The signs we are seeing about the current economic recovery are mixed—in some instances it appears that the recovery is moving along as planned, but other signs point to potential problems. By drilling down closer we may be able to see if the economy is on the right track or recession is just around the corner.
Stock markets: Stock markets are reeling back and forth over the uncertainty of both inflation and the labor markets that show a large number of jobs available and an increasing number of candidates looking for work at the same time. The Federal Reserve has pointed to the threat of inflation, but has also vowed not to begin tapering off quantitative easing until the labor market activity picks up and the number of unemployed workers drops off. Quantitative Easing (or QE) is the activity the Fed gives to the economy by buying government bonds thereby increasing the money supply. QE is ordinarily thought of as a temporary fix to a flagging economy. But since the financial crisis of 2007/8, it has shown some signs of permanency as doves in the government have argued not to unravel it in the face of potential recession. After a long, steady, bull run, volatility in the stock market has dominated the picture as the selloffs have been deeper and the upticks afterward continue to push the major averages towards new all-time highs. The “reflation trade” is on the upswing as investors buy into those investments that are likely to gain as the economy improves.
Covid 19 impact: The pandemic quieted down to the point that most states opened up their economies in May and June only to have the coronavirus Delta variant burst out in many parts of the country—especially those states that were behind in vaccinating the public. The rise of known cases and hospitalizations threatens to force states to close the economy back down again. Mask mandates that were recently withdrawn have been reinstated in many areas.
Economic Forecasts: Economic forecasts of GDP growth have been faced with revisions that also reflect uncertainty. The economic analysts at JPMorgan have revised their annualized GDP rate down to 4.3%, a decrease from a few weeks ago, but still an increase over the month of June’s forecast. The widely watched University of Michigan Consumer Sentiment Index was expected to increase in July, but instead it decreased. On the other hand, housing starts are up in the U.S. Global poverty has increased, but so has real disposable income in most of the rich countries in spite of corresponding declines in GDP. The Bank for International Settlements expects a “wave of firms’ insolvencies” as the impending decline in stimulus could stifle demand and force more layoffs. This vicious cycle causes more families to have less disposable income and in turn promote even less demand.
Declining Stimulus: In the next few months government stimulus programs will be dialed back or done away with altogether. This support for the economy has enabled the population to carry on without much permanent damage from the pandemic. But what will happen if the economy is still not ready to fly on its own? The protection from eviction that renters have enjoyed since early on in the pandemic has run out as of this July 31. The extent of this exposure is not readily known in the aggregate thereby leaving some question marks in the economic community as to the impact to the recovery. Small businesses in some cases might be able to securitize their past due rents into debt obligations with interest and repayment terms. Excess household savings still runs very high; but faced with unemployment for the major breadwinners, this savings may be restricted to basic or emergency expenditures only.
Conclusion: It’s very difficult to get a sense of direction for the U.S. economy out of the great variety of mixed signals. The best sign of direction may come from Australia. When the pandemic began, Australia issued a job-protection scheme for unemployed workers. That scheme ended last March, and so did most of the unemployment. Owing to the pandemic, there are new demands and new jobs available leaving Australian companies with continuing difficulty finding enough employees. By the end of September, we might see the same thing happen in the U.S.
Sources: Mixed Messages, The Economist, July 24th, 2021.