By: Russ Colbert
Fall 2021 (Vol. 39, No. 3)
In the early part of 2020, when the Covid virus hit us, unemployment in the U.S. was around 3.5%, low- income earners wages were rising faster than wages for high income earners, living standards were on the rise and the economy was doing very well. Then came the lockdowns due to the Covid virus and the robust economy came to a halt. Then GDP had a massive drop the second quarter of 2020 at a -31% annualized rate. Since then, due to the re- opening, Federal Reserve printing money, and a gigantic Treasury debt issuance to fund Covid pandemic loans and benefits, the economy has rebounded. This has included over 800 billion dollars in direct payments to individuals. The damage is reflected in the large number of small businesses that shut down or scaled back due to lockdowns. Many of these businesses will not be able to help in the economic rebound like they would have with prior recessions. Unfortunately, this slowdown in GDP and profit growth is now showing signs of rising inflation that will eventually lift long term interest rates. Tax hikes are still a threat, as are tougher Covid restrictions that limit the service-sector recovery. It is clear that the cost of lockdowns was immense. Locking down the economy threw complicated supply chains into chaos and restarting them is not as easy as many seem to think. Inflation has begun this year as we have all seen prices increase at the grocery stores, gas pumps, and most everywhere we shop. Hopefully as the economy improves, and people get back to work, and the supply chain gets back to normal going forward, inflation will slow. One big positive for the economy is that the Fed is still offering low interest rates and easy money. That is a big plus for this economy.
The next several weeks will be important. It is looking like the infrastructure bill may pass in some form. It remains questionable at this time on how much it will be reduced from the $3.5 trillion that many of the Democrats want to pass. Several of them, including Joe Manchin of West Virginia are wanting a reduced version. The odds still favor the Democrats getting something passed. If so, it will pump money into the economy and should be positive for the stock market over the short- term, creating jobs and more stimulus for the economy.
We are remaining positive on the economy currently for several reasons. First, long term interest rates are low and should remain low we believe through next year. Second, corporate profits are high and should remain strong next year, especially if some form of stimulus package is passed. Third, The Fed has a very loose monetary policy that should remain loose even when they start to raise interest rates late this year or into next year. Next year is also an election year.
We are expecting stronger employment reports in the near future. Many unemployed people receiving benefits and payments previously that had exceeded what they earned while working are no longer able to do so. Supply chain problems, vaccine mandates, kids not being back in school means a more volatile economic environment, but easy money from the Fed and less fear of Covid are continuing to boost economic activity. We are expecting improvement in the fourth quarter in GDP and job growth.
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Senior Portfolio Manager
Advisory services offered through Royal Palm Investment Advisors, Inc., a Registered Investment Advisor.