If you’re having trouble keeping track of the myriad virus relief measures either delivered/implemented or forthcoming/planned for the US economy, you’d be forgiven.
Between the lingering effects of the CARES Act, the impact of the December virus relief bill, and the projected effects of Joe Biden’s $1.9 trillion stimulus proposal, it’s virtually impossible to make any kind of definitive statements, let alone projections, other than perhaps to note that the labor market clearly isn’t healed.
We know that the winter COVID wave served to depress activity in the services sector and we know that cost hundreds of thousands of jobs in leisure and hospitality. In fact, more than 10% of the jobs in the restaurant industry which were regained from May through October were lost anew over the subsequent three months.
Jobless claims remain “surprisingly” elevated. But retail sales are robust. The situation in Texas presented America with a new crisis which simultaneously underscored both the urgency inherent in combatting climate change and the perils of limited government. It’s not a stretch to suggest it could further galvanize support for government spending and fiscal stimulus.
Virus mutations and the prospect of vaccine-resistant strains are a tail risk. So is inflation. Intuitively, we know there’s quite a bit of slack in the labor market and that output gaps are pervasive. And yet, supply chain disruptions and pent-up demand threaten to manifest in pice pressures, at least over the near-term.
It goes on and on. As the old adage goes, it’s hard to make predictions — especially about the future. And the number of variables seems to be multiplying, although technically that’s meaningless because the distribution of outcomes was already limitless. What do you get when you introduce a handful of new variables into an equation that already spits out an infinity sign?
Viewed through this lens, trying to predict the trajectory of the US economy is a laughably futile endeavor, especially given that economic outcomes are a function of human behavior. And yet, forecast we must.
Goldman, for example, has released a number of notes recently attempting to quantify the impact of what the bank calls “key growth impulses” which together comprise their 2021 GDP forecast. Those impulses are: 1) post-vaccination reopening, 2) fiscal stimulus, 3) pent-up savings, 4) easy financial conditions, 5) the forbearance cliff, 6) surprise tax obligations, and 7) the trade deficit.
These are laborious exercises fraught with uncertainty and subject to an ever expanding list of caveats. When attempting to analyze the effect of reopening, for instance, Goldman “isolate[s] the impact… by first removing fiscal support from our disposable income forecast, and then comparing consumer spending in a scenario where the saving rate remains at its elevated December level.”
To quantify the effect of currently inert savings being spent into the economy, the bank first notes that they “expect households to accumulate roughly $2.4 trillion, or 11% of GDP, in excess savings by the time normal spending opportunities fully return around mid-year,” before offering the following summary of how the methodology evolves from that initial assumption:
Based on our decomposition of where these excess savings now sit—both by income level and by the form in which they are held—we expect slightly less than 20% to be spent in the first year after mass vaccination. We use the same calculation to extend that estimate through the end of 2022, and we set the quarterly path by assuming that less is spent out of excess savings in quarters in which income is high. We scale down our estimate of excess savings to subtract the contributions from government income support included in the Phases 4 and 5 packages to avoid double-counting.
One also has to subtract something back to account for the expiration of forbearance provisions, and then there’s a counterbalance from the assumed effects of easier financial conditions (e.g., the “wealth effect” from higher stock prices and the “gift” of rock-bottom interest rates).
And what about taxes? That could be a problem. “Some households might be surprised to learn that they must pay taxes on some of their government transfers and short-term capital gains in 2020,” Goldman warned.
All of that is to say nothing of the new stimulus package, which Goldman expects to come in at $1.5 trillion.
And what about “building back better”? Aren’t we going to do that too? Apparently. Goldman expects $75 billion in “new annual fiscal measures” aimed at infrastructure, but that has to be netted against the higher taxes levied to pay for them. In the figure (below) Goldman attempts to capture their estimates of these impulses as contributions to quarterly annualized growth.
“The total growth boost from all of the impulses peaks in Q2 at about 8.5pp, with the largest contributions initially coming from reopening effects, fiscal stimulus, and easy financial conditions,” the bank said, in a note dated Friday evening.
“The total impact of the impulses on sequential growth then fades quickly to become somewhat negative by mid-2022, primarily because most of the fiscal stimulus is one-off in nature,” Joseph Briggs and David Mericle added, before contending that when you combine the waning of the fiscal impulse with a larger output gap estimate, you can understand why they’re “less concerned about the risk of persistent overheating than some other commentators.”
Ultimately, the bank’s GDP estimates are now +6% / +11% / +8.5% / +6% for Q1 through Q4 of this year. The bad news is, they “expect a large sequential deceleration in 2022” where that means Q4/Q4 growth of 2.4% down from 7.9% in 2021.
Again, it’s hard to make predictions — especially about the future.
Here’s an interesting prediction concept. The following FRED blog lays out a case for servicing Fed debt. I’m not posting the link, but it’s easy to locate. This was originally posted there November 1, 2018, but the slider allows us to see the changes with current data.
The FRED® Blog
How expensive is it to service the national debt?
A battle between interest rates and growth rates
The main point is, servicing the debt isn’t a problem:
“Since 1960, negative debt servicing costs have occurred nearly 63 percent of the time; and the average cost of servicing debt is -0.67%. In fact, since the 1960s, the only time period in which the real interest rate was consistently greater than the growth rate of real GDP was from 1981 to 1995.”
Nonetheless, I decided to add our pandemic debt to their chart, by using:
Assets: Securities Held Outright: U.S. Treasury Securities: All: Wednesday Level (TREAST). The result is in the link below; maybe this is not right, maybe there are better ways to do this, if so, would love to see some ideas.
I think this chart simply (and obviously) implies that it’s currently cheap to service the debt, but in the next several years, that cost will jump a fair amount — but, going back to a previous post I made today on spreads, the future plumbing issue probably will play out like the post GFC, why wouldn’t it. Thus, it’s likely that we have some drama, rates go up and GDP will probably increase, the economy will ease back into semi stability, then, as usual, we have slow growth and stagnation with labor — and in time, we start into the next weak cycle. Furthermore, the rich get richer and the poor get wiped out under the bus. Same story continues on …
My Link: https://fred.stlouisfed.org/graph/?g=BfmM
Yours with hope,
Nostradamus
Interest cost is a key to watch, which might not jump that quickly, because it is across the spectrum of Treasury liabilities which will roll off slowly and would have some sensitivity to the size of T-bills rolling off as well as other securities that are maturing against the yield to issue new debt. Here is the good news, once this asset bubble implodes, the Treasury could see the 10-year closer to 0 than 3.
It’s hard to make predictions and sometimes tuff to ignorer elephants inside rooms. This is a matter of lingering doubt, grey areas and anxiety.
The forecasted predictions and models that are built inside vacuums often, if not always fail because there’s some lingering dynamic that isn’t connected to other tea leaves or gears.
The invisible elephant ghost that haunts me now, is the one that looks like we had a massive global generational economic shock, but no economic correction (that one might expect from a massive global generational shock).
The central banks are replaying the GFC playbooks and stimulating everything in sight, but in that prior model, trillions were lost by investors in the stock markets and trillions lost in home values, there was a massive loss of global asset value — which was a Yuge part of the economic puzzle, i.e., the reasons yields dropped, was because of a massive flight to safety for guaranteed sovereign protection. In this epic adventure, the inverse is happening with a flight towards unlimited risk from equities.
Maybe I’m not putting down whut up, but the last several economic corrections had economic damage that resulted in real losses, versus a synthetic stabilization strategy that ignores any downside — or upside risk. Maybe I don’t get the mechanics of how cycles work, but my gut feeling is, something’s wrong. I just posted on servicing the debt and how in theory, things should be fine, but the elephant in the room is flashing yellow.
I think the caution comes from wondering what difference is made by investors not losing trillions, but instead, making trillions — and then glossing over the impact.
I often think about how economic shocks are like tsunamis, which start with an underground earthquake that physically rips open the floor of the ocean, which causes a huge cascade of water to fall down — then, the shockwave of the surface water slapping together in a nonlinear impact that causes a tidal wave, which rushes to a shoreline — leveling everything in its path.
How can we have a nonlinear economic shock, without economic impact? How can we gloss over the shock and actually harness that energy into a powerful force to invigorate a global economy? It’s as if restarting a heart with defibrillation and restarting a heart with a new rhythm.
But, it just doesn’t feel right …
Do you think the Democrats will want to go into the 2022 elections with a faltering recovery?? I suspect there will be a strong infrastructure initiative and maybe some help for main street??
Man OL,
That’s a great observation in terms of how important each legislative battle will be (within this tribal war). One thing to watch will be news traffic and ways to gauge if there is an active interest in political news. It’s possible that many people are burned out on all news distribution — and blogs. It’s hard to imagine that people are not burned out and overly sensitive. Withdrawal may set in, but, as we’ve seen with the Texas Polar Vortex Event, a fairly straight forward weather shock is instantaneously polarizing and tribally stupid.
Here’s a FRED take on that idea:
Economic Policy Uncertainty Index for United States, Index, Not Seasonally Adjusted (USEPUINDXD)
The daily news-based Economic Policy Uncertainty Index is based on newspapers in the United States.
Then this layover:
(a) CBOE Volatility Index: VIX, Index, Not Seasonally Adjusted (VIXCLS)
Units: /
(b) 10-Year Treasury Constant Maturity Rate, Percent, Not Seasonally Adjusted (DGS10)
My chart: https://fred.stlouisfed.org/graph/?g=BgpY