February 26, 2021
As another $2 trillion spending package is due to pass the House later today, and move on to the Senate, where it will pass (likely with the help of the Vice President), let's take a look at what the politicians are calling, the "suffering" economy.
Remember, despite a high unemployment rate (which has improved dramatically), and forced business closures (in some, more than other, areas of the country) there has been incredibly aggressive aid disbursed along the way.
The Federal unemployment subsidy has, for lower wage earners, paid them more than they made while working (about 80% more than minimum wage). And this has put pressure under wages being paid to those that are working. The private sector has had to increase wages to compete with what the government has (maybe unintentionally) set as a new living wage (via the unemployment subsidy).
And within all of this, keep in mind, the economy was never completely shutdown. At the depths of the health and economic crisis, the economy was still running at 64% capacity (from 77% capacity, pre-crisis).
And as you can see in the chart, the economy is now nearly back to the pre-Pandemic operating rate.
With that backdrop, the latest Atlanta Fed GDP model is now projecting an 8.8% annual rate of growth for the first quarter. That’s three times faster than the pre-Pandemic Q4 2019 growth.
Personal income was up 10% in January (compared to December), thanks to stimulus checks from the $900 billion aid package in late December and the extended federal unemployment subsidy. The personal savings rate was 20.5% in January. That's more than double pre-Pandemic levels, and more than double the average U.S. savings rate of the past sixty years. And real disposable income is 13% higher in January, than it was in before the Pandemic. These numbers are doing to go one direction after this next $2 trillion package hits: UP. Sounds great. But as we've been discussing in my daily notes, this will all be accompanied by prices going UP, maybe a lot. Let's revisit the chart from the early 70s, the last time we had a sharp spike inflation. |
This chart shows the dramatic move in inflation from a “shock event.” In the early 70s, OPEC blocked oil exports to the U.S., sending oil prices up four fold in 1973. Broader prices in the U.S. economy followed, spiking by double digits.
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