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There is a great scene in the 1988 film “The Naked Gun” when, after an unbelievably big explosion takes place, actor Leslie Nielsen tells gawking pedestrians to move along as “there is nothing to see here.” That sums up the way the world likely sees central bank leaders and the economics profession in general. With inflation having jumped precipitously recently, central bankers keep telling people to move along, there is nothing to see. The question now is whether recent high inflation data is indicative of a new era of sustained higher inflation or if it signals a transitory problem. And does it suggest that central banks ought to shift gears?
The great economist John Maynard Keynes is alleged to have said, “When the facts change, I change my mind. What do you do, sir?” Today, this statement might be addressed to central bankers. Will they change their minds after seeing the latest inflation numbers? Perhaps a better question is whether the facts have indeed changed? Clearly, there has been a sudden increase in inflation. But it is not clear whether underlying inflation or potential inflation has changed.
Let’s look at the numbers. Recall that, recently, we learned that the US consumer price index was up 4.2% in April versus a year earlier, the highest since September 2008. Core inflation, which excludes the impact of volatile food and energy prices, was 3.0%, the highest since January 1996. Even if one assumes that the annual change in prices was distorted by the base effect of deflation a year ago, it is also true that the monthly increase in prices was very large.
Last week we learned that consumer prices in the Eurozone were up 1.6% in April versus a year earlier, the highest in two years. Prices were up 0.6% from the previous month, an unusually high number. However, core prices were up only 0.7% from a year earlier but were up 0.5% from the previous month. Thus, Eurozone inflation is up substantially but remains below the European Central Bank’s (ECB) 2.0% target. In Europe’s largest economy, Germany, consumer prices were up 2.1% from a year earlier and were up 0.5% from the previous month. This is notable given Germany’s long history of relatively low inflation. Germany now has higher inflation than most of its fellow Eurozone members.
In the United Kingdom, consumer prices were up 1.5% in April versus a year earlier, double the rate reported in March. Prices were up 0.6% from March to April compared to a rate of 0.3% in the previous month. Core prices were up 1.3% in April from a year earlier, the highest in three months. The inflation rate was artificially held down due to temporary tax factors which, if excluded, would have meant an annual rate of 3.2% in April. That would have been the highest rate in eight years. While not stunning, inflation in the United Kingdom is clearly accelerating rapidly. The Bank of England expects inflation to exceed 2.0% before the end of the year.
Finally, consumer price inflation in Canada accelerated in April with prices up 3.2% versus a year earlier, the highest reading since May 2011. Prices were up 0.5% from the previous month. Core prices were up 2.3%, the highest reading since July 2017. Although prices were up in every major category, the lion’s share of the acceleration in inflation was due to sharp rises in some prices. For example, the price of gasoline was up 62.5% from a year earlier. The homeowner’s replacement cost index was up 9.1%—the biggest increase since 1989—reflecting a surge in the cost of lumber and other materials.
What united the inflation experiences of the United States, United Kingdom, Eurozone, and Canada is that much of the increase in inflation was due to a surge in the prices of commodities and inputs related to a sudden surge in demand and supply chain disruption. It did not necessarily reflect the impact of easy monetary and fiscal policies. Central bankers have all indicated that they are watching the data carefully but are not yet ready to make any adjustment to policy. Bank of England Governor Andrew Bailey said that he expects a temporary surge of inflation above the 2.0% target but does not expect it to be sustained, especially given that fiscal stimulus in the United Kingdom will start to abate next year. He noted, “We do hear stories about input prices, but we are not yet seeing strong evidence of the pass through into consumer prices. I can assure you we will be watching this extremely carefully and we will take action when we think it’s appropriate to do so—no question of that.”
Some critics of central banks argue that now is the time to tighten policy before there is a large increase in expectations of inflation—after which it would become more difficult to control inflation. Former US Treasury Secretary Larry Summers said that keeping rates low for the next three years, as the Fed has indicated is its intention, risks creating a situation in which the Fed must act suddenly in ways that cause a jolt to financial markets He said that, when the Fed eventually acts, it will be highly disruptive to financial markets and the economy. Moreover, given strong global demand, some critics argue that there is no longer any reason to maintain an easy monetary policy, especially given the risk of higher inflation. Summers said, “The primary risks today involve overheating, asset price inflation and subsequent financial excessive leverage and subsequent financial instability. Not a downturn in the economy, excessive unemployment and excessive sluggishness. It is not tenable to assert today in the contemporary American economy that labor market slack is a dominant problem. Walk outside: labor shortage is a pervasive problem.” In the Eurozone, for example, the number of job vacancies is now higher than prior to the pandemic in Germany, France, and Italy. This suggests that the job market does not necessarily require support from the ECB.
Central bankers counter that there is indeed labor market slack as evidenced by much lower employment today than a year ago. This fact, combined with the continued risk of new surges in infections, creates too much risk associated with tightening monetary policy. Indeed, in the United Kingdom there is fear that there could be another large outbreak later this year associated with recently detected variants of the virus.
In the world’s three largest economies (the United States, China, and Europe), there are three different stories about how the economy is progressing. In the United States, exceptionally strong stimulus-fueled demand, combined with temporary supply constraints, has led to a temporary surge in inflation that has shaken investors. In Europe, strengthening demand,, combined with easing of economic restrictions, is likely causing an acceleration in growth as well as inflation. China, however, has a different story—the economy appears to be decelerating, a trend that was first evident in the GDP growth numbers for the first quarter and that was confirmed recently with the release of economic indicators for April.
Specifically, retail sales and industrial production decelerated sharply in April. Retail sales were up 17.7% in April from a year earlier, following growth of 34.2% in March. Of course, these numbers were partly distorted by exceptional declines a year ago. Still, month to month growth decelerated as well. Retail sales were up 0.94% from February to March but up only 0.32% from March to April. The latter figure was below the pre-pandemic pace. Among the explanations for the deceleration in spending are the partial withdrawal of government stimulus, the tightening of credit market conditions (which is affecting the housing market), the fact that economic restrictions are no longer being removed, and continued uncertainty about the pandemic given that China was slow to start the process of vaccination. A government spokesman concluded that “the foundations for the domestic economic recovery are not yet secure.”
Some categories of retail spending were stronger than others, although almost every category experienced a sharp deceleration from March. From a year earlier, spending was up 31.2% on apparel, up 48.3% on jewelry, up 17.8% on cosmetics, up 16.1% on automobiles, and up 14.2% on telecoms. At the same time, spending on home appliances was up only 6.1%. The latter is a sharp deceleration that might be related to weakness in the housing market.
Meanwhile, industrial production in China was up 9.8% in April versus a year earlier, compared to a gain of 14.4% in March. On a monthly basis, output was up 0.6% from February to March and up 0.5% from March to April. The slowdown was likely attributable to concerns about the virus, tightening of credit market conditions, and supply chain disruptions, such as shortages of key inputs (which led to a surge in producer prices in April) and limited transport capacity. The latter is hurting the ability to serve strong export demand. Thus, it is not surprising that annual growth of automotive production fell from 69.8% in March to 6.8% in April. Most other categories experienced a deceleration as well.
One indication that the UK economy is rebounding nicely came from the flash purchasing managers’ indices (PMIs) published by IHS Markit. PMIs are forward-looking indicators meant to signal the direction of activity in the manufacturing and services sectors. They are based on sub-indices such as output, new orders, export orders, employment, prices, lead times, and sentiment. A reading above 50 indicates growing activity; the higher the number, the faster the growth. The latest PMIs for May signal rapid growth.
The manufacturing PMI increased from 60.9 in April to 66.1 in May, the highest level since records began in 1992. All sub-indices accelerated, including output, new orders, and export orders. The strength of export orders, which grew at a record pace, was due to strong demand in China and the United States as well as an easing of Brexit-related difficulties in trade with the European Union. There was a substantial increase in manufacturers’ lead time, indicating that suppliers are struggling to keep up with demand and boding well for further increases in output.
The separate services PMI increased to 61.8, a 91-month high and a level indicating blistering growth. This reflected the reopening of the hospitality sector (restaurants and hotels), removal of other restrictions, and strong consumer and business demand. Backlogs of work hit a more-than-seven-year high as businesses struggled to meet the rapid revival of demand. Business optimism was high, contributing to a spurt of hiring.
Markit commented that the strength of the manufacturing and services PMIs means that real GDP growth in the second quarter is likely to be very strong, following a decline in the first quarter. However, Markit also noted that the surge in demand has led to supply-chain delays. It said that manufacturers are engaged in forward buying of raw materials, thereby “contributing to the ongoing poor performance of supply chains.” It added, “A direct consequence of demand running ahead of supply was a steep rise in prices, hinting strongly that consumer price inflation has much further to rise after lifting to 1.5% in April. However, the inflationary spike could prove temporary, as many of the price hikes have reflected surcharges on shipping and other shortage-related issues emanating from the pandemic. As these constraints ease, price pressures should abate.”
The Eurozone economy is also rebounding, according to the latest PMIs. The manufacturing PMI for the Eurozone fell slightly from April to May, but remained extremely elevated at 62.8, a level indicating rapid growth of activity. Growth of new orders was the third highest on record and uncompleted orders hit a record high. Inventories fell at a record pace, boding well for expanded production in the months ahead. As elsewhere, a surge in demand that businesses struggled to meet led to supply chain problems.
Meanwhile, the services PMI for the Eurozone increased sharply from 50.5 in April to 55.1 in May. This 35-month high was largely due to the easing of pandemic-related restrictions. New orders were up sharply, leading to a surge in backlogs. This, in turn, led to inflationary pressures. In fact, for both goods and services, Markit reports prices rising at the fastest pace since 2002.
Markit said that the Eurozone economy appears to be growing at the fastest pace in 15 years. Still, it said, “Growth would have been even stronger had it not been for record supply chain delays and difficulties restarting businesses quickly enough to meet demand, especially in terms of re-hiring. The shortfall of business output relative to demand is running at the highest in the survey’s 23-year history.” With respect to inflation, Markit noted, “This imbalance of supply and demand has put further upward pressure on prices. How long these inflationary pressures persist will depend on how quickly supply comes back into line with demand, but for now the imbalance is deteriorating, resulting in the highest-ever price pressures for goods recorded by the survey and rising prices for services.”
Meanwhile, ECB President Christine Lagarde said that inflation will ultimately return to lower levels after a temporary acceleration. Specifically, she said, “We should see through a higher period of inflation because the underlying factors and fundamentals are certainly not there to let us forecast that inflation will stay at these levels.”
The latest PMIs point to exceptional growth for the US economy. The report from Markit comes at a time when there is growing anxiety and uncertainty about the economic situation in the country. This is due to recent data indicating a sharp deceleration in employment growth, a sharp increase in inflation, and a sudden reversal of the stellar performance of the US housing market. Despite these indicators, Markit suggests that the US economy is on track for very rapid growth, combined with a temporary burst of inflation.
Markit’s PMI for US manufacturing hit a record high of 61.5 in May, a level indicating very rapid growth of activity. New orders increased at a record pace, putting pressure on suppliers who reported greater backlogs and longer lead times. These factors likely held back output growth. Although manufacturers hired more people, employment growth decelerated to the slowest level in five months. Input costs surged, contributing to an easing of business confidence which was the lowest in seven months.
The separate PMI for services increased from 64.7 in April to a record and stunning level of 70.1 in May. Amidst further reopening in many states, demand surged in May, contributing to the high PMI. The surge in demand, combined with higher input prices, led to more inflation. Hiring was strong as businesses struggled to meet the revival in demand. The strong revival of services bodes well for rapid growth of real GDP in the second quarter. It was weakness in consumer-facing services that, for much of the pandemic, held back growth and kept economic activity below the pre-pandemic level. That has changed. Meanwhile, Markit expects higher inflation in the months ahead, but sees this as being mainly due to supply-chain constraints that will eventually ease.
Japan stands out among large advanced economies in not experiencing high PMIs. The latest report from Markit says that Japan’s manufacturing PMI was 53.1 in May, a level indicating moderate growth. The services PMI, however, remained in negative growth territory at 45.7, down from 49.5 in April. The composite index, which combines both the manufacturing and service numbers, fell from 51.0 in April to 48.1 in May, suggesting that overall economic activity declined in May. Markit reported a sharp deceleration in overall output and new orders. It said that survey respondents “largely attributed the deterioration in business conditions to a resurgence in COVID-19 cases and the re-imposition of state of emergency measures.”
Japan has not had severe outbreaks of the virus. Yet this has come at the cost of persistent economic restrictions and voluntary immobility on the part of many Japanese. Moreover, Japan has been slow to start mass vaccination, although the latest numbers are promising. Markit stated, “Disruption to short-term activity is likely to remain until the latest wave of COVID-19 infections passes and restrictions enacted under state of emergency laws are lifted. However, Japanese private sector companies were optimistic that business conditions would improve in the year ahead.” Interestingly, despite weakness, Japan has also experienced rising costs related to global supply-chain disruption. Still, the Japanese government reports that consumer price deflation continued in April.
In the United States, the yield on the 10-year government bond initially soared last week following the release of the government’s inflation report for April. Consumer prices increased much faster than previously expected, creating some investor anxiety that the country is potentially moving toward a much more inflationary environment. Yet many economists, including me, believe that what we are seeing is not so much inflation as it is an adjustment of prices in response to rapidly shifting demand patterns as well as supply chain disruption. An examination of the details of the inflation report reveals as much. So, let’s look at the numbers.
In April, the consumer price index was up 0.8% from the previous month, the biggest increase since June 2009. It was up 4.2% from a year earlier, the biggest increase since September 2008. Of course, this surge partly reflected the base effect of very low inflation a year ago at the start of the pandemic. Excluding the impact of volatile food and energy prices, core prices were up 0.9% from the previous month, the biggest increase since April 1982. Core prices were up 3.0% from a year earlier, the biggest increase since January 1996.
Thus, inflation has clearly taken a turn for the worse. Yet the devil is in the details. For example, used car prices were up a staggering 10.0% from March to April and up 21.0% from a year earlier. This was not a case of general inflation. Rather, it was a perfect storm of circumstances. These included rental car companies making massive purchases of used vehicles after having sold much of their fleet early in the pandemic. Indeed, the cost of renting a car increased 16.2% from March to April; it was up 82.2% from a year earlier due to a shortage of rental vehicles. In addition, consumers returning to work remained averse to public transit and, consequently, chose to purchase relatively inexpensive used vehicles. Finally, the shortage of semiconductors has reduced new car production. Evidently this led many consumers to purchase used cars rather than wait for new car production to ramp up.
In addition to the notable case of used vehicles, there were other exceptional situations. Prices at restaurants increased as vaccinated consumers returned to eating out, thereby putting pressure on an industry not entirely prepared to meet the increased demand. Prices of airline tickets and hotel stays increased sharply as consumers chose to boost travel while providers scrambled to meet demand. Prices of apparel increased after a prolonged period of stagnation. Prices of major appliances and sporting goods also climbed up due to increased demand for housing combined with limited capacity to ship goods from China.
The price increases described above are likely to be transitory, assuming that businesses will ultimately be able to meet increased demand as consumers return to normal forms of behavior. These price increases are mostly not a reflection of sharply rising wages, which would normally be the basis for a sustained bout of higher inflation. Rather, they reflect dramatic shifts in demand patterns combined with supply disruption.
Moreover, there is, in fact, quantitative evidence that the surge in overall inflation was largely due to price increases in a relatively small number of spending categories. The Federal Reserve Bank of Cleveland has developed an interesting approach to determining underlying inflation. The usual method is to subtract the impact of volatile food and energy prices, rendering so-called core inflation. Yet the Cleveland Fed takes a different approach—they exclude the outliers. As they state on their website, their measure “is a weighted average of one-month inflation rates of components whose expenditure weights fall below the 92nd percentile and above the 8th percentile of price changes.” This measure, knowns as the “16-percent trimmed mean,” indicates a relatively modest level of underlying inflation.
Here are the numbers: The government’s headline annual rate of inflation for April was 4.2%, up from 2.6% in March. Their “core” rate of inflation in April was 3.0%, up from 2.7% in March. However, the Cleveland Fed’s measure was 2.4% in April, up from 2.1% in March. This suggests that, when a small number of categories are excluded, underlying inflation only increased modestly and remained at a level that should not generate heartburn.
Recall that the outliers included the prices of used cars, the cost of renting a car, the prices of major appliances, the prices of airline tickets, and the price of hotel stays. Each of these categories saw a surge in prices that was not reflective of stimulus spending or wage pressures. Rather, they likely reflected changed behavior on the part of consumers and businesses related to the pandemic abating. They also reflected supply chain constraints that will likely be resolved in the next few months. As such, it seems premature to worry about ruinous inflation.
Meanwhile, the Federal Reserve had been explicit in seeing an inflationary surge coming. It said all along that this would be temporary. Consequently, the Fed still intends to stay the course until there are signs that inflation is truly becoming problematic. Nevertheless, the combination of higher inflation and slower job growth in April is causing heartburn for many investors. The concern likely stems from several factors which include expansive monetary and fiscal policies, evidence of rising inflation, sharp increases in the prices of some commodities and traded inputs, and rising costs of transporting goods. On the other hand, the labor market continues to exhibit slack and the US Federal Reserve and other central banks have signaled a willingness to shift gears should inflation become a problem.
One way to gauge what investors are thinking is to look at the so-called breakeven rate, probably the best indicator of investor expectations of inflation. The breakeven rate is calculated by subtracting the yield on inflation-protected securities from headline bond yields. As of this writing, the 10-year breakeven rate is about 2.5%, which is the highest level seen in about eight years. This fact is concerning investors. But is that rational? After all, from about 2005 to 2013, the breakeven rate averaged about 2.5%, a period during which inflation remained historically low. Moreover, the breakeven rate of 2.5% didn’t spook anyone at that time. Most investors thought that 2.5% was fairly low compared to history. So why get worried now? One reason is that the breakeven rate has been steadily rising for several months. There is likely anxiety that it will rise further. In addition, any time an indicator is the highest in eight years, it is news.
Finally, there is likely fear that the Federal Reserve will wait too long to act. Fed Chair Powell has focused on employment rather than inflation and has indicated a willingness to allow inflation to exceed the 2.0% target for a sustained period. In the past, Fed policy was to act pre-emptively to avoid a shift in expectations. Now, the Fed seems to be waiting to act only once actual inflation has become a problem—by which time it could be too late to effectively anchor expectations.
My own view is that we will see higher inflation later this year and next year, but that it will largely be a temporary result of supply chain disruption and adjustment. It will not likely be due to a wage-price spiral resulting from a shortage of labor. Nor is the massive government stimulus likely to be a culprit, especially as much of it will be saved or will drain out of the country in the form of higher imports. Thus, I expect inflation to revert to a normal level by 2023. Moreover, if there are indications to the contrary, I believe that the Fed will indeed adjust policy accordingly, even at the risk of engineering a slowdown in the economy. Interestingly, the five-year breakeven rate, at 2.65%, is higher than the 10-year breakeven rate—which means that investors expect higher inflation in the short term followed by a decline in inflation. This is consistent with the Fed’s view, and mine, that higher inflation will be temporary.
In the Eurozone, bond yields have lately risen to the highest level in about two years. This is mainly due to higher expectations of inflation rather than a tightening of supply and demand conditions in the bond market. The yield on German 10-year bonds is now about –0.10%, the highest level since May 2019, although still negative. The yield on the Italian 10-year bond is now about 1.1%, also the highest since May 2019. The spread between the Italian and German yields is also now the highest in several months.
This comes at a time when the European Central Bank (ECB) has been engaged in substantial monthly asset purchases. It raises the question as to whether this needs to continue. At its latest policy meeting, the leaders of the ECB indicated that they intend to leave policy unchanged for now. However, they also indicated that the future pace of asset purchases will depend on market conditions. In other words, they are not dismissing the possibility of a change in policy. In fact, the ECB leaders said that they now see more upside risk for growth and inflation than downside risk. Specifically, the ECB said this of its policy committee’s view: “While the policy-relevant medium-term inflation outlook was broadly unchanged from the March meeting, risks to this outlook could be assessed as tilted to the upside.”
Inflation in the Eurozone has suddenly surged, with April consumer prices up 1.6% from a year earlier. While much lower than in the United States, this acceleration has alarmed some observers. However, the surge is seen as due to transitory factors, including supply chain disruption. What could boost underlying inflation would be a significant acceleration in economic growth, likely due to rapid and mass vaccination taking place. Currently, the number of daily vaccine doses administered is higher than in the United States on a per capita basis, although the share of the population that is vaccinated remains far lower. Still, the quick resolution of vaccine bottlenecks has improved confidence and led many observers to expect the economy to strengthen in the months ahead. This could boost inflation and it could certainly allay the need for continued expansive monetary policy. The ECB’s policy committee will meet again in June at which time, depending on the data, it could decide to adjust the trajectory of monetary policy.
China’s central bank has offered its view on the likelihood of a surge in inflation in China—it is not worried. This view comes following news that producer prices accelerated sharply. Yet the People’s Bank of China (PBOC) believes that this was due to a rapid increase in global demand, combined with supply chain disruption and shortages of key inputs. In a report, the PBOC said that this surge will likely be temporary and that, as a result, consumer price inflation is likely to remain modest. The PBOC also said that the link between producer and consumer prices is not as robust as it was in the past.
There is a global pattern at work here. That is, the central banks of the United States, Eurozone, and China have all expressed the view that recent dramatic shifts in prices are not indicative of a move toward sustained higher inflation. Rather, these price changes reflect rapid shifts in demand and supply. Consider semiconductors, for example. Chinese demand is up about 35% from the prepandemic trend, putting pressure on prices. This is not inflation in the traditional sense and is not likely to be sustained indefinitely. Still, try telling that to some business leaders who, judging by my own conversations, are irate about what is happening to their costs and believe it is the result of government policies.
One headline last week said that “retail sales disappoint.” Another said that “shoppers kept up stimulus-fueled spending in April.” Both are true. It is true that some investors were disappointed that retail sales were unchanged from March to April. But it is also true that the April level of spending was extremely elevated compared to any other time in history. Here are the details.
In April, retail sales in the United States were unchanged from March and up 51.2% from a year earlier. The significant increase from April 2020 was largely due to the collapse of spending a year ago when the pandemic began. A better comparison would be with retail sales from April 2019. In that case, retail sales were up 23.7% from two years ago—a stunningly large increase. It appears that, following the stimulus payments made in January and March, retail sales have increased to a new plateau. To some extent, today’s report is a surprise on the upside. After all, it would have been reasonable to expect that, after the 10.7% surge from February to March due to stimulus money, sales would have eased thereafter. In fact, on April 15 when the March numbers were reported, I wrote that “it would not be surprising if spending falls in April.” They did not. The latest number should not have disappointed anyone.
There were two categories of retail establishments that saw significant monthly increases. Sales at automotive dealers increased 2.9% from March to April and sales at restaurants increased 3.0%. In addition, sales at electronics stores were up 1.2% and at drug stores were up 1.0%. At the same time, sales at clothing stores declined 5.1% (although clothing store sales were up 726.9% from a year earlier—yes, you read that right), at department stores declined 1.9%, and at nonstore retailers declined 0.6%.
Meanwhile, the University of Michigan reports that its index of consumer sentiment fell sharply from April to May, mainly due to fears of rising inflation. The index fell from 88.3 in April to 82.8 in May, the lowest level since February. The survey results indicate that consumers now have the highest long-term inflation expectations in a decade. Moreover, higher inflation implies lower real incomes, assuming that the higher inflation is not met with a commensurate gain in nominal wages. The survey also found that consumer perception of buying conditions for homes, cars, and household durables is the worst since the 1980s. This shift in consumer perception is likely due to sudden price movements that largely reflect supply chain disruption. Although many economists (including me) believe that the current surge in inflation is likely to be temporary, there is a potential problem if consumers expect higher inflation. The problem is that inflation is, in part, driven by expectations. That is, if consumers expect higher inflation, then they will be more accepting of price increases and will more likely seek higher wages. This, in turn, can exacerbate inflationary pressures. Thus, from the perspective of policymakers, it will be critically important to anchor expectations. Interestingly, the survey also finds that two-thirds of respondents expect the Federal Reserve to raise interest rates in the year ahead. It would do so if inflation were to get out of hand.
It is a rare event when investor expectations about a major economic indicator, such as employment, are dramatically wrong. Yet that is what has happened in the United States. Last week, the government reported that only 266,000 new jobs were created in April. Investors had expected something in the neighborhood of one million. What went wrong? One possible explanation is that the numbers are simply wrong. After all, the government’s employment estimate is based on a survey of a sample of business establishments. The number will be revised as new information comes in. The reported number could, theoretically, be far removed from reality. But, for the sake of argument, let us assume that last week’s number is a reasonably accurate reflection of reality. Why, then, did employment growth decelerate so much? After all, most other indicators suggest that the US economy is firing on all cylinders. Here are some possible reasons.
First, some business leaders have complained that the enhanced unemployment insurance that was part of the last two stimulus bills has left millions of people receiving more money from the government than they can earn from returning to work. Thus, many have chosen not to work while they receive government benefits that are set to expire in September. This is likely true, but it probably only accounts for a small part of the problem.
Second, many women who dropped out of the labor force are reluctant to return so long as they continue to care for children at home. Millions of children have not yet returned to school full time. Female participation in the labor force, which had been declining for the last two decades, fell dramatically during the pandemic as women found it nearly impossible to work from home and take care of children at the same time. Indeed, this is seen as a larger and longer-term problem that goes beyond the pandemic. The Biden administration has included substantial government subsidies for childcare and early childhood education in its latest fiscal proposal. It is meant to allow women to be able to work even if they have young children at home. The United States, uniquely among developed countries, has seen a decline in female participation. It also is the only major developed economy that does not provide substantial subsidies for childcare. Meanwhile, some Republicans oppose the Biden proposal, saying that it will undermine the family and discourage women from being stay-at-home parents. Republican Senator Josh Hawley wrote: “Our public policies should promote the family rather than hurt it, and we can start by giving parents the power to raise their children as they see fit. Democrats try to make family life more affordable by pushing both parents into the full-time workforce while subsidizing commercial childcare.”
Third, it is likely that some people who left employment during the pandemic are wary of returning to jobs that involve social interaction so long as the virus remains a threat. The rate of infection has risen sharply in some states and remains relatively elevated in others. Thus, despite a high rate of vaccination, the virus is not yet defeated and is likely discouraging some people from working.
Fourth, there have been significant disruptions of supply chains involving shortages of transport capacity and key inputs. This has suppressed the ability to produce, transport, and distribute goods. It is possible that this situation, indicative of robust global demand, has stifled employment growth.
Finally, the structure of the economy is changing in response to the pandemic, with some sectors shrinking and others growing. This has affected the mix of jobs available and the mix of skills required of the labor force. It is possible that a skills mismatch is stifling hiring. That is, companies are finding it difficult to obtain people with the skills they need. It might also be the case that some companies are not boosting wages sufficiently to attract the labor they need. Indeed, four years ago, when there was full employment and some business leaders complained about labor shortages, a Federal Reserve official said, “If you’re not raising wages, then it just sounds like whining.”
To better understand what is happening, it helps to look at the numbers. The government releases two reports on employment: one based on a survey of establishments and the other based on a survey of households. Let’s first consider the establishment survey. It found that there were 266,000 new jobs in April, following an increase of 770,000 jobs in March (which was revised down from an initial estimate of 916,000). It was the slowest growth since January. The result is that, in April, employment remained about eight million jobs below the prepandemic level, yet about 14 million above the trough reached in April 2020. By sector, there were some substantial jobs losses that were offset by some big gains. As for losses, employment in automotive manufacturing fell 27,000; in grocery retailing fell 49,400; in courier and messenger services fell 77,400; in temporary help services fell 111,400; and in nursing care facilities fell 18,800. These big losses were offset by the following: employment was up 16,500 in real estate; 42,600 in professional and technical services; 89,600 arts/entertainment/recreation; 54,400 in hotels; 187,000 in restaurants; and 31,100 in local school districts. Most other categories experienced only small changes.
The separate survey of households reported a strong increase in labor-force participation, with the participation rate rising from 61.5% of the working age population in March to 61.7% in April. Because of this, and because job growth was slower than labor force growth, the unemployment rate increased modestly from 6.0% in March to 6.1% in April.
The report was a surprise, but was reasonably well received by investors. Equity prices increased moderately on the expectation that, because there remains considerable slack in the labor market, it is less likely that the Federal Reserve will have to tighten interest rates any time soon in order to fight inflation. Bond yields were steady.
As the global economy recovers, the critically important manufacturing sector appears to be on fire. The latest purchasing managers’ indices (PMIs) for manufacturing, published by IHS Markit, suggest as much. PMIs are forward-looking indicators meant to signal the direction of activity in the manufacturing sector. They are based on sub-indices on output, new orders, export orders, employment, pricing, inventories, pipelines, and sentiment. A reading above 50 indicates growing activity; the higher the number, the faster the growth. The global PMI increased from 55.0 in March to 55.8 in April, the highest reading since April 2010. It is a level reflective of strong growth of activity. Of the 24 nations surveyed by Markit, only three—namely, Mexico, Myanmar, and the Philippines—reported a PMI below 50, signaling declining activity. The fastest growth of activity was reported in Europe and the United States, where the manufacturing PMIs were both above 60, an unusually high number. This strength was due, in part, to the easing of economic restrictions as the threat of the virus recedes, as well as to government stimulus. That said, supply chain constraints held back growth and contributed to the biggest increase in input costs in a decade. That, in turn, led to higher output prices. Output of investment goods grew especially rapidly, boding well for an uptick in global business investment.
By country, the PMIs were notable. The PMIs for the United States (60.5), Eurozone (62.9), and Taiwan (62.4) were all above 60. The PMIs for the United States and Taiwan were at an 11-year high and that for the Eurozone was at a record high. The PMI for Japan (53.6) was at a three-year high. However, the PMI for China (51.9) was relatively modest, indicating that the manufacturing sector is growing at a modest pace. The high performing countries have a couple of things in common. They are all experiencing strong growth of output, new orders, and export orders. They are also experiencing supply-chain constraints, including shortages of key inputs that are inhibiting even faster growth. The fear of inflation that has consumed some pundits is largely due to the rising cost of inputs stemming from this disruption. Yet it is likely that the problems now experienced will be temporary and will not necessarily contribute to longer-term inflationary pressures.
Importantly, while manufacturing is strong, there will need to be an improvement in the performance of the larger service sector in order to assure a robust global economic recovery. It is reasonable to hope that, with vaccinations and easing of restrictions, many service enterprises could soon see an improvement in their performance.
Consumer-facing services have been, and continue to be, disrupted by the need for caution and by government restrictions on social interaction and travel. As vaccinations take place and outbreaks decline in some locations, a rebound in services will likely take place, leading to faster global economic growth. There is evidence that this is starting to happen. The latest PMI readings for services indicate strong global growth.
The global PMI for services increased from 54.8 in March to 56.3 in April, an 11-year high and a number indicating rapid growth of activity. The survey found strong growth of output, new orders, and expectations for the future. There was also, not unexpectedly, a big increase in input prices paid by service providers. The strength of the global industry was disproportionate due to very strong growth in the United States, United Kingdom, and Australia. In the United States, the services PMI hit a record high of 64.7 in April, partly attributed to the successful rollout of the vaccine. In the Eurozone, however, the services PMI in April was 50.5, indicating almost no growth. Of the countries surveyed, only Brazil experienced a decline in activity. Even in India, where a major virus outbreak is under way, there was relatively strong growth in service activity in April. The Indian services PMI in April was 54.0. As the crisis worsens, it would not be surprising if the May numbers turn out to be far worse.
Markit divides services into three categories: consumer, business, and financial. Interestingly, while the PMI for consumer services has improved in recent months, it still indicates no growth in activity globally. Rather, the strong global growth of services is entirely due to a rapid rebound in business and financial services. Given continued restrictions on travel and the persistence of lockdowns in some locations, it is not surprising that consumer services remain moribund. Going forward, the principal risk for services is the possibility of further outbreaks of new variants of the virus. Sadly, the current experience in India can happen elsewhere.
Michael Wolf, an economist with Deloitte Global, examines the factors that will determine the success or failure of the massive global tourism industry in the coming year.
The pandemic continues to create challenges for international tourism. Would-be tourists are forced to assess the health risks at the destination and to consider border policies, including testing and quarantining mandates, and domestic restrictions, such as the opening of restaurants and tourist sites. In addition, policymakers in tourist destinations have set restrictions on who can enter the country based on the perceived riskiness of the traveler. Changes in infection rates and the presence of variants add to the uncertainty when planning a trip abroad. Vaccine passports, typically digital codes certifying that the holder is a low risk, should help travelers navigate these issues, but there is no global standard for such passports, and determinations of who is low risk will vary. Given these challenges, it is no surprise that tourists remain hesitant when it comes to international travel. According to the Deloitte State of the Consumer Tracker, only 19% of respondents plan to board an international flight in the next three months. For context, that proportion was 18% in June 2020.
Small island nations that have historically relied heavily on international tourism are the most vulnerable. For example, international tourist receipts accounted for just shy of 60% of GDP and 85% of all export revenue for Maldives. However, larger countries are also vulnerable to weakness in international travel. More than 10% of GDP comes from international tourists in Croatia, Thailand, and Portugal. In Spain, Australia, New Zealand, the Philippines, and Turkey, more than 15% of all export revenue is from tourism.1 Vaccination rates at destination and departure countries, domestic tourism, and savings during the pandemic will largely determine which countries ultimately fare the best.
Countries with high vaccination rates that are reliant on tourism from countries that also have high vaccination rates are likely to be more resilient. For example, Israel was ahead of the curve in terms of its vaccination program and relies heavily on tourists from countries such as the United States, France, and the United Kingdom, all of which are inoculating their populations relatively quickly. Countries like Israel may be able to attract international tourists that would have traveled elsewhere had the global pandemic not happened. Popular tourist destinations in southern Europe may face similar benefits if their vaccine programs remain on track. On the flip side is Thailand where more than two thirds of international arrivals are from East Asia alone. Although much of East Asia has kept infection rates relatively low throughout the past year, they have been slow in terms of vaccine dissemination. In addition, Thailand recently implemented a mandatory 14-day quarantine for international arrivals after infection rates began to rise domestically, dealing another blow to tourism in the country. Other tourist destinations in Southeast Asia may face similar challenges.
While international tourism remains subdued, domestic tourism has the potential to supplement some of the lost revenue. For countries most reliant on international tourism, it will be difficult for domestic tourists to fill the entire gap left by foreigners. For example, foreign tourist spending in Greece is more than five times the amount Greek tourists spend in other countries. In Portugal and Thailand, it is more than four times higher, and in New Zealand it is more than two times higher.2 However, other tourist-reliant countries are in a better position. In the Philippines, foreign tourists actually spend less than Filipino tourists spend abroad, suggesting they can fully bridge the gap. Australian tourist spending abroad is equivalent to 90% of foreign tourist receipts domestically. In Colombia and the United States, tourists spend 85% and 72% as much as they take in from foreign tourists,3 respectively, making it more likely that domestic expenditures can make up for the loss of foreign spending.
For countries that are typically net importers of tourism, meaning their residents spend more for tourism abroad than foreigners spend coming to their country, weakness in international tourism presents an opportunity. Money that was previously spent traveling abroad can now be spent domestically. Several northern European countries fall into this category. For example, Norwegian tourists spend 2.6 times more than they take in from foreign tourists, while German tourists spend 1.7 times more. South Korea, Singapore, and Israel all stand to benefit as well.4
Large savings accumulation in many countries suggests that each traveler may be able to spend more money on a trip than they would have previously. Tourists from the United States and United Kingdom are particularly well positioned to spend significantly more per traveler. So far, there is not much evidence this extra savings has been spent on international tourism. For example, in Spain, average nonresident expenditure has been lower than a year earlier since the pandemic hit, apart from a modest uptick in February 2021. Other factors may be weighing on per capita spending. To avoid crowds and the risk of disease, more people may have opted to stay in homes rather than in hotels, eaten in rather than go out to restaurants, and chosen low-cost or free outdoor activities, such as hiking or going to the beach. However, per-traveler spending could rise as confidence over the economic outlook has improved along with the pace of vaccinations.
It is clear that international tourism will be restrained while the pandemic lingers. Pockets of variants and resurgence in infection rates will add to the industry’s challenges. Although many tourist-reliant countries will struggle, those that have access to more vaccines and can attract tourists from other highly vaccinated countries are best positioned to regain lost ground. Other countries could see large benefits as would-be international travelers opt for domestic tourism this year instead.
There is a debate taking place about the degree to which we will continue to work remotely after the pandemic. The latest contribution to the debate comes from several economists affiliated with the National Bureau of Economic Research. They conducted a massive monthly survey of workers and employers during the past year. In total, they collected over 30,000 responses in the United States. Based on survey responses, they have concluded that “20% of full workdays will be supplied from home after the pandemic ends, compared with just 5% before.” This is down from 60% at the height of the pandemic early last year. While 20% might not seem like much, the researchers note that such a shift will reduce spending in major city centers to 5% to 10% below the prepandemic level. That could be very disruptive to the economies of major cities. On the positive side, they say that this shift will boost productivity due to increased use of technology as well as due to the reduction in commuting time. In contrast, critics of the survey argue that workers who don’t directly interact with other human beings on a regular basis could become depressed and will not get the benefits of mentorship, thereby hurting productivity. Indeed, those workers who live alone are especially at risk of mental health issues resulting from constantly being alone.
The survey results are based on the responses of workers and employers when asked about their future intentions. It assumes that people will do what they say. Moreover, there is great variability among business executives with respect to their corporate intentions. Some companies intend to bring all workers back to the office, while others have determined that remote interaction works very well and should be continued.
Disruption of supply chains and shortages of key components continue to be a challenge. In Germany, nearly half of respondents in a survey of manufacturers reported disruption to their supply chains. This was the highest number so reporting in 30 years. Why is this? There are a number of factors contributing to disruption, including soaring global demand for consumer goods, restrictive supply chain practices meant to stifle spread of the virus, a shortage of container ships and air freight capacity, and even the lingering effects of the blockage of the Suez Canal. This disruption is hurting the recovery of the manufacturing sector, although in Germany the sector is doing remarkably well. Strong global demand is not surprising. The Conference Board reports that global consumer confidence “soared to record heights” in the first quarter of 2021. Confidence was especially high in the United States, China, India, Australia, and Canada.
Elsewhere, the story of supply chain disruption is similar. In China, a shortage of semiconductors has led to a surge in imports from neighboring Taiwan, despite the rising political tensions between the governments in Beijing and Taipei. In the first quarter of 2021, orders from China and Hong Kong for chips made in Taiwan were up 47% from a year earlier.
Meanwhile, it is reported that the global chip shortage is worsening due to rising global demand for consumer electronic goods, home appliances, and automobiles. In addition, it is reported that Chinese companies have been hoarding chips lest there’s a shortage. Moreover, it is believed that Chinese companies are concerned about the potential impact of future sanctions from the United States. The US government has expressed a desire to prevent China from advancing in certain technologies. The overall supply chain problem is likely to have a negative impact on the global supply of mobile telephones, automobiles, and home appliances, possibly leading to significantly higher prices. Already, some prices have begun to rise. Taiwan’s largest supplier of semiconductors says that the global shortage is not likely to be resolved until 2022. Meanwhile several Taiwanese producers are massively investing to boost capacity.
Will supply chain disruption and fraught global economic relationships ultimately lead to greater diversification of supply chains? There is evidence that this is starting to take place, although China’s footprint in global supply chains remains massive. A recent survey found that companies based in the United States and Europe have marginally reduced their reliance on China for sourcing over the last two years. Specifically, 96% of US-based companies reported in 2019 that China was one of their top three sourcing countries. By the first quarter of 2021, this number had fallen to 77%. For companies based in Europe this figure fell from 100% in 2019 to 80% in the first quarter of 2021. Despite this decline, China remains the number one sourcing location for the companies surveyed.
As companies have started to diversify, one country that has been a beneficiary has been Vietnam. It was listed as a top three sourcing location by one quarter of companies surveyed this year. For US-based companies, Vietnam was a top three location for 43% of respondents, about double the share just four years ago. For European companies, Vietnam was a top three source for 25% of respondents, up from 11% in 2019. In addition, 38% of US companies and 28% of European companies intend to shift some sourcing to Vietnam in the next 12 months. Only a very small share of companies intends to do more sourcing in China in the next year.
This survey tells us quantitatively what we already knew anecdotally. Diversification away from China is being driven by a combination of factors, including fear of trade disruption due to protectionist measures, pandemic-related evidence that supply chains are vulnerable, rising labor costs in China, and low labor costs in Vietnam and elsewhere. The survey shows, however, that China remains dominant player—something that is not likely to change soon.
The US economy grew at a robust pace in the first quarter, driven by consumer spending on goods, business investment in equipment, and a surge in nondefense Federal government purchases. These positive factors were offset by weak growth of consumer spending on services, a decline in business investment in structures, and a sharp decline in business inventories. For the first time in a year, real GDP exceeded the level from a year earlier, but remained below the prepandemic path. Finally, consumer incomes increased dramatically due to stimulus money as well as continued job growth. While consumer spending grew strongly, it is clear that consumers chose to save a large share of their increased income. Here are the details.
In the first, quarter, real GDP grew at an annualized rate of 6.4% and real GDP was up 0.4% from a year earlier. This was roughly in line with expectations. In response, equity prices increased modestly. However, US bond yields increased significantly as investors absorbed not only the GDP numbers but strong numbers regarding initial claims for unemployment insurance and an index of pending home sales.
Consumer spending increased at an annual rate of 10.7%, including a stunning 41.4% increase in spending on durable goods and a 14.4% increase for nondurable goods. Spending on services, however, increased a more modest 4.6%. Notably, although spending on goods was up strongly from a year earlier, with durables up 25.9% from a year ago, spending on services remained 3.2% below the level from a year ago. Thus, some consumers remained wary of returning to restaurants, airplanes, and hotels. Indeed, the hotel occupancy rate last week was still 17% below the rate in the same week of 2019. Also, real disposable personal income was up at an annual rate of 61.3% while consumer spending was up at a rate of 10.7%. In addition, the government reported that, in March, when the stimulus payments were sent to most households, the personal savings rate increased sharply to 27.6% of disposable income. Given that the personal income data indicates that consumers saved about 85% of the stimulus in March, and that a Federal Reserve survey found that households intend to save 75%, one might infer that further spending took place in April. If so, that suggests strong growth of spending in the second quarter and, consequently, strong economic growth in the second quarter.
Business investment (nonresidential fixed investment) grew at an annual rate of 9.9% in the first quarter. This included a strong 16.7% increase in investment in equipment (computers, telecoms equipment, transportation equipment, etc.) and a 4.8% decline in investment in structures (office buildings, shopping centers, oil wells, etc.). Investment in structures tends to lag other forms of investment, so the decline is not completely unexpected. However, there could be something else happening. That is, structural changes in the economy due to the pandemic could inhibit structures investment going forward. If large numbers of people continue to work remotely, that will reduce long-term demand for office space as well as demand for energy. That, in turn, will mean less investment in office buildings and oil wells. If people continue to shop remotely, then there will be less construction of shopping centers. That being said, if government efforts to stimulate development of renewable energy are successful, there could be an increase in investments meant to add windmills and solar panels to the electric grid as well as investments in electric charging stations. Moreover, if people continue to work and shop from home, there could be continued strong growth of investment in information technology, data warehouses, distribution centers, and transportation equipment. Supply chains that run from mines and farms to big box stores increasingly extend to people’s homes.
Investment in intellectual property (software, R&D, branding, etc.) was up a strong 10.1%. In fact, this kind of investment has been relatively immune to the pandemic. Going forward, digital transformation will have a positive impact on investment in intellectual property. At the same time, inventory accumulation fell sharply in the first quarter as businesses evidently sold more than they were able to produce. The decline in inventory investment reduced GDP growth by 2.6 percentage points. This bodes well for an increase in output in the months ahead. Finally, residential investment was up at an annual rate of 10.8%. This reflects the strong level of activity in the housing market.
After growing rapidly in the fourth quarter of 2020, exports declined in the first quarter at a rate of 1.1%. Imports were up strongly, rising 5.7% in the first quarter. Thus, trade had a net negative impact on GDP growth in the first. In addition, it means that the trade deficit widened. You can see commentary in the press to the effect that this was a bad thing. It was not. A trade deficit is not an indication of weakness. Rather, it is normal for trade deficits to widen when economies accelerate, and vice versa. Moreover, a trade deficit exists because investment exceeds saving. You’ll note that personal savings has surged dramatically. Yet overall savings have not due to massive government borrowing. Going forward, imports are likely to be strong so long as domestic demand is strong. As for exports, a further revival of the global economy will likely cause an acceleration in exports.
Where do we go from here? There is reason to expect that a strong rate of economic growth will continue for the remainder of 2021. Government spending has increased considerably, providing millions of households with additional funds available for increased spending throughout the year. In addition, vaccinations continue to reduce the threat of the virus, thereby enabling more consumers to engage in the kinds of social interaction that boost spending.
Some economists worry that the economy will become overheated and that inflation will become a problem. They point to shortages of inputs and transport services. In addition, there have been complaints that businesses cannot easily find workers to fill slots, despite the fact that employment remains far below the level from a year ago. One complaint is that the government’s enhanced unemployment insurance payments mean that many unemployed workers receive more money from the government than they could get working. This is likely true in many cases, although that level of government largesse is set to end later this year. Also, many women have dropped out of the labor force in order to care for children who are schooling remotely. As children return to school, many of those women will likely return to work. Finally, it is likely that many disrupted workers who lost jobs in consumer-facing services lack the skills needed for the jobs being offered. This skills mismatch could stifle the return to full employment and contribute to higher wages.
Given the strength of the economy, some observers have questioned why the Federal Reserve continues to operate an easy monetary policy characterized by historically low interest rates and large monthly purchases of assets. Some critics say that this continued boost to liquidity could spark inflation and that, at the least, it is already contributing to an equity price bubble. The counterargument is that, despite the strong economic growth in the first quarter, the economy still has plenty of room for further growth given considerable slack in the labor market. Plus, uncertainty about whether the virus is under control means that the Fed likely does not want to apply its foot to the brake until there is no longer a risk of a substantial renewal of the outbreak.
In the past year, a remarkable and unusual thing happened in the major developed economies. Consumers and businesses saved a very large share of their income, leading to a surge in bank deposits. This came about for a variety of reasons, including reduced spending opportunities for consumers due to social distancing requirements of the pandemic as well as lockdowns, reduced investment spending by businesses due to reduced need for structures, economic uncertainty, and massive infusions of cash from temporary government stimulus efforts. It is often the case that temporary disbursements of money are largely saved. Interestingly, in the United States, Canada, and Japan, government stimulus led to a surge in personal income even as there was a decline in personal spending. In Europe, however, cash disbursements were lower and, as a result, the increase in savings was not as pronounced. Still, saving increased dramatically in every developed economy during 2020, with the volume of saving up by 7% of income in the Eurozone to as high as 12.5% in Canada. The result is that, in 2020, household bank deposits increased by 12.5% of disposable income in the United States, Canada, and Japan, and by about 7% of disposable income in the Eurozone. Deposits were up by about 10% of disposable income in the United Kingdom.
Moreover, as 2021 unfolds, it is likely that, at least in some countries, there will be a further large increase in consumer financial balances, especially in the United States due to the recent fiscal stimulus. Some commentators say that, once the pandemic is truly over following mass vaccination, this massive pool of money will be spent with abandon, potentially setting off a new round of high inflation. Others, however, argue that there is a limit to how much can be spent. After all, how many restaurant meals and airplane rides can one purchase? Plus, it is argued that many consumers will be comfortable with a higher level of wealth, especially if it is eventually used to fund the down payment needed to purchase a home. Thus, a debate is under way about how this money will be used and what this will mean for the path of the world’s leading economies. If the money continues to be saved on a large scale, then worries about excess demand leading to ruinous inflation will turn out to be wrong.
During the pandemic, one way that China’s government boosted economic activity in order to offset the negative consequences of social distancing was to allow an acceleration in credit growth. For example, total social financing (TSF), which includes credit offered through both bank and nonbank entities, accelerated sharply during the pandemic, helping to fund property investments. However, in recent months, with the pandemic receding and the economy operating above the prepandemic level, the government has become more focused on the potential costs of excessive credit growth. As such, it has taken steps to reduce credit expansion. Although monetary policy has not changed, the government’s hand is evident in the recent deceleration in the growth of TSF, now growing at the slowest pace in more than a year. The government has specifically targeted the property market, fearful that excessive growth could ultimately lead to a sharp decline in prices. There is also a fear that excessive debt could become unsustainable. The deceleration in credit growth has led to a rise in long-term borrowing costs. The net effect is likely to be a deceleration in business investment and property investment, both of which have contributed significantly to economic growth in the past year.
To avoid a sharp slowdown in economic growth from reduced investment, the government is encouraging more consumer spending. The government has said it wants to “accelerate the recovery of consumption and unleash the spending potential.” The relatively strong performance of retail sales in March versus weaker performance of industrial production is evidence that the government’s effort may be having its intended an impact. Still, the first quarter GDP numbers indicate a sharp slowdown in quarter-to-quarter growth.
In the longer term, China faces some demographic problems that could inhibit economic growth. Much has been written about the sharp decline in births and the potential impact on the working-age population. The number of marriages in China fell sharply in 2020, down 13% from the previous year and down 40% from a peak in 2013. The marriage rate (marriages as a share of the population) hit an historic low. The decline in 2020 was likely related to the disruption of the pandemic. The longer-term decline could reflect rising costs of new homes as well as an excessive supply of men versus women. In addition, it appears that Chinese are marrying later in life, which will likely reduce the number of children they have.