December is soft while consensus for 2021 foresees "robust growth" and "rapid job gains"
… Even before Congress settles on $900,000,000,000 of 'stimulus'
Key points:
Two most up-to-date data series show recovery stalling at high level in last two weeks
Survey of Consumer Expectations shows people highly optimistic about spending
… and household financial situation recovering to the levels of 2014-16
Consensus of economists predicts fast GDP and jobs growth in 2021 and ‘22
… and forecast just revised upward by the Federal Reserve
Let's again begin the weekly roundup and analysis of macroeconomic indicators with the two most current and broadly representative of the entire economy. First is the Federal Reserve Bank of New York's Weekly Economic Index (WEI), a composite of 10 high-frequency stats, appearing with a one-week lag. Last week we saw the first noticeable drop since September. This week (ending Dec 12) we see the drop extended to two weeks.
The blue line shows that only one of the last five weeks has been notably positive, and the net change over that time is barely up. The number for the week of Dec 5 was revised downward, and then the newest news showed another drop from there. The NY Fed's paragraph of Commentary specifies:
The decline in the WEI for the week of December 12 is due to an increase in initial unemployment insurance claims and decreases in electricity output and fuel sales (relative to the same time last year), which more than offset rises in tax withholding and rail traffic.
For the record [largely for my reference when I am writing again next weekend, looking at the inevitable revisions], the last 4 data points have been:
-2.87, -2.09, -2.47, -2.70
… with negative numbers showing the amount by which economic activity is below one year ago. That gap had improved from -11.45% in late April to a high-water mark, as we just saw, of -2.09%.
The second indicator takes us all the way to the most recent days. The GDPNow 'nowcast' from the Atlanta branch of the Fed is a running estimate of real GDP growth based on the latest available data. A few weekends ago I marveled at the massive, quantum revisions between Nov 17 and Nov 25, resulting in the best guess of GDP growth in the present quarter being lifted from 3.5% to 11.0% (while the quarter under consideration was already more than half over!).
Since then the nowcast has changed ten times but has stayed in a range of 10.8 - 11.3%. Specifically, the three revisions this week were up 0.2 to 11.3% on Tue after news about industrial production; down to 11.0% on Wed after news about retail trade, and back to 11.1% on Thu after news about housing starts. The net change from the week's three revisions was zero. In short, when we get official 4th quarter GDP news on Jan 28 look for it to be around 11%, about 4 times faster growth than any experts were predicting early in the quarter, just 2+ months ago. If that's correct, look for major egg on the face of the expert prognosticators surveyed by Blue Chip, who are sticking with their guess of a growth rate around 4%, or lower than that for most of them.
Taken together, these first two snapshots of our current position show the economy having recovered very substantially from the spring Catastrophe to the early winter, but that these last four or five weeks seem to represent a stall in the progress. I would emphasize that a 'stall' means a holding pattern at a high level, not worse than that such as a decline—except in the small-business Main Street health metric I presented at length last week.
Also last week, I anticipated Monday Dec 14's release of the November Survey of Consumer Expectations. I should clarify up front that although these data come from the New York regional branch of the Federal Reserve System, they are not regional data; they are meant to be "nationally representative." The news is on balance positive, as you can see in their summary:
Household Spending Growth Expectations Strengthen; Labor Market Signals Are Mixed
The November Survey of Consumer Expectations shows that consumers’ year-ahead spending growth expectations rose to 3.7 percent—the highest level in more than four years—despite flat income and earnings growth expectations. Labor market signals were mixed: Although the mean perceived probability of losing one’s job in the next twelve months decreased to 14.6 percent in November from 15.5 percent in October, expectations that the unemployment rate will be higher one year from now rose to 40.1 percent, the first increase since July.
The full press release goes into a lot more detail. The "main findings" section begins with several findings related to inflation. I don't put much stake in this (I didn't even mention the inflation part the other times I've presented the Survey of Consumer Expectations) for several reasons. First, I believe inflation has not been measured accurately for decades at least: the Consumer Price Index still has no way adequately of accounting for the massive quality improvements in the many tech-influenced things we buy. There's more to say about that, but not here. Second, the official stats also don't show the massive price bubbles in housing and other asset prices, including stocks, that we've had fairly often but inconsistently for all of this century. For the first reason we have much less inflation than we think; and for the second reason we have much more. I can't begin to know how to quantify or compare the two. And third, neither can any anyone else, including the non-economists who respond to this survey: they have no better idea about next year's price trends than a coin toss or a straight-line extrapolation of what they think they know about the recent past.
So, I'm really not very interested in people's responses in this and similar surveys, and the responses aren't interesting when I do look. For example:
There's nothing here to see, even in all the demographic slicing and dicing.
The interesting parts start when we turn to the data that generated the survey's self-headline about household's spending growth expectations rising to 3.7 percent, the fastest in over four years:
The time interval shown here, the entire history of the Survey of Consumer Expectations, partially obscures the point that household spending expectations have grown significantly this year, and not just from the COVID lows. That's in this context, quoting from a source I'll introduce more fully below: "The country has effectively done a mass Suze Orman, giving up restaurant meals, drinks at bars, and vacation travel" and I would add live music, most sporting events, almost all highly personal services such as gyms and spas and salons, a lot of commuting expenses, some car insurance costs, many child-care expenses, and more. With those needs/wants removed from many people's budgets for most of 2020 and even with unemployment still elevated compared to 2014-19, people at large are flush enough and confident enough to be planning to splurge on those things and more as soon as they get the chance.
Not since July 2016 have people planned on spending so much. This detail from the survey report bears on the topic of the K-shaped recovery: "The increase was driven mostly by those with household incomes below $50,000."
The summary I quoted above mentioned flat income and earnings expectations. Specifically, from the main findings:
Median one-year ahead expected earnings growth remained flat in November at 2.0%, below its 2019 average level of 2.3%. This is the fifth consecutive month that the series has remained unchanged.
Two percent raises are not world-beaters, but are after all positive.
Moving to the heart of the matter of "How are we doing?", survey respondents are asked about their household financial situation, whether they are financially worse or better off than one year ago. The answers are, I think, the most important of all the information to be gleaned from the Survey of Consumer Expectations.
First, the enduring trend of a rising tide is clear here. See it in the typical size of the two blue "better off" bands, versus the two red "worse off" bands: around 30-35% and even up to 40% v. around 18% in the last four years and around 25% before that. Even just taking the "better" on its own, it puts the lie to the persistent notion that "the economy is benefitting only the top 1% [or 5% or 10% or whatever]" that has fueled the political careers of quite a few Washington creatures. When asked about their own lives, people tell us otherwise.
You wouldn't know it from consuming 'news,' but people's average standard of living rises in non-recessionary years. Even during recessions, the SoL goes down all the way to the bad ol' days of a year or so earlier, and then resumes rising the next year or sometimes within the same year. Everything I have seen in my close look at these economic indicators every week since September tells me that 2020 is a case of "within the same year." After April's COVID lows, just about every number that goes into a concept like standard of living has been improving, and in cases including retail sales and anything related to the housing sector that means improving more than 100% of the COVID losses.
The graph above also shows the economy recovering in 2020, if not as starkly as most graphs I've shown in these newsletters. Not surprisingly, the "worse off" numbers spiked in March and April and into May, but by June had resumed a level in the 20s (%) that was typical of the Bad ol' days of 2014. The percentage of Americans financially worse off from late 2019 to now is smaller than the number worse off in 2013 than in '12. But do we remember 2013—the fifth year of recovery after the Great Recession—as a generation-defining calamity?
Toggling the same graph from 'Year ago' to expectations of 'Year from now,' we see this:
Here we see the same spike in Worse Off in March-May followed by substantial improvement in June-Nov to levels that were typical in the Bad ol' days of late 2014 through late 2016. With some bouncing around, that's still where the "worse off" numbers are now.
One observation is that in the period surveyed by the NY Fed, Americans are persistently more optimistic about Year from now than they turn out, a year later, to be happy about Year ago. Around 35-40% have been normally predicting Better off, but as we've seen, the number reporting actually becoming Better off has been persistently less. (The gap narrowed substantially in late 2017 through early 2020.) I wonder if any other country carefully measures the two concepts in the same survey over a number of years, and whether the same pattern appears? If it the answers are Yes and No, I wonder if this would be evidence of a special type of American optimism enduring since the days of J. Hector St. John de Crèvecœur and Alexis de Tocqueville?
Almost all of what I do in these newsletters is report statistics, provide graphs of them, and add a few observations that anyone could glean by looking at the numbers or graphs. But now I turn on my editorializing voice to add this:
The people who were asked above whether we'll be financially better off one year from now are much too pessimistic. I think 2021 is the most easy year in memory about which to make clear-headed, confident, and very highly optimistic predictions. Remember three weeks ago I reported on and quoted from the predictions of the purchasing managers surveyed by the "information and insight" firm IHS Markit:
Firms are scrambling for inputs and workers to meet the recent growth of demand, and to meet rising future workloads. Expectations about the year ahead have surged to the most optimistic for over six years, reflecting the combination of a post-election lift to confidence and encouraging news that vaccines may allow a return to more normal business conditions in the not too distant future.
Wednesday, IHS Markit published their Top-10 Economic Predictions for 2021, the primary one of which is:
The rapid deployment of effective vaccines and reopening of economies should gradually unleash a new wave of spending on travel and services, driving robust growth in the later part of 2021," said Sara Johnson, executive director, global economics, IHS Markit.
[personal notes: Regular readers know that IHS Markit is the current incarnation of the econometric modeling and macroeconomic forecasting firm where I worked in my first career until 30 years ago this week. Sara Johnson worked there with me then, and now we see that she is still there in a top role. Presuming her memory for people is OK, she should at least dimly remember me being on her team for a while at the old DRI/McGraw-Hill; I remember her as being extraordinarily gentle and kind to me personally in some ways I've mostly forgotten. It was announced earlier this month that IHS Markit is being re-acquired by Standard & Poors (of S&P500 fame), reverting to the way it was back in the late '80s and 1990, when McGraw-Hill owned S&P, which included the DRI division in Lexington, Mass.]
For the United States, last week’s IHS Markit predictions specified:
If another modest stimulus bill is implemented soon, and a highly successful COVID-19 inoculation program is well underway by summer, full year real GDP growth is expected to exceed 4.0 percent next year, with a reasonably good probability of growth reaching above 5.0 percent in the second half of 2021.
We found out Sunday Dec 20 that in fact Congress has agreed on a 'stimulus' bill of c. $900 billion, i.e., more than what they meant by 'modest.' The italicized words at the top of the Yahoo! story I've been quoting from raise the forecast: "Stimulus bill of 900 billion USD plus would be expected to raise U.S. GDP growth to more than 5 percent next year." That would imply a booming jobs market, noticeably falling poverty rate, and all the happy outcomes we hope for in an thriving economy.
Last week I pointed out that the stock market is basically a big betting market about the future economy as reflected in corporate profits, and it's been up, up, up since late March; meaning that in the aggregate they see things the same way my old company does.
Piling on to the same idea, I recently came across an article from Dec 8 called "Here's why 2021 is going to be a great year" by Business Insider and New York magazine writer Josh Barro (reprinted without paywall here). Quoting extensively and adding emphasis, Barro wrote that 2020—yes, this year—is:
on pace for the fastest growth in per-capita disposable income since at least 1998 and most likely 1984.
Home prices and stock prices are up. Household savings have been extremely high — due to government aid payments, yes, but also due to reduced consumption and lower interest rates. All told, the increased savings rate means households will have saved an extra $1.5 trillion or so more this year than if they saved at the same rate as they did over the prior four years.
The country has effectively done a mass Suze Orman, giving up restaurant meals, drinks at bars, and vacation travel. This has been devastating to specific industries (more on that in a moment) but it has also put households in a good position to spend robustly once those categories of consumption become desirable again. This is especially true because consumer debt service costs have gone down and, in the case of households that own their homes, asset values have gone up. These strong conditions for consumer demand are a major contrast to the 2009 crisis, which destroyed household wealth and led to years of weak consumer demand that slowed the recovery.
I’ve seen a lot of people looking at the weak November jobs report and extrapolating to say it would take three years at that pace of job growth to recover all the jobs we lost in the crisis. This is true but irrelevant. We won’t continue at that pace of job growth, which was battered by worsening virus conditions. The abatement of the acute pandemic and the wide distribution of the vaccine will spark rapid job gains as people venture out more and more businesses reopen or staff back up.
I am under no illusion that every business will return to its February 2020 operations. This crisis has been a nightmare for small businesses, especially restaurants and bars, many of which have closed or will close permanently. But many of those businesses will return to normal, and other new businesses will start to serve the pent-up consumer demand that can be supported by strong household balance sheets, solid bank finances, and low interest rates. All that means we can expect accelerated job growth in 2021.
You can see that economic resilience already if you know where to look. While a reduction in spending on travel and entertainment is boosting household saving, it’s also leading to consumption shifts. Spending on electronics, automobiles and home improvement has been strong through the crisis, supporting jobs and investment in those industries. As Neil Dutta notes, strong demand for homes has led to a backlog of houses being sold before they are built — a phenomenon that promises to boost residential construction employment long after the pandemic is over.
To me and most of the economic observers I follow, these predictions are very evidently likely. (A prediction can't be declared "true" until later.)
Now as I do my last edits of this newsletter, I come across one more forecast for 2021 and pile it on the emerging consensus mountain. It's a table from the Summary of Economic Projections produced by the Federal Reserve for last week's meeting of their interest-rate-setting Federal Open Market Committee:
The top row of each pair is last week's updated projection, alongside the same guess from three months earlier. Obviously, it shows optimism rising among Fed economists for 2021 (and also 2022). The bottom rows show that the Fed intends to keep overnight interest rates at essentially zero for years to come. If this newsletter project of mine were more about general economic analysis and commentary rather than being about interpreting the latest statistical indicators, then I would have a lot more to say about the Zero-Interest-Rate Policy (ZIRP).
I will keep writing these weekly newsletters as long as the economy is precarious enough to be interesting. But if Barro and I and Wall Street and IHS Markit and the Federal Reserve are correct, then this project might last only about another month or two.
With time and space this week far beyond running out, I leave you with one more image from the NY Fed's Survey of Consumer Expectations (the data for which were gathered this month). You can add your own interpretation in the comments section.
Writing not about economics, Andrew Sullivan ended the non-subscription excerpt of his "The Weekly Dish" on Substack this way:
"Coop an entire society up for a year, suppress all the human instincts to be together, surround everyone with fear and caution … and then set them all free. The end of this epidemic is coming. We know that now. We can see it in the future. And can almost taste it. So get ready to party. Because 2021 will rock."
That's the same thing the economists are saying.