November 15, 2021

Economic Letter

How Strongly Are Local Economies Tied to COVID-19?

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Samuel R. Tarasewicz and Daniel J. Wilson

The relationship between economic activity and local COVID-19 conditions—infections and deaths—has changed over time. While activity was strongly tied to local virus conditions during the first six to nine months of the pandemic, they decoupled in late 2020 through the first half of 2021. This link strengthened again in the third quarter of 2021, particularly for highly vaccinated counties. One possible interpretation of this restrengthening is that areas with high vaccination rates have heightened virus risk aversion and hence high sensitivity to changes in local virus conditions.


The U.S. economy became inextricably linked to the public health conditions posed by COVID-19 in March 2020. The September 2020 FOMC statement predicted, “The path of the economy will depend significantly on the course of the virus” (Board of Governors 2020). That was particularly true for economic activity that cannot be done online, such as restaurant dining and in-person retail shopping. Now, roughly one year after that statement, has the U.S. economy become less tied to the pandemic? For instance, U.S. consumers may have become fatigued by avoiding in-person activities or may have increasingly found ways to minimize potential virus exposure while engaging in such activities.

This Economic Letter uses daily county-level data to assess the statistical relationship between economic activity and local COVID-19 conditions. We analyze how COVID-19 conditions affect various economic outcomes, allowing these relationships to vary over time. We account for potential reverse causality, whereby economic outcomes may affect COVID-19 conditions, and for national and state factors such as fiscal policies and health restrictions.

We find that local economic activity was strongly related to local COVID-19 conditions for the first six to nine months of the pandemic but then decoupled around the end of 2020. Yet, we also find some evidence of a recoupling, that is, a return to the earlier strong relationships, in the third quarter of 2021.

We then examine what impact vaccinations in the spring and summer of 2021 may have had on the relationship between local economic activity and local COVID-19 infections. We find higher vaccination rates are associated with increased economic activity. We also find that the link between economic activity and COVID-19 infections is stronger in counties with higher vaccination rates. A possible explanation is that high vaccination rates signal high virus risk aversion by local consumers and workers, which leads in-person economic activity to depend heavily on virus conditions.

The national picture

The U.S. economy, especially sectors involving in-person activity such as retail shopping and restaurant dining, became strongly linked to COVID-19 health conditions when the pandemic began in early 2020. This relationship can be seen in Figure 1, which compares the national index of retail and restaurant visits from mobile device geolocation data (Google Community Mobility Reports) with daily COVID-19 deaths per capita (usafacts.org). Credit card spending on retail, restaurants, and hotels (tracktherecovery.org) show a similar pattern.

Figure 1
National retail and restaurant activity and COVID-19 deaths

National retail and restaurant activity and COVID-19 deaths

Note: Daily data through October 23, 2021.

COVID-19 deaths spiked in spring 2020, and in-person retail and restaurant activity plummeted. This first wave of the virus subsided in May, and retail and restaurant visits and spending rebounded. In-person activity then fell again in late 2020 and early 2021 during the second wave. More recently, virus conditions, driven largely by the Delta variant, worsened again starting around the end of July 2021. In-person retail and restaurant activity again showed signs of softening, but the drop was much smaller than those seen in earlier surges of COVID-19.

Cross-county analysis

One can only learn so much from simple time series comparisons. We have only one national economy, while many other national and global factors besides COVID-19 affect economic activity. Such factors include fiscal policies like tax rebates, enhanced unemployment benefits, eviction moratoriums, the Paycheck Protection Program, and expanded child tax credits.

So here we turn to county data, the most granular level of geographic data available for both local economic activity and local COVID-19 conditions. By conducting our analysis at the county level, we can take advantage of the variation across counties at a given point in time to provide more explanatory power than analysis on a purely national level. This also enables us to assess whether the estimated relationship between the virus and economic conditions has changed over time. More generally, our data and framework enable us to test the validity of these underlying relationships.

By applying a statistical technique known as fixed-effects regression, we account for factors that are common to all counties in a state, such as statewide mask mandates or business restrictions, along with national factors like fiscal policies. We are also able to account for county characteristics that are largely fixed over our period of analysis, such as local demographic composition, by estimating how the changes in a county’s economic activity respond to changes in its COVID-19 conditions.

Our analysis accounts for one other potential issue: reverse causality. Our aim is to identify the extent to which changes in local virus conditions lead to changes in local economic activity. However, the causation may go in the other direction: an increase in such activity may increase local virus exposure. We take two steps to address this concern. First, we measure virus conditions using the number of new cases per capita over the preceding 14 days. Changes in current economic activity should not affect past COVID-19 cases. Second, we directly account for economic activity as of 14 days prior, which implicitly accounts for any direct, reverse causal effects that activity may have on subsequent COVID-19 cases.

We estimate this regression for three different indicators of county economic activity, focusing on their response to recent COVID-19 cases, on a per person basis (from usafacts.org). All three indicators are indexes measuring percentage changes in activity relative to a January 2020 baseline (from tracktherecovery.org). The first index is retail and restaurant visits from Google Mobility Reports. The second is consumer spending by county residents based on all credit card transactions, from the data services company, Affinity Solutions. Note that these data reflect both in-person spending and online spending, likely reducing the response of this measure to local virus conditions. Third, we look at initial jobless claims, which generally reflect job losses; it is not as comprehensive a measure of local labor market conditions as employment but is available in near real time.

Figure 2 plots the relationship for each of these three measures of activities with the number of recent COVID-19 cases (excluding deaths) per 100,000 residents from the second quarter of 2020 to the third quarter of 2021. The gray brackets around each marker show its 90% confidence interval.

Figure 2
Estimated relationships between local activity, COVID cases

Estimated relationships between local activity, COVID cases

Note: Data through September 30, 2021. COVID-19 cases measured per capita.

Local economic activity was strongly related to local COVID-19 conditions for the first two or three quarters of the pandemic, depending on the measure. Specifically, on average, in counties where COVID-19 cases were rising, retail visits and consumer spending fell and initial jobless claims climbed, while in counties where cases were falling, the opposite was true. These relationships faded and became statistically insignificant by late 2020 or early 2021. The results on consumer spending echo those of Cotton, Garga, and Rohan (2021), who additionally found that the early negative relationships with COVID-19 were strongest for spending in social-distance-sensitive activities like retail and restaurants.

The significant links between local COVID-19 conditions and local economic activity returned in the third quarter of 2021, which coincide with the deterioration in virus conditions driven by the Delta variant. In particular, we find negative and significant relationships for recent cases for overall spending and in-person retail and restaurant activity.

The role of vaccinations

We next examine what effect vaccination rates in the spring and summer of 2021 had on the relationship between economic activity and COVID-19. To do this, we extend the above analysis by explicitly accounting for vaccination rates using Centers for Disease Control and Prevention daily county-level data on the share of the population that is fully vaccinated and allowing for the effects of COVID-19 cases to be different for high and low vaccination counties.

First, we find local vaccination rates have a strong statistical relationship with local economic activity (not displayed in a chart). The relationship is positive for consumer spending and for retail and restaurant visits and negative for initial jobless claims. This suggests that higher vaccination rates may, on average, lessen local consumers’ and workers’ fears of in-person activities and thus stimulate local retail shopping and restaurant dining.

Second, by allowing the effects of COVID-19 cases to be different for high and low vaccination counties, we find in-person retail and restaurant visits and jobless claims are more strongly linked to COVID-19 conditions in counties with higher vaccination rates. In particular, panel A of Figure 3 shows the effect of COVID-19 cases per capita on retail and restaurant visits—as in Figure 2—except that now this effect is allowed to differ between high and low vaccination counties for the latest two quarters. For illustrative purposes, we plot the implied effects for counties with vaccination rates at the 90th (high) and 10th percentiles (low). Panel B shows the analogous results for jobless claims.  By contrast, we find no differential effect of high and low vaccination counties for credit card spending (not shown), likely because much of that spending can be done remotely.

Figure 3
Relationship between local activity and cases per capita, varying by vaccination rates

A. Relationship between cases and retail mobility
B. Relationship between cases and jobless claims

One might have expected a high vaccination rate in a county to reduce local consumers’ and workers’ concerns about the virus, thereby loosening the link between virus conditions and economic activity. Instead, we find the opposite. One possible explanation is that a lower vaccination rate may reflect lower virus fears in that county. Put differently, counties where more residents are concerned about avoiding the virus may also be counties with high vaccine demand. Under this interpretation, higher vaccination rates are not a cause of a tighter relationship between virus conditions and economic activity but rather a signal of high local risk aversion in regard to virus exposure.

Conclusion

We find that local economic activity in U.S. counties was closely related to local COVID-19 conditions last year but gradually became decoupled as the pandemic wore on. However, there is some evidence that the connection in some areas strengthened in recent months, perhaps due to the rapid spread of the Delta variant. We also find that the link is stronger in highly vaccinated counties, suggesting that higher vaccination rates may signal higher virus risk aversion. Monitoring local data in the future may give valuable insights. In particular, further waves of the pandemic might strengthen the link with local activity, or local economic conditions might once again decouple from COVID-19 health conditions, implying limited impacts of future outbreaks on the economy. 

Samuel R. Tarasewicz is a research associate in the Economic Research Department of the Federal Reserve Bank of San Francisco.

Daniel J. Wilson is vice president in the Economic Research Department of the Federal Reserve Bank of San Francisco.

References

Board of Governors of the Federal Reserve System. 2020. “Federal Reserve issues FOMC statement.” Press release, September 16.

Chetty, Raj, John N. Friedman, Nathaniel Hendren, Michael Stepner, and The Opportunity Insights Team. 2020. “The Economic Impacts of COVID-19: Evidence from a New Public Database Built Using Private Sector Data.” NBER Working Paper w27431. Related data available at www.tracktherecovery.org

Cotton, Christopher D., Vaishali Garga, and Justin Rohan. 2021. “Consumption Spending and Inequality during the COVID-19 Pandemic.” Covid Economics 83(2, July), pp. 116–154.

Biden’s nominees would bring diversity to the Fed—if they’re confirmed

President Biden has announced his roster to fill key vacancies on the Federal Reserve’s 7-seat Board of Governors. If confirmed by the Senate, Biden’s nominees would advance his economic agenda at the central bank. They would diversify the ranks of economic policymakers and likely tighten supervision of Wall Street.

Sarah A. Binder

Senior Fellow – Governance Studies

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Mark Spindel

Chief Investment Officer, Potomac River Capital LLC

These nominations follow in the wake of Biden’s decisions late last year to reappoint Jerome Powell to a second term as Fed chair and to elevate Lael Brainard as second in command. Powell and Brainard already serve as confirmed governors, but the Senate will also need to approve their four-year leadership posts. If the Senate confirms all five, Biden’s Fed appointees would reverse the heavy GOP-tilt of the Board engineered by the Trump administration.  
Here’s what you need to know.
Diversity counts
Biden has nominated two Black economists, Michigan State’s Lisa Cook and Davidson College’s Phillip Jefferson, to seats on the Board. He has also named former Fed governor and Treasury official, Sarah Bloom Raskin, as the Fed’s vice chair of supervision, a position Congress created in the wake of the global financial crisis as the Fed’s top banking cop.
These appointments help to diversify the Fed’s almost exclusively white ranks. Since Congress revamped the Federal Reserve Act in 1935, creating the 7-seat Board of Governors, 82 people have served on the Board. Just three of them were Black men, and ten of them were white women. And while Biden’s nominations augment the Fed’s racial diversity, confirming Cook, Brainard, and Raskin would expand the number of women governors by just one, since both Raskin and Brainard already have Board service under their belts. Notably though, this would be the first Board with a majority (four) of seven seats filled by women governors.
Rough waters ahead?
Observers expect a broad swath of Senate Republicans to vote to confirm Powell, a Republican, to a second term as chair. However, it remains to be seen how many, if any, Republicans will vote to confirm the other four nominees. Of course, Senate Democrats—if they stick together—can confirm all four without any GOP support, since Democrats banned nomination filibusters back in 2013.
Like most Congressional decisions, Fed confirmation votes are more contentious today than they were even 15 years ago, before the global financial crisis. The figure below shows shrinking Senate support on final confirmation votes for Fed nominations since the Reagan administration. Of those nominees considered on the Senate floor between 1982 and 2011, only one, Alice Rivlin, received less than 94% of the vote. The most dramatic contests came in 2020: The GOP-led Senate rejected Trump’s nominee, Judy Shelton, by a vote of 47-50, and just barely confirmed another Trump nominee, Christopher Waller. Four other Trump picks never even made it to a floor vote.

Nor can Biden count on filling the Board swiftly. Prior to the financial crisis, nominees waited about three months on average for confirmation. After the crisis, the wait time ballooned closer to eight months. The Senate took nearly ten months to confirm Waller, a record delay for the contemporary Senate’s handling of Fed nominees. Even with Democrats in control this year, Republicans have found ways to slow down the Senate.
Beware partisan crosshairs
Decades of rising partisanship are seeping into senators’ views of the Fed, often turning otherwise low profile Board nominations into politically charged votes. At the same time, public attention to the Fed has grown with its expanding imprint on the economy.   
The central bank has played an outsized role in stemming the economic damage caused by the global financial crisis in 2007-08 and the global Coronavirus pandemic in 2020-21. And with interest rates near zero, central bankers need to use more creative and often contentious tools to manage the US economy. Critics from both sides of the partisan aisle blame the Fed for either doing too much—or too little—to stem an array of old and new problems.
Add in rising expectations that the Fed will hike interest rates early this year to combat inflation and a hot economy, these nominees will face questions at the core of central banking—how fast and how soon to take away the punchbowl. Raising the price of money is never easy, but this Board could find tightening especially difficult given the addition of Biden’s governors committed to the Fed’s goal of a stronger and more racially inclusive labor market. 
The parties also disagree about whether the Fed can or should do more to combat climate change, especially in light of Congress’s own tentative steps. Democrats want the Fed to use its supervisory powers to force banks to address climate risk in their lending decisions; Republicans think such policies fall outside the Fed’s mandate. Partisans also contest whether the Fed should do more to redress racial economic inequities.
Presidents use appointments to advance their agendas. The Fed is no exception, despite the myth that central banks like the Fed are “independent.” But given the often partisan Senate confirmation process, Democrats will likely need to hang together to get Biden’s picks over the finish line.

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