Market economies ride waves of boom and bust, recovery and recession. All METARs of a certain age (most of us) recall the recessions of 1973-74, 1980-82, 1990, 2001, 2008-10 (the financial crisis of 2008 followed by the Great Recession with high unemployment for a long time) and 2020 (the Covid-19 recession).
The mandate of the Federal Reserve is to provide liquidity in a crisis and smooth the peaks and valleys of unemployment with monetary policy. Congress provides (or not) support with fiscal stimulus as transfer payments. The scale of transfer payments in 2020-21 dwarfs any previous recession.
**Fiscal Stimulus Is Turning Into a Fiscal Drag, in a Big Headwind for Growth**
**Drop in federal relief could help curb inflation, while elevated savings should blunt impact on consumers**
**by Amara Omeokwe, The Wall Street Journal, Feb. 20, 2022**
**The federal pandemic support that helped propel the economy to blistering growth last year and put upward pressure on inflation is rapidly waning. That will weigh on consumers this year, pulling growth down though not by enough to knock the recovery off track, economists say.**
**Inflation-adjusted gross domestic product rose 5.5% in the fourth quarter from the same period a year earlier, its best annual rate since 1984. That was supported by roughly $3.6 trillion in federal spending in response to Covid-19 since the pandemic’s start, including direct support to households via stimulus checks, enhanced unemployment benefits, monthly child tax-credit payments, and aid to state and local governments....** [end quote]
Various economists in the article project slower growth in late 2022, based on termination of these programs. However, a lot of the stimulus was saved. Households will probably spend it gradually, smoothing the sudden shock of losing the support programs. The Fed calls this “excess savings.” Excess savings are the accounting counterpart of “extra” government debt. Many U.S. families did spend a significant share of the checks and other income support that they received during the pandemic. According to available estimates, this share is around one-third on average. The rest was used to pay down debt (also about one-third) or otherwise saved.
The enormous transfer payments stimulated demand for goods (not services) in 2020-2021, which ran into supply constraints, driving inflation. January 2022 YOY inflation was 6%.
The Fed expected inflation to be transitory, but it’s still rising. The Fed expects to raise the fed funds rate in March and also to gradually end their purchases of long-term Treasury and mortgage bonds. The market is already increasing interest rates at all durations.
The monetary/ fiscal stimulus wave has crested and is in a downward phase. Both monetary and fiscal stimulus are withdrawing at the same time.
The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2022 is 1.3 percent on February 17, down from 1.5 percent on February 16. The real GDP is after inflation. With inflation so high and unpredictable, it’s not clear what they expect from the nominal GDP.
The markets have been pricing in this picture since the beginning of the year. Stock and bond prices are declining. The trade is risk-off. The SPX is declining faster than the 10YT. NAZ is declining faster than the SPX. Junk bonds are declining faster than the 10YT, a clear sign of recession fear. The Fear & Greed Index is in Fear, with Stock Price Strength and SPX Market Momentum in Extreme Fear. The percentage of SP100 over their 200-day MA has dropped below the 50 day MA for the first time since March 2020. This is a real danger sign. VIX is climbing. Energy prices may be stabilizing – it’s too early to say.
With stocks and bonds looking scary, the price of gold has been spiking. Silver and copper are rising, also.
The asset markets (stocks, bonds, real estate) are in one of the greatest bubbles in American history.
Not to mix metaphors, but barometric pressure rises and falls in waves as weather systems move in and clear out. The stimulus wave has passed and the contracting wave is approaching.
The METAR for next week is for rain. It might be mild, or it might be a serious storm. (Partly dependent on the situation in Ukraine.) Given the bubble, a crash is possible.