US Economy: All Systems Normal, Liftoff Ahead
For those of us who experienced the wonders of the 1960s space program, we remember both the good and the bad. First came the disaster of the Apollo 1 Mission in 1967, when the capsule burnt up in a test, killing all abroad. And just two years later, on July 16, 1969, after a normal countdown, we watched the Apollo 11 rocket launch into space with its crew and the hoped for moon landing. Both these experiences left such indelible impressions on me, I can also remember where I was when those events occurred. When Apollo 1 failed, I lived in an apartment in New York City overlooking the asphalt on the streets below. But when Neil Armstrong uttered his famous words, just 4 days after launch, I sat on a couch in a New Hampshire inn, amidst the White Mountains and the lush forests on their slopes. They were two contrasting locations for two very different events.
For the US economy, the disaster of the Global Pandemic stands in the rearview mirror. The economy continues to rebound at a rapid rate. And a variety of leading indicators show just how quickly and how strongly the economy will likely rebound as 2021 progresses. First, GDP rebounded strongly in Q3 as the following graph indicates:
This stands in sharp contrast to the recovery from the 2008 – 2009 Recession, which resembled a shallow U Shape and took until Q2 2011 to exceed its 2007 GDP peak. Based on current projections of GDP Growth, US GDP will exceed its Q4 2019 high in Q2 2020, just 6 Quarters later. Thus, this recovery exhibits the typical recovery seen in most prior recessions. The Atlanta Federal Reserve Bank’s GDP Now continues to affirm the sharp recovery expected, as they project an 8.9% Annual Growth Rate for Q4 2020, bringing US GDP almost back to its Q4 2019 level. Second, M1 Money Stock continues to explode upward:
With the Federal Reserve continuing to support the economy, economic growth should accelerate with a lag.
Third, manufacturing continues to demonstrate a sharp rebound. The following chart of the Manufacturing PMI (Purchasing Managers Index) exhibits how manufacturing already reached levels typical of a strong recovery:
Chart Courtesy of Macrotrends.
Should manufacturing accelerate from here, the recovery could start to resemble both the Clinton and Reagan recoveries. Historically, M1 Money Growth leads the ISM PMI Manufacturing by 9 months. With M1 Money Growth exploding upward, US manufacturing growth should exhibit even stronger growth moving forward.
Fourth, adding to this potential for manufacturing stands the US Dollar. Early in 2020, the US Dollar soared as other countries sought to soften the impact of the Pandemic on their economies by devaluing their currencies against the US Dollar. With the Federal Reserve massively expanding the money supply and driving interest rates to zero, the US Dollar undid this significant runup in Q1 2020 over the past 9 months:
This puts the US Dollar back at levels consistent with the range from 2016-2019, protecting US manufacturers from further devaluation by the Rest of the World.
Fifth and last, US unemployment stands concentrated in the industries most directly impacted by the Pandemic shutdowns. For example, Leisure & Hospitality Employment dropped from 16,867,000 to a low of 8,549,000 and currently stands at 13,418,000, 20% below its pre-Recession level, having recovered almost 60% of the jobs lost initially:
See https://www.bls.gov/charts/employment-situation/employment-levels-by-industry.htm for details and charts by industry sector from the Bureau of Labor Statistics.
Currently, these lost jobs account for 3.4 million or 47% of the 7.2 million total private sector jobs currently still lost since the peak of employment in February 2020. With the economy reopening over the next six months as the vaccine rollout accelerates, the vast majority of these jobs should be restored. In addition, the vast majority of the 0.5 million retail jobs, 0.5 million manufacturing jobs, and 1.0 million professional and business service jobs lost should reappear, bringing US Employment almost back to its Pre-Recession levels by Year End.
With these five factors operative and the Federal Government likely to provide continued support, with an infrastructure program the centerpiece of the incoming Biden Administration’s Economic Program, the US economy should grow at a rapid pace in 2021. This would restore the historical relationship exhibited prior to 2009, whereby US GDP reached new heights quickly after recessions. And given this, for the US Economy, it is All Systems Normal, Liftoff Ahead.
Picture Courtesy of NASA, available at www.nasa.gov .
Upcoming Speaking Events
While the Coronavirus continues to sideline our live Public Speaking, we continue to do several Zoom/ Skype presentations per month for private groups. And expect to do many more over the coming months. This has become a good way to reach those in search of insights into the current state of the economy and what the data indicate will come. Once the powers that be allow us once more to get up in front of more than 2 people, we plan to be out on the road, sharing our thoughts again live. As to speaking for your group, should anyone wish to have me speak for their group using Zoom or Skype, please contact us and we can set up a date on the calendar.
Monthly Letter Preview
This Month, we take a look at the 2021 Equity Markets and what likely will ensue as the Pandemic comes to an end:
- Equities 2021: Internet Millionaires, The Revenge of Value, & The Return of Emerging Markets – We provide our Quarterly Analysis of the Equity Markets. With the setup in the Markets looking eerily like 1999 – 2000 and the outperformance of Growth Stocks beginning to reverse, markets may stand on the cusp of a major style change whereby Growth Stocks, which dominated over the past few years, give way to Value Stocks and Emerging Markets. Such changes occur infrequently, but when they do investors must beware as they typically last for years.
As always, we end the Monthly Letter with Economic Observations on the US Economy through Interesting Data Points that provide color on the happenings in America. The link to the Monthly Letter is:
https://greendrakeadvisors.com/views-from-the-stream/
Should you have any questions on how the above issues or the items discussed in our accompanying Monthly Views From the Stream Letter impact your family’s financial position or your business’s future as well as the potential actions you could take in response, please do not hesitate to contact us. We welcome the opportunity to discuss this with you.
Yours Truly,
Paul L. Sloate
Chief Executive Officer