Month: September 2020
Full Recovery Requires Reopening
September 28, 2020
Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Dep. Chief Economist
Strider Elass – Senior Economist
Andrew Opdyke, CFA – Economist
Bryce Gill – Economist
With the presidential election just over a month away, prospects for another round of fiscal stimulus seem to be dwindling. The recent death of Justice Ginsburg and the rapidly approaching election have shifted the Senate’s gaze.
Conventional wisdom is worried that a lack of additional stimulus, and the potential for a drawn out and contested election, could impede the economic recovery. And some of those fears seem to be reflected in the stock market recently, with the S&P 500 having fallen 7.9% from its high of 3588 on September 2, as of Friday’s close.
While we need to wait for August data on incomes, through July, the Commerce Department’s measure of personal income was 4.9% higher than in February, as government transfer payments – which the US borrowed from future taxes – more than fully offset declines in wages and salaries. Think about that for a moment. Even with the end of special unemployment bonus payments, there is likely more money in people’s pockets today than there would have been had the pandemic never happened!
Right now, any weakness in the economy is coming from the fact that many sectors (especially service-type activities) remain shut down or lightly used.
Spending on goods in July was up 6.1% from February, while spending on the more pandemic-restricted service sector was down 9.3% over the same period. Overall spending (goods plus services) remains down 4.6%. We doubt a full recovery can happen without a rebound in services. Additional checks can’t change Americans’ wants and desires. Instead, continued recovery is going to require states to push ahead with reopening in a responsible manner.
Take New York and California. Daily new cases are down roughly 92% and 66%, respectively, from the peak in these states. Deaths are down, 99% and 40%, respectively as well. Yet both still have some of the nation’s strictest pandemic-related restrictions in place. This, in turn, has held back their economic recoveries.
According to August data from the Bureau of Labor Statistics, New York and California had unemployment rates of 12.5% and 11.4%, respectively, while the unemployment rate for the US excluding these two states was only 7.7%. If New York and California mirrored the nation’s unemployment rate, the result would be an additional 1.2 million Americans employed. New York and California combined have 18% of the US population, but 32% of all people receiving continuing unemployment benefits.
Just this past week, Florida (7.4% unemployment) and Indiana (6.4%) have fully opened their economies. These states, among many others, had lower unemployment than the national average, mainly because their shutdowns were less draconian.
The competition between states that open and those that don’t – at the political, business, sports, school, and even family level – will lead to even more opening of the economy in the months ahead.
For a self-sustaining recovery to fully catch hold, it is reopening, not additional stimulus, that is the key.
Consensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and
reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
https://www.ftportfolios.com/Commentary/EconomicResearch/2020/9/28/full-recovery-requires-reopening
The Long Slog Recovery!
September 21, 2020
Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Dep. Chief Economist
Strider Elass – Senior Economist
Andrew Opdyke, CFA – Economist
Bryce Gill – Economist
The second quarter of 2020 was the mother of all economic contractions. Real GDP shrank at a 31.7% annual rate, the largest drop for any quarter since the Great Depression.
However, based on the economic reports we’ve seen so far, it looks like the third quarter will be the mother of all economic rebounds. Even if industrial production and retail sales are flat – unchanged – in September, they will still be up at 37.6% and 60.1% annual rates, respectively, versus the second quarter average. Total private-sector hours worked would expand at a 25.6% annual rate. Housing starts would be up at a 218% annual rate. (No, that last one is not a typo.)
The GDPNow tracking model, created but the Atlanta Fed, is forecasting that real GDP grew at a 32% annual rate in Q3. We’re waiting for data on inventories and net exports (which may pull down GDP growth) before committing to a growth rate over 25%. But, either way, it’s going to be the fastest real GDP growth for any quarter since World War II and we all knew it was coming.
The first thing to recognize is that even if the real GDP growth rate in the third quarter equals or exceeds the percentage drop in the second quarter, the economy is still in a very big hole. To illustrate this point and putting aside that GDP figures and percentage changes are annualized (which is a whole other issue), let’s take a company that produces 100 dresses each quarter. If production drops 20%, that means it goes down to 80 dresses. If production then goes up by 20%, that growth rate is from a lower base (80, not 100), so a 20% gain just gets you back to 96 dresses. It’s harder to grow out of a hole than it is to dig one.
The bottom line is that a full economic recovery in the US is still multiple years away. The surge in growth in the third quarter is largely related to many businesses going from a total lockdown to a new COVID-19 normal. Production and construction six feet apart, no fans in the stands, and 50% occupancy. Meanwhile, many small businesses (and some not so small) have simply disappeared.
This suggests that although growth should continue after the third quarter, it’s not going to be nearly as fast. You can only re-open your business once, not again and again (unless lockdowns happen again, which would send the economy back into negative territory).
We don’t think we get back to the level of real GDP we saw in late 2019 until late 2021. And that’s really not a full recovery because, in the absence of COVID-19, the economy would have grown 2% or more, per year, in the interim. If we define a “full recovery” as getting back to an unemployment rate at or below 4.0%, we’ll probably have to wait until 2023.
The pace of the recovery in 2021-22 will depend not only on the course of COVID-19, as well as development of vaccines, and therapies, but also public policy. Reducing overly generous unemployment benefits, even if gradually, would help get many back to work.
Some investors might be concerned about tax and regulatory increases in 2021, but it appears increasingly likely that any tax increases would not kick in until at least 2022 and maybe 2023.
If Joe Biden wins the Presidency and the Democrats take the US Senate, it would likely be by a very narrow majority. In that instance, we would imagine at least several Democrats balking at immediately imposing tax hikes. Remember, when President Obama took office in 2009, the Democrats had 59 seats in the US Senate, and taxes didn’t go up until 2013. This was because Democrats were hesitant to hike tax rates when unemployment was high and the economy was slowly recovering from the Financial Panic of 2008-09.
In addition, a President Biden would likely face a federal judiciary that more strictly limits federal regulators to issuing rules that stick to the laws passed by Congress and don’t go beyond. This makes executive orders “increasing” the power of regulators harder to push through than those that “limit” those powers. And the Supreme Court may get a new member soon.
Either way, don’t expect the rapid growth in the third quarter of this year to last. It’s going to be a long slog back.
Consensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
https://www.ftportfolios.com/Commentary/EconomicResearch/2020/9/21/the-long-slog-recovery
Inflation and the Fed
September 14, 2020
Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Dep. Chief Economist
Strider Elass – Senior Economist
Andrew Opdyke, CFA – Economist
Bryce Gill – Economist
As we near the end of the third quarter, key economic reports will be released that will influence our forecast for third quarter real Gross Domestic Product. It will be a very strong quarter. We expect a 25% “annualized” growth rate in Q3. Using just the data that have already come in so far, the Atlanta Federal Reserve Bank’s GDP Now Model says 30%. Either would be a record quarter for the US economy, but still an incomplete rebound from the shutdown collapse in the first half of the year. This week industrial production, retail sales, housing starts, and a weekly report on unemployment insurance are on tap.
Also this week, the Federal Reserve will hold a two-day meeting, which ends on Wednesday. The Open Market Committee will revise its economic forecasts, reveal its expected path of short-term interest rates, and Chairman Powell will hold a post-meeting press conference.
We anticipate a focus on the Fed’s willingness to let inflation run higher than its 2.0% target to make up for periods when it has run below 2.0%. For the record, this is not a new policy. The Fed has talked about it for years. But what does it really mean? The Fed’s favorite measure of inflation, the PCE deflator, has grown at a 1.5% annual rate in the past ten years. So, in theory, the Fed could let it grow at an annual rate of 2.5% for the next ten years and claim consistency. And because the Consumer Price Index typically grows faster than the PCE deflator, that could mean the CPI increases at about a 2.75% annual rate.
Back in June, the median forecast among Fed policymakers was that PCE prices would rise 0.8% in 2020 (Q4/Q4), which already appears too low. We’re estimating an increase of 1.4%, which is only a hair below the 1.5% increase in 2019.
The Fed’s June forecasts for inflation in 2021 and 2022 also look too low, at 1.6% and 1.7%, respectively. The M2 measure of the money supply is up 23% in the past year, the fastest rate on record, and much above its growth rate after the first use of Quantitative Easing between 2008 and 2015.
Meanwhile, consumer spending has revived much faster than production, with retail sales up 2.7% versus a year ago in July, while industrial production is down 8.2%. The reason for the gap is unprecedentedly generous government transfer payments, which, in the four months ending in July, were up 77% versus a year ago. You show us a country where people can spend more without producing more, and we’ll show you a country that is heading for faster inflation.
But with the Fed willing to let inflation rise, we don’t think it’s going to lift short-term interest rates anytime soon. This, in turn, will hold the entire yield curve down. At least for the near- to medium-term.
But what happens if, as we expect, inflation has clearly and persistently outstripped the Fed’s long run 2.0% target? Will the Fed act to bring it back down? Will it let it run? The Fed has embarked on a dangerous game. Let’s hope it has not forgotten the hard lessons learned from the late 1960s through the early 1980s. For now, rates will stay low. But no country can print its way to prosperity, nothing is free. The stakes are very high.
Consensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
https://www.ftportfolios.com/Commentary/EconomicResearch/2020/9/14/inflation-and-the-fed
Positive Policies to Cut the Debt Burden
Aside Posted on Updated on
September 8, 2020
Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Dep. Chief Economist
Strider Elass – Senior Economist
Andrew Opdyke, CFA – Economist
Bryce Gill – Economist
When government forces businesses to close (even if it is for a pandemic), it’s a “taking” in the legal sense. And we can think about $3 trillion in extra federal spending as “just compensation” to businesses and workers for that taking. Basically, we decided to borrow from future generations in an attempt to stop a virus and save the economy.
Federal borrowing is already more than 100% of GDP and politicians are debating how much more money to borrow as shutdowns drag on. Some of this potential borrowing, up to $1 trillion, is for direct state bailouts. And it appears some of that borrowing is to bailout states for problems that already existed. For example, in Illinois, unfunded pension obligations were roughly $200 billion before COVID hit. Illinois politicians are not letting a crisis go to waste and want to get bailout money now.
Those who worry about federal spending and the “moral hazard” of rewarding bad financial behavior by states look at a bailout as a huge mistake. The question is: Could there be anything positive that comes from this? What policies could the US put in place to limit the damage to future generations from all this borrowing? If we are asking our children and grandchildren to pay for this, are there things we can do that boost growth and limit the odds of more bailouts ahead?
We think there are.
First, the Treasury should issue 50- and 100-year Treasury bonds to finance Coronavirus debt. While the virus will pass, the economic costs will not and should be financed over a long period of time.
One of the reasons this has not happened already is that, in the normal budget process, issuing longer-term debt at higher interest rates than short-term borrowing rates increases debt costs and therefore total government spending. This takes away short- term budget dollars that politicians hope to spend on other things, so they don’t like it. But these days, nobody in Washington, D.C. seems to care about adding to spending. So, lock-in the financing costs for decades to come. After all, that’s realistically how long it will take to pay it back.
Second, if US taxpayers are going to bail out states, we should force states to change policies so bailouts are less likely in the future. This means the President and Congress should ask for three changes in the way state and local governments manage their affairs.
Taxpayers should demand that states immediately shift to defined contribution pension plans (like 401-K’s) from defined benefit plans. The private sector has already done this; states should too. It limits the liabilities of state and local governments and pushes government workers to think more about their own retirement rather than putting the burden on taxpayers. If taxpayers are going to bailout Illinois for running up $200 billion of unfunded pension debt, they deserve to know it won’t happen again.
Taxpayers should require any states getting a bailout to provide universal state-wide school-vouchers so that parents can choose where their kids go to school with the property taxes they already pay. Right now, private schools in many states are open for in-person education, while public schools are not. The incentives are all wrong and vouchers will adjust those incentives.
Any state that gets a bailout should be forced to pass a Right-to-Work law and follow Wisconsin’s example of making Union dues truly voluntary, with no gimmicks about when a worker has to give notice to stop paying dues. Unions support more pay and bigger pensions for government workers with campaign donations to government officials. This helped create the budget problems that state and local government currently have today and government workers have not been hit as hard by shutdowns as private sector workers.
If taxpayers need to spend $1 trillion to bail out state and local government for decisions made prior to (and during) COVID, and these states are unwilling to open up their economies today, these states should be willing to make changes that will limit the chances of similar problems recurring in the future.
And if Washington, D.C. made these changes a requirement to receive bailouts, it would help offset the financial burden that federal taxpayers are being asked to shoulder. Any bailouts should come with conditions. Every bailout of banks in 2008/09 came with conditions, why shouldn’t states be required to do the same?
Consensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and
reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
Infinity Wealth Management, LLC 