FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
July 13, 2021

IN THIS ISSUE:

1. Overview – Strongest Economy Since Early 1980s

2. The U.S. Economy To Grow 7% This Year – Wow!

3. Wealth Is Up & The Income Gap Has Narrowed

4. Shortage: Employers Can’t Hire Enough Workers

5. Conclusions – Enjoy It/Make Money While It Lasts

Overview – Strongest Economy Since Early 1980s

Recoveries from recessions often feature a burst of pent-up consumer demand, but the current boom has few precedents. The Federal Reserve now forecasts US economic growth will average 7% in 2021, the strongest performance since the recovery from the double-dip recession of the early 1980s. Best of all, this good news is no accident.

While the current surge in the economy – up 6.4% (annual rate) in the 1Q – may not sit well with conservatives who want to give no credit to the current administration, this economic recovery is validating the past year’s policy experiment of being bolder, more generous and quicker during a crisis. Ditto for the pro-growth policies of the Trump administration before it.

Today, we’ll look into the reasons why the economy is responding so strongly to the monetary policies enacted since the pandemic recession we experienced last year and why it is likely to continue into next year and maybe beyond – if the liberals in Washington don’t screw it up.

The U.S. Economy To Grow 7% This Year – Wow!

Earlier this month, the government reported the economy added 850,000 jobs last month – a welcome pickup from the slower pace of job growth over the past three months and a sign that overall economic growth is now tracking stronger than in the 1Q of this year.

Yes, we are still roughly seven million jobs down from pre-pandemic levels of employment, unemployment among Black and Hispanic workers remains distressingly high and millions have yet to return to the labor force. But if policymakers hold steady, we are also on the verge of creating a foundation for a more inclusive, resilient recovery much more robust than what we experienced after the Great Recession of 2008, despite having suffered a much bigger jobs hit.

The early successes of this recovery stem from how both Congress and the Federal Reserve tackled the pandemic recession using a new approach: go early and go big on policy support. As the economy shut down, policymakers bucked some conventional wisdom and entrusted households and businesses with cash support which typically had few strings attached. Congress passed stimulus measures with the general mantra that the cost of doing too little was greater than potentially doing a bit too much.

In the last downturn, when the federal government did less, people in their prime working years were still dropping out of the labor force six years into the recovery, and labor’s share of national income fell to an all-time low in 2014. Mortgage delinquencies and foreclosures remained near record highs. In 2011, the gap by which unemployment among Black people exceeded that among white people had risen to a multi-decade high.

This time, however, we are seeing the benefits of policymaking that wasn’t lacking. Businesses which were expected to use funds to pay employees and cover essential operating expenses generally did just that. Meanwhile, workers who were unemployed received additional cash support, which they put right back into the economy to cover necessities and in many cases to buy some stay-at-home goods.

The current burst in growth and hiring has had an unwelcome companion – inflation. The Fed’s preferred gauge of consumer inflation rose 3.9% (annual rate) in May from a year earlier – and some believe it could go higher in coming months – thus fueling intense speculation among adherents of conventional economics about whether we will see a return to the high inflation of the 1970s or a loss of confidence in the US dollar.

Still, it is worth remembering there is a deliberate reason for this new policy approach. After years of consideration, the Federal Reserve implemented a new approach to monetary policy last year with a promise to seek a “broad based and inclusive” realization of maximum employment: to keep credit cheap and accessible long enough to produce a strong labor market which could narrow social disparities and boost productivity.

This easier approach to monetary policy was accompanied by the earlier fiscal stimulus enacted by President Trump in 2017 – the large tax cuts and deregulation – and were implemented during an economic expansion. Traditionally, tax cuts were reserved for use during recessions.

The new framework won. Just before the pandemic, there was steady, non-inflationary growth, stronger wage growth for lower-wage workers and the narrowest gap between Black and white unemployment rates on record.

Now early evidence shows this new, more generous economic framework being applied by the Biden administration in its own way – is being proved right again, at least for now.

Wealth Is Up & The Income Gap Has Narrowed

This will be the first recession where consumers across the earnings and wealth spectrum are emerging with a stronger financial position than what they started with. As a result, consumer confidence in June reached its highest level since February 2020.

Households have used the various sources of cash support – like stimulus payments and extended unemployment benefits – to feed their families or shore up their savings and hold on to their homes and cars – even as millions of jobs were lost. The Census Bureau reported a greater than 30% drop in the number of Americans going hungry last year, a sharp departure from the rise in hunger and poverty which usually accompanies a recession.

Meanwhile, delinquencies on a range of consumer loans like mortgages, auto loans and student loans fell from already low levels last year, reflecting both cash support and policy efforts which provided temporary moratoriums on some loan payments during the pandemic.

Note: President Biden announced earlier this month that the eviction and foreclosure moratoriums will end on July 31. Many forecasters have reacted with dire predictions for the economy (and perhaps stocks) when this happens. I’ll have more to say about this before the deadline.

In other good news, mortgage foreclosures and personal bankruptcies are at record lows. Consumers are spending money but are not taking on a lot of new debt and are holding on to a lot of savings.

Shortage: Employers Can’t Hire Enough Workers

Businesses have been complaining of worker shortages this year, and as a result, many are offering generous sign-on bonuses which can be up to several thousand dollars. Many employers complain that government stimulus payments are causing millions of Americans to avoid working altogether.

The Labor Department reported last Wednesday that the number of unfilled jobs rose to a record 9.3 million at the end of May. In the week ended June 18, total job postings were up around 30% from February 2020 levels. The number of job openings and the number of unemployed people actively looking for work were almost identical at the end of May at 9.3 million, as the chart below illustrates.

A recent survey by the job placement platform INDEED showed most unemployed workers are actively searching for jobs but not urgently – which may be a reflection of health concerns, challenges with child care and/or the fact that some have built up a financial cushion – and gives them leverage to say no to bad, low-wage offers.

Others have greater financial breathing room because of income from a working spouse. INDEED maintains that stimulus support is not discouraging work, but rather giving workers a stronger bargaining hand. This may be disruptive to business models which have become reliant on abundant cheap labor, but those which adapt are likely to be more productive.

Making matters worse, the so-called “quits rate,” which measures how many people left their jobs in any given month, rose to a record high recently. In April, nearly 4 million workers quit their jobs, the most ever. Most economists agree a rising quits rate is a sign many workers believe there are better opportunities available elsewhere.

Conclusions – Enjoy It/Make Money While It Lasts

From just about every angle, the US economy looks strong and may get even stronger just ahead if the Fed’s forecast of 7% GDP growth this year is accurate. The Fed estimates GDP growth will slow in 2022 but remain at a solid 3.3% next year and 2.4% in 2023.

My only big concern here is exploding debt. Earlier this month, the Treasury Department said our annual budget deficit for fiscal year 2021 will again surpass $3 trillion – thus pushing our national debt above $30 trillion by early next year. Meanwhile, corporate debt has exploded to over $11 trillion, the highest level ever recorded by far.

My concern continues to be that this debt binge will end very ugly at some point and deliver us a new, deeper financial crisis. So, enjoy these good times and make money while they last!

CNL Strategic Capital Webinar

We will be hosting a live webinar Wednesday, July 21 at 1:00 PM Central Time with CNL Strategic Capital, LLC. CNL identifies and invests in private companies they believe to be promising and seeks to provide long-term growth and monthly income to retail and institutional investors. 

CNL offers individual investors access to the increasingly popular private equity market, which is typically available only to institutional investors. CNL Financial Group, the parent company, is an investment management firm with over 45 years of history. The CNL Strategic Capital strategy is co-managed by Levine Leichtman Capital Partners, an institutional asset manager with 35+ years of history and billions under management.

Today’s webinar with CNL is one you don’t want to miss for two reasons. First, CNL offers investors a unique approach to private equity investing – which is a red-hot sector these days – now that individual investors can participate. It is one of the most interesting investments we’ve ever looked at, and we’re excited to be able to make it available to our clients.

Second, due to the proprietary information CNL will share with our clients today, we are not able to record the webinar as we usually do. So, if you want to learn more about this successful private equity strategy – and you really should – you need to join us July 21 at 1:00 PM Central to hear the webinar live. The presentation will last less than 30 minutes followed by Q&A.

To reserve your spot for this webinar, you can register here.

All the best,

Gary D. Halbert

SPECIAL ARTICLES

IMF Forecasts 7% GDP Growth For US

Why Employers Can’t Find Enough Workers

Gary's Between the Lines blog: US Home Prices Soar To New Record – No End In Sight

 

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