The economy should recover this summer, according to an expert in a webinar hosted by Albuquerque Business First.
Jan. 21, Wells Fargo Vice President and Economist Charles Dougherty presented at the “Economic Outlook” webinar. He has a Bachelor of Arts and Bachelor of Science in economics and finance from the University of Pittsburgh and an Master of Arts in economics from Temple University in Philadelphia.
“The economy is holding up better than expected throughout this whole pandemic,” he said.
Based on data Dougherty collected, he predicts the economy should recover by the third quarter of 2021, mid-summer through early fall. Despite the COVID-19 vaccine being administered, it is going to be a rough few months till herd immunity builds, he said.
Employment and industries
“The most impacted parts of the national economy, and this goes for every state too — including New Mexico, certainly — is that employment has been decimated. I can’t overstate this enough,” Dougherty said.
In November 2020, New Mexico was down 6.7 percent in employment growth, according to the presentation.
The state lost over 100,000 jobs in March and April, with about 40,000 returning since then, he said.
The state is struggling to gain momentum in employment growth because leisure and hospitality have seen about a 23 percent decrease in jobs, and natural resources and mining have been down about 27 percent in jobs, according to the presentation.
“So, we are seeing two industries really hold down overall economic growth in the state of New Mexico: That is leisure and hospitality, and oil and gas,” Dougherty said.
The state unemployment rate at 7.5 percent in November is slightly higher than the rest of the county at 6.7 percent, he said.
The labor market is weak, therefore unemployment is high, Dougherty said.
“And that is something I wanted to comment on: The recovery so far has been uneven…” Dougherty said. “Lower-income households are still struggling; higher-income households are basically not only back to where they were beforehand, but they are above that level.”
The leisure and hospitality and natural resources and mining industries are affecting lower-income households, Dougherty said.
In November 2019, Albuquerque had an unemployment rate of 4.5 percent, while in November 2020, the unemployment rate was 7 percent, Dougherty said.
“The unemployment rate across the state is very elevated in all of New Mexico’s major metropolitan areas,” he said.
This is because of COVID cases spiked in November, holding down economic activity, he said.
It’s important to grow small business, Dougherty said. In the state, small business revenues are estimated to be 45 percent below where they were the beginning of 2020.
“Small businesses have been disproportionately hit by the pandemic, and this is something to keep in mind,” Dougherty said.
Housing and renting market
“The housing market is white-hot, basically,” Dougherty said.
In December, the country saw the strongest pace of new home construction since 2006, he said.
A reason the housing market has been able to go so well is record-low mortgage rates, Dougherty said. In January, the interest rate for a conventional 30-year mortgage fell to around 2.67 percent, according to the presentation.
Another reason the housing market is doing well is people need more space with working from home and online schooling, Dougherty said.
This recession is fundamentally different from the housing crash in 2008. The housing bust happened because something went wrong with part of the economy, which caused a recession, he said.
“There is nothing that is fundamentally wrong with our economy or fundamentally wrong with the New Mexico state economy that is going to hold back economic growth once we get past this external shock that is the coronavirus pandemic,” Dougherty said.
On the flip side, fewer people are renting, he said. Dense urban areas like San Francisco, New York City and Los Angeles have seen a decline in renters, with people moving to suburbs and more affordable areas for additional space, Dougherty said.
The U.S. apartment vacancy rate for quarter three in 2020 ended at 6.8 percent, according to the presentation.
“This why I am very optimist about New Mexico; as you have this migration from very expensive coastal areas to inland, everywhere from Phoenix to Albuquerque to Denver, all of these places are seeing this influx of residents and that is going to be an overall positive for those areas,” he said.
In 2020, the state gained nearly 6,700 new residents, he said. Dougherty expects the state’s population to continue this growth.
With everyone working from home and people shopping online more, commercial real estate has not done so well, Dougherty said.
The office vacancy rate at the end of quarter three in 2020, was 10.7 percent. Retail space was 5 percent vacant, and industrial space saw a vacancy rate of 5.7 percent, according to the presentation.
“The areas will probably still be weak in 2021, but better days are clearly ahead,” Dougherty said.
Real gross domestic product
As herd immunity builds against COVID, economic activity will unlock, he said.
“Of course, those efforts to suppress things have been centered in these close-contact type industries like leisure and hospitality, retail, sectors of health care. Those are the sectors that have yet to really begin to recover,” Dougherty said.
The level of real gross domestic product (GDP) decreased sharply last March. According to the U.S. Department of Commerce Bureau of Economic Analysis’s website, real GDP is a measurement of the economy based on the value of goods and services produced in the United States.
At an annual rate, real GDP decreased 5 percent in quarter one of 2020; quarter two decreased 31.4 percent, while quarter three increased 33.4 percent, according to the BEA.
“When you think in terms of real GDP, we saw a historic decline in real GDP second quarter, followed by a historic rise in real GDP in the third quarter and now the fourth quarter — which we don’t have all the data yet for — but the fourth quarter, we think it is going to be a positive growth story, but it is going to be a more moderate growth, especially compared to the third quarter of (2020),” Dougherty said.
The health of the economy improved during the second quarter because of consumers, he said.
“As we get more vaccinations, that consumer spending picks up, then consumer spending takes off, then overall economic growth is very strong,” he said,
“Consumer spending is such an important part of the economy; it is an important part of understanding how the economy works,” Dougherty said.
Because the pandemic changed our way of life, our spending patterns changed as well, Dougherty said.
First, to accommodate the new normal, consumers spent money on goods like recreational cars, RVs, renovations and electronics, he said.
“That’s all good spending,” Dougherty said.
Spending is higher than at the start of 2020. Buying of durable goods increased 12 percent throughout 2020, followed by nondurable goods, which saw a 5 percent increase, while spending on services dropped 7 percent.
Moving forward, this spending pattern will flip and spending on services will increase and spending on durable goods will decrease, he said.
“What we think is going to happen is that one, consumer goods spending — especially durable goods — they don’t have to be purchased very often because they last a long time,” Dougherty said. “For services, now that we have a vaccine, we are very confident that as the year moves forward and more folks get vaccinated, that will unleash a lot of the pent-up demand for a lot of the services that have been limited because of COVID.”
Consumer spending makes up 70 percent of the U.S. economy, he said.
With a small group of big spenders from higher-income households combined with people from all income levels saving money, the future looks promising for the economic recovery, Dougherty said. The personal savings rate increased over 35 percent in 2020.
“Generally speaking, a lot of households have this excess savings,” Dougherty said.
This excess can be spent moving forward, he said, which is another reason why he believes the economy will rebound within the next year.