A faster, but uneven employment recovery

Declining case counts and pent-up demand for services should lead to more robust consumer spending in Q4 across all regions.

October 30, 2021 – The Northeast was the only region that did not fully recover in the second quarter of this year. We had expected this based on our previous estimates, and suspect that by the end of Q3, all regions had recovered to their pre-recession peak level of output gross domestic product (GDP). We lifted our U.S. employment forecast based on strong employment growth through August, as we now expect the nation to fully recover to its pre-pandemic employment levels in the fourth quarter of next year. The South and West will likely lead the employment recovery, since these regions should reach pre-pandemic employment levels in Q2-2022 and Q3-2022, respectively. The Northeast’s reliance on tourism will likely push the region’s employment recovery into Q1-2023. We expect supply chain disruptions to continue well into 2022, likely delaying the manufacturing-reliant Midwest’s employment recovery to lag all other regions.

We estimate that all regions did recover pre-pandemic levels of consumer spending in the first quarter of this year. The South continued to experience the strongest consumer spending recovery among the four regions, with Q3 spending estimated at 9.7 percent above its pre-recession peak. The spike in COVID cases due to the Delta variant’s spread was probably the culprit of a pullback in consumer confidence, which weighed on consumer spending in Q3. However, declining case counts and pent-up demand for services should lead to more robust consumer spending in Q4 across all regions.

Highlights:

  • Northeast will be strongest in consumer confidence
  • South will lead in consumer spending
  • South and West should be first to recover pre-pandemic employment levels
  • Midwest expected to lag all other regions in employment recovery

A light at the end of the tunnel

The Northeast was the only region to not reach full recovery of pre-pandemic GDP in Q2 as the New England census division (Connecticut, Maine, Massachusetts, New Hampshire, Vermont and Rhode Island) was hampered by the lowest growth rate among all census divisions and the Mid Atlantic (New York, New Jersey, Pennsylvania) did not grow enough to offset the sluggishness in the New England census division. While tourism, education and health services output continued to suffer in Q2, a significant increase in consumer confidence helped lead to the largest year-over-year (YoY) increase in consumer spending among all regions in Q2. The Northeast recovered to pre-pandemic levels of GDP in Q3, likely due to employment and output gains in tourism, education and health services, as well as consumer spending.

Going forward, we expect that employment growth will ramp up in the Northeast as tourism returns to the area and sectors that are significant there, such as leisure, hospitality and education services, return to normal. While we expect that consumer spending growth in the Northeast will remain comparatively slow in Q3 and Q4 of this year, we are expecting a significant ramp up through the first two quarters of 2022 following a strong bounce back in consumer confidence in Q4. Maine, New Hampshire and Massachusetts were the only three states to recover their pre-pandemic levels of Gross State Product (GSP) in Q2 and we expect those states to continue to outperform the rest of this region through 2023. The return to normal and pent-up demand for services will benefit all three states due to the heavy concentration of output and employment in professional, education, health and retail services.

The South will recover employment losses first (Employment recovery, by region)

A map showing the quarter when each region is expected to reach its pre-pandemic level of employment. See image description.

A map showing the quarter when each region is expected to reach its pre-pandemic level of employment. The South will reach that level in Q2-2022, while the West will reach it in Q3-2022, the Northeast will reach it in Q1-2023 and the Midwest will reach it in Q2-2023.

Sources: Visa Business and Economic Insights, U.S. Department of Commerce.

Strong growth moderates, as bumps in the road appear

As expected, the South continued to post very strong GDP, consumer spending and employment growth in Q2. Increased migration to popular Southern metro areas was a large contributing factor to the robust growth numbers in Q2 as construction output and employment helped lift the region. However, the housing boom cooled off in Q3, which hampered the region. Additionally, the energy sector has been sluggish, which likely limited Q3 GDP and employment growth in Texas, Oklahoma and Louisiana. Additionally, supply chain disruptions have negatively impacted states that rely heavily on manufacturing like Alabama, Mississippi, Kentucky, Tennessee, North Carolina, South Carolina and Arkansas. Given these impediments, we expect that the South will underperform relative to other regions in GDP, consumer spending and employment growth in Q3.

Through the rest of 2021 we do expect that supply chain issues and a worker shortage in the energy sector will continue to limit GDP and employment growth in much of the South. However, thanks to favorable migration patterns, as well as consumers remaining relatively confident, we expect that consumer spending will bounce back quickly. Additionally, we expect that in mid to late 2022, supply chain issues will be resolved and the energy sector will rebound. This should lead to the robust growth the South has seen relative to other regions resuming in the latter half of 2022. We expect that Florida, Texas, Georgia, Tennessee and North Carolina will experience the strongest growth in the South going forward due to very favorable migration trends, an abundance of affordable housing and generally favorable conditions for businesses.

Disrupted recovery

The strong rebound in consumer spending, consumer confidence and employment helped the Midwest fully recover to pre-pandemic levels of GDP in Q2. However, the Midwest’s over reliance on manufacturing in the eastern part of the region and agriculture in the western part has left the area susceptible to the significant supply chain disruptions that started to ramp up in Q3. This led to a decline in consumer confidence and likely contributed to the weak GDP and consumer spending growth in Q3. Furthermore, the worker shortage in the domestic energy sector has negatively impacted states like North and South Dakota. We expect that these factors will continue to hamper the region through the rest of 2021.

Our forecasts suggest that employment, consumer spending and GDP growth will suffer through the first half of 2022, leading the region to underperform relative to the rest of the country. In the latter half of 2022, we do expect that resolved supply chain disruptions and a stronger energy sector will greatly benefit the region, which should lead to robust growth in employment, consumer spending and GDP. Given these headwinds and the East North Central division’s very unfavorable net migration trends, we expect that the Midwest will be the last region to reach pre-pandemic levels of employment. While this region does have a tough road ahead, we expect Indiana, Kansas, Nebraska and Minnesota to rebound stronger than other states in the region thanks to favorable business policies and more positive in-migration trends than the rest of the region.

The West takes the lead

Revised Q1 GDP numbers showed that not only was the West much stronger coming out of a tumultuous 2020 than previously thought, but also that it was the first region to return to its pre-pandemic levels of GDP. Most states in the West recovered their pre-pandemic GDP level by Q1-21. The Q2-21 GDP numbers revealed robust growth that led to the West finishing the quarter 2.1 percentage points above its pre-pandemic peak—the best second quarter growth in the nation. A significant rebound in consumer confidence that translated into strong consumer spending growth and the hottest housing sector in the country drove this robust growth. Despite the cooling housing market and the hit to consumer confidence in Q3, we still believe that the West will likely lead all regions in terms of GDP growth.

Through the end of 2021, we expect robust GDP and employment growth from the West relative to the other regions. As tourism rebounds and employment growth accelerates, we expect the Pacific division (Alaska, California, Hawaii, Oregon, Washington) to grow faster than the Mountain West (Arizona, Colorado, Idaho, New Mexico, Montana, Utah, Nevada, Wyoming) due in part to the relative strength of consumer spending in Washington, Oregon and California. Also, many Mountain West states are largely dependent on non-energy mining and thus will likely continue to be negatively impacted by supply chain disruptions through the rest of this year. Our forecasts indicate that the Mountain West census division will start to outperform the Pacific census division in 2022 in terms of GDP and consumer spending growth when global and domestic supply chain disruptions are remedied. We expect the strongest long run growth of GDP and consumer spending in Utah, Colorado, Idaho, Nevada, Montana and Arizona due to continuing positive in-migration trends.

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