Summer 2021
The Beacon Outlook: United States
Welcome to The Beacon Outlook
This succinct, quarterly outlook delivers up-to-date analysis of leading indicators driving the national and state economies, including GDP growth, employment, housing and commercial real estate markets, taxable sales, international trade, and more.
HIGHLIGHTS
ECONOMIC OUTPUT RECOVERED
In the 2nd quarter of 2021, the U.S. economy grew at a 6.5% annualized pace, pushing overall output to a level higher than where it was in the 4th quarter of 2019, just before the pandemic hit. The so-called V-shaped recovery is officially complete, although it will take another quarter for the level of economic output to return to its long-run sustainable growth path. The near-term forecast boils down to this: expect a great run over the next couple of years, with the major constraint being the ability to find the workforce to manage demand.
TOO MUCH STIMULUS
Largely in reaction to a hyper-political world, the Federal government sent trillions of dollars in the form of monetary and fiscal stimulus across the entire economy, regardless of whether a sector or group was actually at risk of pandemic-related fallout. While the stimulus efforts very likely hastened the recovery, the massive injection of money into the economy comes at a serious cost and could introduce dangerous instabilities into the next expansion. These include inflation and asset bubbles, a deepening of the nation’s long-run fiscal budget challenges, and possibly laying the seeds for the next downturn.
PRICE SHOCK
The stimulus thrown at the economy has heated sectors that benefitted during the pandemic (e.g., consumer spending on goods and the housing market) to white hot levels. The production part of the economy is struggling to keep up with the extraordinary level of demand. The impact on input prices has been sharp, with commodity prices up 20% over the last year, the sharpest increase since the 1970’s. These high input prices have not hurt earnings as corporate profits have risen to their highest level ever, as of the 3rd quarter of 2020. Expect this level of excess demand, and the high prices it brings, to continue for at least the next year, if not longer.
KEY INDICATORS
Household Savings
The pandemic-driven Federal stimulus has created an excess in household savings, cash that has been used to pay down debt, invested, or saved.
Household Net Worth
Due to booming home prices and a stock market bubble, aggregate household net worth has grown at its most rapid year-over-year pace – ever.
A Labor Market With Fewer Jobs
The one aggregate statistic that remains far behind pre-pandemic levels is the labor market where there are still millions (or 4.5%), fewer jobs than there were before the crisis.
U.S. REAL GDP
U.S. REAL CONSUMER SPENDING
U.S. PERSONAL INCOME
U.S. DELINQUENCY RATES
UNITED STATES FORECAST – OUTPUT
UNITED STATES FORECAST – KEY INDICATORS
UNITED STATES FORECAST – INFLATION
The Law of Gravity
Economies can only stay overheated when there is a fuel source fanning the flames. While Beacon Economics sees little sign of a balanced budget coming out of Washington DC anytime soon, the nation’s current spending binge is clearly unsustainable. Eventually the United States will be forced to back off on its borrowing-fueled fiscal stimulus. Bank accounts will start to shrink back towards normal levels and the nation will experience sharply slowing growth rates.
The interaction between excessive monetary and fiscal stimulus is of serious concern. One reason the Federal government has not yet suffered the consequences of its borrowing binge is because the cost of borrowing has remained remarkably low despite the inflation surge seen in the last few months or the huge buildup in the money supply, which suggests more inflation to come. But history tells us that bond markets are shockingly slow in reacting to inflation, and generally don’t until the market is being pummeled by inflation driven losses.
The two issues, the sugar-high collapse and inflation, will lead to that unpleasant economic condition known as stagflation and will almost assuredly drive a re-pricing in the similarly overheated equity markets. But this will lead to a spike in debt costs for the Federal government, creating budget problems. And ultimately the Fed will have to shrink the money supply to try and get price growth under control.
Will this be enough to set off another recession not unlike the early 1980’s when Volker waged his fight against inflation? Very possibly, but much will depend on the path that policymakers take in the coming months.
For more information
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