Federal Reserve of Cleveland Group Vice President in the Research Department Guhan Venkatu reported to the Cleveland Club on February 17, discussing the regional and national economy and answering questions from participants. Mr. Venkatu’s views were not necessarily those of the Cleveland Fed.
Presenting slides, Mr. Venkatu said:
Recent U. S. economic statistics have been historic. The 30+% drop in GDP early last year was the steepest since modern recording began in 1942 and likely the steepest since the 1890s. But the rate of the initial rebound was also historic so that by the end of 2020, GDP was only 2.5% less than in the 4th quarter of 2019, when the recession officially began.
Not counting the $1.9 trillion aid package currently contemplated by Congress, the federal government has spent four times the amount it spent to save the financial system during the collapse of 2008-‘09. This federal spending has increased the debt-to-GDP ratio from roughly 110% in the first quarter of 2020 to roughly 130% through the third quarter of 2020. The federal largess has helped to keep family disposable income at roughly pre-pandemic levels. Consequently, national spending on goods has been strong, although on services – which includes movie theaters, hospitality and restaurants – has been weak.
Sectors sensitive to interest rates -- which have been low -- have done well, for example auto and homes sales.
A study by the Cleveland Fed nationally has shown that over the last year net migration into core cities has dropped slightly, though the reasons remain murky.
Cleveland area employment has mimicked that of the nation; all gains made up since the Great Recession have been lost. Most affected have been low-skilled workers.
Small business survival has been slightly better in Ohio than nationally.
State and local governments’ bottom lines have been stressed, which may lead to lower investment and consequent deterioration of education and human capital.
Statistics studied for evaluating the fair value of the stock market are mixed.
The Federal Funds Rate is likely to stay as low as today into 2023.
The pace of economic recovery will depend on the rate of recovery from covid-19.
Answering questions from participants, Mr. Venkatu said:
A carbon tax is looming less likely on account of the inroads made by renewable energy production and prospects of an increasing electric-car fleet.
Anxiety over the level of U. S. debt-to-GDP is ameliorated by the purpose of the spending, which lately has been to retain the economy’s infrastructure, the health of which will be used to pay off the debt. Mr. Venkatu likened current government spending to the spending for winning World War Two.
Cleveland’s strengths are “Eds and Meds,” meaning educational and medical resources, human capital and infrastructure. Mr. Venkatu pointed out that the United States in the 1930s and 1940s understood the economy was shifting and that the one-room schoolhouse would have to be replaced with a greater educational infrastructure. He thought the present adoption of digital technology is similar to the conversion from an agricultural to an industrial society then. The digital economy may benefit non-coastal areas such as the Midwest on account of being able “to do the work” anywhere. He also said there was at least anecdotal evidence of persons interested in moving from high-cost coast cities to cities offering good weather and a more congenial life-style.
Mr. Venkatu responded to a question about cryptocurrencies by saying that currencies need wide-spread confidence, not yet enjoyed by cryptocurrencies when compared to the trust in such tax-supported currencies as the dollar, the euro and the yen. But he conceded that cryptocurrencies were making inroads and that even central banks were becoming increasingly interested.
Mr. Venkatu pointed out that persons can receive free Federal Reserve Bank of Cleveland newsletters by going signing up here. Persons can learn more about the Cleveland Fed’s research at www.clevelandfed.org or its regional analysis here.
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Mr. Venkatu also encouraged persons visiting Cleveland to tour the Federal Reserve Bank and its Money Museum (when permitted by pandemic-related rules).