important currently, in the presence of COVID constraints such as fears of
contracting the virus and caregiving responsibilities. While these constraints have been
prolonged by the Delta variant, they are not permanent or structural. Therefore, it is more
informative to rely on a V/U ratio that adjusts the unemployment rate for pandemic-
related nonparticipation and misclassification. After adjusting for pandemic-related
nonparticipation, the ratio of job openings to job seekers was about 0.85 in July-nearly
one-third below the headline ratio-and similar to levels last seen between 2014 and
2016-suggesting there is ample room for a full recovery in employment.13
The assertion that labor force participation has moved permanently lower as a
result of a downturn is not new. Indeed, it has been a regular feature of the early stages
of recent recoveries. Research demonstrates that the labor force participation rate cycle
lags that of the unemployment rate by years. So, it is important to consider indicators
beyond the headline unemployment rate when assessing progress toward maximum
employment, as participation gains might come late in the recovery for some groups.14
For these reasons, I see no reason employment should not reach levels as strong or
stronger than before the pandemic.
Next let's consider price stability. Inflation is currently elevated. This is creating
challenges for consumers and businesses alike. But the high inflation readings from the
spring and early summer were disproportionately driven by a few sectors experiencing
specific supply bottlenecks. In May and June, new and used vehicle prices accounted for
half of the outsized monthly increases in core consumer price index (CPI) inflation.
These categories were lesser contributors in July, and in the August CPI their joint
contribution declined to essentially zero, as prices finally began to retreat for used cars,
offsetting increases in new car prices.
I am closely monitoring incoming data for any indications that the breadth of
inflation pressures is rising. Twenty-four-month core personal consumption expenditures
(PCE) inflation provides one approach to smoothing through the distortions from the
pandemic: It is estimated to have been 2.5 percent in August, above the 2 percent target,
but well below the 12-month measure. The Dallas trimmed mean inflation measure
provides another indicator of the breadth of inflation pressures: It came in at 2.0 percent
in July-well below the 12-month measure of core PCE inflation.15
The currently elevated level of inflation is driven by COVID-related disruptions.
As these COVID-related disruptions subside, most forecasters expect inflation to move
back down toward the Federal Reserve's 2 percent long-run objective on its own. That is
the sense in which currently high inflation is likely to be transitory. In that regard, the
August monthly CPI reading was the first month with a notable retrenchment among
COVID-sensitive categories like hotels, used cars, and rental cars.
So, I expect inflation to decelerate, and pre-COVID inflation dynamics to return
when COVID disruptions dissipate. But with Delta disrupting the rotation from goods to
services and prolonging supply bottlenecks, it is uncertain just how fast and how much
inflation will decelerate over the remainder of the year and into next year. Therefore, I
am monitoring a few upside risks closely. First, while rent and owners' equivalent rent
both rose a moderate 0.3 percent in the August CPI data, if housing services inflation
moved up substantially more than expected, it could provide durable upward pressure on
inflation. Second, there is a risk that goods prices may not decelerate and return to pre-
COVID trends as is widely expected, for instance, if excess savings or disruptions to
services result in persistently elevated goods demand. Third, I will be watching for any
signs that wage gains are feeding into higher inflation more broadly, but the evidence so
far suggests that wage gains are broadly in line with productivity growth, and the labor
share of income remains low relative to historical levels. To date, high markups and non-
wage input costs appear to be more notable contributors to inflation than wage pressures.
Finally, I am vigilant for any signs that the current high level of inflation might
push longer-term inflation expectations above levels consistent with our 2 percent
inflation objective. Market-based measures of inflation compensation suggest inflation
expectations remain well anchored. For instance, the five-year, five-year-forward CPI
inflation compensation measure based on Treasury Inflation-Protected Securities has
remained range bound around 2.2 percent since declining about 0.2 percentage point in
June-consistent with the FOMC's 2 percent objective for PCE inflation.16
Survey-based measures also suggest longer-run expectations remain well
anchored. Recent analysis of the Survey of Consumer Expectations (SCE) concludes that
"in August 2021 consumers' five-year ahead inflation expectations were as well anchored
as they were two years ago, before the start of the pandemic."17 Longer-term inflation
expectations in the University of Michigan Survey of Consumers have moved mostly
sideways in the past four to five months, and the current reading of the Federal Reserve
Board index of common inflation expectations remains well within the range that
prevailed before 2014. While one-year ahead measures in the SCE and the Michigan
survey have seen large increases, these short-term measures tend to move with
consumers' experience of contemporaneous inflation.
So what do these developments imply for the path ahead? One clear lesson is that
we need to be humble about our ability to correctly anticipate future economic conditions
given the unpredictability of the virus. We had expected a smooth rotation from goods
spending to services spending during a complete reopening this fall, but Delta has slowed
this process. Partly as a result, employment gains flatlined in August in the leisure and
hospitality sector, where many of the job losses have occurred. As a result of Delta, the
September labor report may be weaker and less informative of underlying economic
momentum than I had hoped.
Payroll employment is now between 5 and 81⁄2 million short of where it would be
in the absence of the pandemic. The unemployment rate adjusted for pandemic-related
- 10 -
nonparticipation is 7.5 percent. Employment is still a bit short of the mark on what I
consider to be substantial further progress. But if progress continues as I hope, it may
soon meet the mark.
While inflation has been well above target for the past six months, affecting
consumers and businesses alike, it previously spent roughly a quarter century below 2
percent. There are good reasons to expect a return to pre-COVID inflation dynamics due
to the underlying structural features of a relatively flat Phillips curve, low equilibrium
interest rates, and low underlying trend inflation. While the playbook for guiding
inflation back down to target following a moderate overshoot is well tested and effective,
experience suggests it is difficult to guide inflation up to target from below.
Once COVID constraints recede, I see no reason the labor market should not be as
strong or stronger than it was pre-pandemic. The forward guidance on maximum
employment and average inflation sets a much higher bar for the liftoff of the policy rate
than for slowing the pace of asset purchases. I would emphasize that no signal about the
timing of liftoff should be taken from any decision to announce a slowing of asset
purchases. We have learned this summer that it is important to remain highly attentive to
the data and to avoid placing too much weight on an outlook that remains highly
uncertain. In implementing policy step by step, we must remain faithful to our new
framework and attentive to changing conditions in order to ensure sufficient momentum
as fiscal tailwinds shift to headwinds to achieve our maximum employment and inflation
goals.