The Economy
Let us pause in life’s pleasures and count its many tears.
While we all sup sorrow with the poor.
There’s a song that will linger forever in our ears.
Hard times come again no more.
‘Tis the song, the sigh of the weary.
Hard times, hard times, come again no more.
Many days you have lingered around my cabin door.
Oh, hard times, come again no more.”
Hard Times - written by Stephen Foster in 1854 – performed by many including Bob Dylan and Bruce Springsteen
…..
We have just begun the longest general election in our lifetimes. Many of you are tired of it already. If not, don’t worry. We have over seven more months to talk about it. But for now, let’s give it a rest and look at where the economy is and where it might be going.
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Now, back to our regularly scheduled programming:
The Good News: The Dow, NASDAQ and S&P 500 are all at or close to all-time highs. So, are Bitcoin, Gold, and most home prices. Unemployment is below 4%. There are jobs created every month and economic growth is solid. Corporate earnings are at all-time highs and growing by 8% a year. The dollar has been strong and interest rates, although up from the lows of a few years ago, are still below 40-year averages. Consumer spending continues to be strong. Happy days are here again, right?
The Reason for the Good News: What is causing all this strength? Well, the United States economy, though choked by more taxes and regulations than in the past, is still a beacon of economic freedom in the world. There are brilliant entrepreneurs creating new businesses and ideas every day. The U.S. economy wants to grow. It always has.
But, all economies are cyclical. Even this one. It doesn’t always go up. So, why all this good news right now? In two words, government stimulus. The massive amounts of “helicopter money” that the government handed out to people during the pandemic has not yet been depleted. Household checking accounts still have about $3.9T (Trillion) in cash versus about $1T in 2019. Bank reserves are double what they were before the pandemic. So, there is still more cash to spend and lend. Additionally, the federal government’s $2T or more annual deficit is also very stimulative. The government is handing out nearly $200B in cash to people each month more than it is taking from them in taxes.
Basically, this is an economy growing largely on the back of government monetary and fiscal stimulus.
Economic Dichotomy: The Biden administration is understandably frustrated. With all the good news outlined above, people are still unhappy with the economy. Rarely has there been a time like this when consumers are spending more money, but their confidence in the future is falling to recession-like lows. One large reason for this appears to be the impact of inflation on families. They have jobs and a house and bought a new car and are going to Hawaii on vacation, but they see inflation as eating away their ability to keep that up going forward. Also, people see war and strife and discord and crime and an illegal alien invasion around them. They may have the money to remodel the kitchen, but they don’t feel good about the world and community in which they live.
What Could Go Wrong: Lots of things. As good as things look on the surface, there is a lot boiling underneath that could confirm people’s fears about the future and send the economy into the inevitable downturn. Here are some of the things that could trigger a turn in the economy. They are listed roughly in the order of their potential impact.
Federal Debt Crisis: All this federal largess in fiscal and monetary stimulus has been financed with debt. Due in part to the interest costs on the ever-increasing pile of debt, the deficit is increasing all the time. Foreigners are no longer buying our debts. So, either the American public buys it or the Federal Reserve buys it. If the Fed does the buying, that is money printing and inflation will rise again. If they expect the public to buy it, the interest rates, particularly on the longer duration end, will have to increase forcing a potential debt spiral. There are a number of consequences that could happen here, but none of them are good.
Inflation Returns: Inflation in the late 1960s went up above 6%. The Fed raised rates and it went down to 4%. Then they lowered rates again and it shot back up to 12%. This all happened over about a five year period. It could happen again. Part of what is keeping inflation lower right now is a relatively strong dollar. If the dollar were to weaken, the price of energy and many other goods we buy would go up. History tells us that inflation does not go up or down in a straight line.
Housing and Cars Falter: The two biggest purchases most people make are a house and a car. They are a huge part of the economy. We never go into recession without them going down and we never come out if they don’t lead us. Both are holding up at the moment. But, there are so few buyers in today’s housing market that if a bunch of people decided to sell for whatever reason, prices would likely drop. Potentially a lot. In the car market, pent up demand and all that cash is keeping sales humming, albeit with more incentives and smaller margins. If that pent up demand were to be satisfied, the reality that many car payments are now more than $1000 a month would likely cause of lot of people to fix and keep driving what they have.
Commercial Real Estate: Some office buildings in big blue cities are selling for as little as 10% of what they sold for five years ago. When that happens, lenders and owners lose a lot of money. But also, the new owner is able to lower rents because they paid so little for the building. That endangers the rental income of nearby buildings that might otherwise be able to cover their mortgage. This is how a “contagion” spreads through a market and winds up affecting almost everyone. Office is in the worst condition. But apartments, hotels and retail commercial properties are all showing some cracks. Commercial real estate cannot have the same massive impact that housing did in 2006-2009, but it can create problems that ripple through the economy to some degree.
Unemployment: The unemployment rate is now 3.9%. That is still low. But, excluding the pandemic spike, that is the highest it has been since December 2018. It is rising slowly. People spend today because they are confident they will have a job tomorrow. If that confidence wanes because unemployment ticks up, consumer spending will drop off.
Consumer Debt: There is a lot of cash still out there. But increasingly, that cash is in households in the top half of incomes. The lower half is having debt problems. Delinquencies on credit card debt and some other consumer loans are spiking up. Maybe a coal mine canary here?
War: Obviously, if the U.S. gets involved in a hot war, all bets on everything are off.
Spend all the Cash: And finally, it is possible that all that cash out there gets spent or lost in bad investments. If people and businesses run out of cash, they have no alternative but to cut back.
I suspect that none of these matters reach crisis stage until sometime next year. But some could begin unfolding earlier. How the government responds is very unpredictable and obviously depends on who controls the government. They can always print money and hand out more cash to make things better, but then the debt crisis could unfold.
It has long been said that the four most dangerous words in investing are “it’s different this time.” But it may truly be different now. Never before have we had such huge deficits, giant Fed balance sheet, and such an enormous debt in peacetime with a growing economy. There is no roadmap for what happens to the economy with the world’s reserve currency if that economy starts to decline with a financial backdrop like we have today.
We all hope that “hard times come again no more” as the song says. Stephen Foster wrote that song in the middle of a recession. There was the “panic of 1857” shortly thereafter and then of course, the Civil War. His hopes were not realized and hard times came. I hope they do not come to us. They certainly are not here now. But, it is prudent to pay attention and be prepared.
I remain respectfully,
Congressman John Campbell
Drive Fast & Live Free