Pro Perspectives 7/10/20

July 10, 2020

The NY Fed’s GDP forecasting model is now looking for a contraction of only 15% for Q2.   

This is a dramatically improved outlook from just a little more than a month ago, when it was projecting a down 35% quarter. 

Of course, we’ve been looking at the Atlanta Fed’s model here in my daily Pro Perspectives notes, which has been projecting as dire as -54%— again, as recent as just a month ago. 

That model is now projecting down 35%

As I said in my June 4th note, at the trough of these projections, these expectations are set to be beaten.  And they have been. 

Here’s the latest snapshot of the evolution of these models …

So if we assumed an outcome somewhere between these two models, we’re talking about a loss of economic output in the range of $750 billion to $1.8 trillion

Now, with this in mind, remember the simple theme we’ve been discussing here for the past few months, as the data began rolling in. 

The theme: “The response (by policymakers) is far greater than the damage.

Remember, we have $3.3 trillion in fiscal stimulus now working through the economy.  And the Fed has pumped $3 trillion into the system since March.  That’s a total of $6.6 trillion.  And it’s estimated that, with the Fed’s other facilities, the Fed could inject up to another $3 trillion+. 

This doesn’t even include the massive amounts of money the banks are creating, with a zero reserve requirement. On that note, if we look back at the Global Financial Crisis response, where the Fed expanded the balance sheet from $870 billion to $4.5 trillion.  The money supply grew from $7.4 trillion to almost $14 trillion.  That’s a double in the money supply.  If the money supply doubled this time, we’d be looking at over $15 trillion of new money circulating in the economy.

Let’s do some math:  $15 trillion minus $1.8 trillion equals a lot of excess money.

The response is far greater than the damage.  Again, this means, the nominal price of practically everything is going higher – much higher.