economy

Delta Didn’t Impact Demand

Some economists are suggesting Delta impacted the economy in Q3 as growth estimates have been cut from 10% to 4%. I just don’t see it. The problem is the economy has mostly recovered by end of Q2, reducing future growth possibilities.

Here is a graph looking at COVID cases, restaurant attendance, and TSA passenger data starting in April.

Three things to note:

  1. As advertised 6 weeks ago, the Delta wave would probably peak in 3-5 weeks. It looks like it peaked last week.
  2. The recovery in restaurant and TSA data peaked well before the Delta surge started.
  3. Delta did not materially adversely impact demand for these services.

Overall, future economic growth in the US will be closer to the long-term trend. The days of 8% and 10% GDP growth are over. Additionally, it’s highly unlikely unless things get really crazy and there are lockdown again we see COVID impact demand materially.

The problem is on the other side of the aisle… I’ll get to that next week.

By Christopher Schwarz, ago

The Hangover 4: Too Much Stimmy

10-year rate down 0.50%. 5-year inflation expectations down 0.30%. 10-year minus 2-year – an indicator of future growth – is down almost 0.50%. What does it all mean? The market is reining in growth expectations … perhaps due to a government spending hangover.

While people are focused on the Fed, they have their eyes on the wrong ball as the cause.

The real cause? We may have a huge decline in Government spending next year. Last year Government spending increased by almost 50% – THE MOST SINCE WORLD WAR II. What happened when the stimulus stopped in 1945/6/7? The economy had a huge hangover.

Here’s annual economy growth since 1930.

Once that stimulus stopped, the economy slowed down too.

To keep up last year’s spending the Government needs some big time permanent spending increases. Those were coming in the form of two “infrastructure” bills. The first was set to be $2 trillion. The second was set to be the “American Families Plan” – another $1.8 trillion. In total: $4 trillion. Not all this year, but enough to have government spending stay at the $6 trillion level for the next few years.

But now… that’s not so likely. The $2 trillion infrastructure bill is down to $1.2… and only $579 billion is new spending. The American Families Plan is on hold.

Thus, spending next year is set to decline significantly, which will be a big drag on the economy.

By Christopher Schwarz, ago