The economy during and after COVID: 3 questions to consider

Vaco - COVID economy blog graphic

In a recent Vaco webinar, Dr. Mike Walden, distinguished professor emeritus at North Carolina State University, discussed the economic fallout from the conflict in Ukraine and shared insight about the economic impacts of the COVID-19 pandemic. The following is a recap of Dr. Walden’s presentation and reflects his research and opinions.


The COVID-19 pandemic is the deadliest medical event to hit the United States since the Spanish Flu of 1918. The pandemic’s effects on the economy—and the federal government’s fiscal response to it—are unprecedented in American history.

Dr. Mike Walden
Dr. Mike Walden, Distinguished Professor Emeritus, North Carolina State University

To put a number on it, the federal government has appropriated $5.5 trillion for pandemic-related issues; that equates to 25% of the entire U.S. Gross Domestic Product (GDP).

Vaco recently presented a webinar, “The Economy During and After Covid,” to explore the pandemic’s economic effects and forecast what the post-pandemic economy will look like throughout 2022. The webinar was led by Dr. Michael Walden, a nationally recognized professor, author, and expert on economic and public policy. During the presentation, Dr. Walden explored  “three big questions” regarding the economy and the pandemic:

  1. Will the economy continue to improve?
  2. How will we pay for federal spending during the pandemic?
  3. How will the economy adjust after the pandemic?

Question 1: Will the economy continue to improve?

The GDP dropped 10% when the pandemic hit at the start of 2020. It was such a drastic decline that economists officially declared a recession during the second quarter of 2020. The dip was short-lived, however, as the GDP recovered by almost 6% by the third quarter of 2020.

According to Walden, two factors drove the quick economic recovery. First, quarantines and lockdowns helped reduce virus transmission. The second catalyst was the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020, which pumped $2 trillion into the economy in the form of stimulus checks, emergency grants for small businesses, and other aid.

The stimulus helped the GDP bounce back to its pre-pandemic levels. But Walden said it did not fix one of the larger problems businesses have faced in the last several years.

The looming labor shortage

Unemployment hovered around 4% at the beginning of 2020, but jumped to more than 14% once the pandemic took hold in March. According to Walden, unemployment isn’t the best barometer for the availability of labor resources to produce goods and provide services. Rather, it’s better to look at the U.S. labor force participation rate, which reflects the percentage of everyone over the age of 16 (not in the military or institutionalized) who is working or actively looking for work.

In January 2020, the U.S. labor force participation rate was 63.5% (164.4 million workers). Just a few months later, at the height of the pandemic, the rate fell to 60% (a loss of about 1.7 million workers). Currently, the labor force participation rate is back up to 62%, or about 500,000 fewer Americans working compared to pre-pandemic levels.

Walden said there are several reasons why fewer people are looking for work, including:

  • Continued worry over COVID-19
  • Uncertainty about school schedules/reduced availability of child care
  • An increase in retirements (However, according to a recent report, factors like the high demand for workers and financial need prompted 3% of retired workers to re-enter the workforce in February 2022—the highest percentage to date during the pandemic.)

In addition to the labor shortage, Walden said businesses have also faced a reallocation of workers, particularly those from sectors with low-paying jobs. Many workers used the time and financial support during the pandemic to improve their skills, so when they returned to the workforce, they didn’t go back to minimum wage jobs.

The Bottom Line: According to Walden, the labor shortage is going to get better, which will continue to drive the economy in the right direction. But in the meantime, there are a few ways for businesses to address ongoing labor issues: 

  1. Attract labor with higher pay/benefits
  2. Substitute technology and automation for workers
  3. Improve worker productivity/efficiency

Question 2: How will we pay for federal spending during the pandemic?

Walden reiterated that the federal government approved unprecedented financial assistance to stem the medical and economic effects of the pandemic. With respect to that assistance, he posed the following questions: how was that $5.5 trillion generated, what is the downside to such a large economic stimulus, and could stabilizing the economy lead to a recession? 

It starts with the Federal Reserve

Created in 1913, the Federal Reserve is the central banking system of the U.S. While the Federal Reserve has some regulatory functions, Walden said its real power lies in the ability to adjust the levels of growth in the economy—which it does through two methods:

1.    Controlling the federal funds rate: This is the rate that banks charge each other when they’re loaning money from one bank to another. When the economy is growing slowly or in a recession, the Federal Reserve will lower this rate to encourage people to borrow and spend.

2.    Creating money: Walden said to think of the Federal Reserve as an institution that can write a check without having to debit anything.

In fact, Walden said out of the $5.5 trillion that was authorized to fight the effects of the pandemic, the Federal Reserve funded $4 trillion of that by simply creating money. He said this led to an 85% increase in the federal money supply since the beginning of the pandemic, which in turn, created a major financial issue currently on the minds of many Americans.

What caused current levels of inflation?

Walden explored some of the potential causes of current inflation levels. He pointed out that when stimulus money started to flow in 2020, many consumers elected to save it and not spend it—causing a 10% increase in the personal savings rate. Now that the economy is opening back up, many people are starting to spend what they saved.

This increased spending, paired with supply-side restrictions and supply chain disruptions, has created a bottleneck, Walden said. As demand has outstripped supply, many goods and services have seen price increases, also known as inflation.

Currently, the U.S. inflation rate is 8%. That means for every dollar spent, 92 cents of goods and services are purchased. Before the pandemic, inflation hovered between 1% to 2%. The question now, according to Walden, is how can the Federal Reserve lower inflation without hindering economic growth?

The delicate task of stabilizing the economy

Walden said because the unemployment rate and labor force participation rate are moving in the right direction, the Federal Reserve is on the verge of shifting its focus to stabilizing prices and lowering the inflation rate.

To do this, the Federal Reserve will slowly and gradually increase the federal funds rate while decreasing money growth. Raising rates isn’t an exact science, Walden pointed out, which is why he thinks there is a 25% chance the U.S. will be in a recession by the end of 2022.

The Bottom Line: From Walden’s perspective, federal pandemic assistance led to higher inflation that the Federal Reserve is now trying to fix. Walden suggested that businesses should be prepared in case the economy takes a turn for the worse toward the end of the year.

Question 3: How will the economy adjust after the pandemic?

Wrapping up the webinar, Walden shared his predictions and a U.S. economic forecast for 2022.

Accelerated labor market disruption

For decades now, there has been a gradual shift from production and services jobs to more tech-based jobs. Walden said this trend is going to continue and probably accelerate, making this the biggest issue of the economy, post-COVID. Walden said it’s projected that by 2050, 75% of jobs are going to be cognitively-based and only 25% are going to be physically-based.

An education reformation

According to the U.S. Census Bureau’s Household Pulse Survey, 93% of households with school-age children reported some form of distance learning during the pandemic. Though the transition from in-school learning to remote learning wasn’t perfect, Walden said some level of distance learning is here to stay at all levels of education.

High-speed internet is a must

With continued expansion of cable provisions and the utilization of low-orbiting satellites, the country will continue taking steps toward complete high-speed connectivity by 2030. Universally available high-speed internet could lead to increased telecommuting and widespread residential relocation. According to a recent study, universal access to high-speed internet could lead to a sustained boost in worker productivity—which would increase economic output by $160 billion a year.

Businesses that support remote work often enjoy lower operating costs and an increase in business profits. They may also be more attractive to job seekers. Researchers found that 70% of job seekers will overlook businesses that don’t offer any kind of flexible work options.

Working from home continues

Before the pandemic, 8% of workers telecommuted. At the peak of the pandemic, that number soared to 60%. Walden said he expects the number of people working from home to remain between 20% to 30% following the pandemic, depending on internet availability.

But where is home?

With the increase in telecommuting and plentiful options for high-speed internet, people will no longer seek proximity to work, schools, shopping, etc. Rather, Walden said he believes more people will seek a “new farm lifestyle” on cheaper land, leading to a revival of rural America.

Where the economy (and teams) go from here

Walden provided advice to businesses as they navigate the state of the economy in the post-COVID world. 

As the economy regains strength and the labor market continues to improve, he encouraged businesses to remain in the hunt for workers by offering competitive pay and benefits. He said it’s also key for businesses to look for ways to improve productivity and increase efficiency among their current workers, while keeping in mind that inflation will continue to affect their teams. As a result, it’s important for businesses to be prepared for possible economic downturn as the year progresses. 

Finally, he noted, with improvements to internet access and the persistence of work-from-home opportunities, businesses that continue to offer flexible work options can successfully navigate accelerated labor market disruption and stay ahead of their competitors.

When it comes to crucial economic insight that helps you make informed decisions, Vaco is with you all the way. Check out our Insights & Spotlights for additional information that can help your business grow and thrive.

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