Fed deals New York City, LA another setback

The pandemic hit the US economy unevenly, with some places hurting more than others and recovering at different speeds. As the Federal Reserve gets ready to start raising interest rates, we’re about to see that some places are better-positioned to withstand monetary tightening than others.
With national unemployment falling below 4%, the Federal Reserve has indicated it’s time to start moving rates higher, probably as soon as March. That policy shift might make sense for most of the country, but it risks squeezing the places whose economies have lagged behind. And that happens to be mostly urban areas, particularly New York City and Los Angeles. These cities still have unemployment rates far higher than most of the country, and will no longer have easy monetary policy to help them catch up with the places that weren’t hit as hard.
The last time the unemployment rate broke below 4%, in May 2018, we didn’t have the same disparities in the performance of different geographies the way we do now. West Virginia, Mississippi and Alaska were the only states with unemployment rates above 5%. The unemployment rate in Los Angeles was 4% and the rate in New York City was 3.4%. That makes sense — there was nothing particularly unusual about the economy in the middle of 2018.
But it’s not the case today. While 26 states had unemployment rates below 4% in December 2021, 11 states plus the District of Columbia had unemployment rates higher than 5%. Four states — California, Nevada, New Jersey, and New York — had unemployment rates above 6%. New York City’s rate was a whopping 8.8%, and Los Angeles was close behind at 8.4%.
There are several reasons for the divergence. There’s been much discussion about how the consumption of goods — physical items — has surged during the recovery, while the consumption of services — such as leisure, healthcare and education — has lagged. So economies and labor markets more tied to the production and movement of goods have been relatively stronger. We see this in the state data, where rural states like Montana and Vermont have unemployment rates of 2.5%.
Higher rates in New York City and Los Angeles makes sense because of what drives their economies. International travel and tourism are still mostly dead. So are high-powered business travel and business conferences. Well-paid knowledge workers are still trickling back to the office, with December representing another setback as the omicron variant of Covid-19 arrived. Compared to cities in states like Florida and Texas, in-person activities like dining have recovered more slowly.
The hope is that over time, as acute waves of the virus become less frequent, economic activity in all cities will normalise: office commuting will recover somewhat, as will things like international travel and business conferences. But we don’t know when or to what extent that will happen.
The problem for those cities is that the Fed isn’t going to wait around. While inflation remains lower in New York City and Los Angeles than in the US as a whole, it’s well above levels nationally that the central bank is comfortable with — and policy will be dictated by the course of inflation rather than the pace of the economic recovery in lagging urban communities.
—Bloomberg
So once again, we need to adapt our thinking about the economic recovery based on how different places are being impacted. In the summer of 2020, the impact on the economy was expected to follow the course of the virus, and to some extent that’s been true — in-person activity does pick up when the virus has waned — but the more dominant factor has been that economies tied to the production and movement of goods have outperformed economies tied to services.
Fiscal policy was tailored in large part to help out workers and communities hurt by the slump in services — such as generous unemployment benefits that incentivized people to stay at home rather than work, and state and local government aid tied to how much their economies declined. While that succeeded, it also had the effect of stimulating economies based on the delivery of goods and driving inflation higher.
Now we’re going to get monetary policy that’s attempting to rein in the inflation driven by that fiscal spending. It might be the right move for Montana, but it’s going to squeeze the cities that have been damaged most by the pandemic. Policy has supported those harder-hit communities for two years, but that won’t be the case going forward. For New York City and Los Angeles, a return to normal — and soon — will be all the more crucial.

—Bloomberg