Economic Chicken Littles Missed the Mark

All-time highs in all major indexes! NASDAQ and the Russell 2000 each recently gained over 3 percent and the S&P 500 added 1.25 percent. Cloud computing and cybersecurity stocks performed especially well due to multiple cyber-attacks on federal cabinet agencies (Defense, Energy, State, Homeland Security, Commerce, Treasury, and Institutes of Health). However, despite a still recovering economy, many on Wall Street agree that the (stock) market has gotten ahead of itself.  

When members of the Federal Open Market Committee met, they released the third in a series of forecasts for full-year GDP and jobless rates showing a massive improvement each quarter. Going back to March 23–the stock market bottom in 2020–we witnessed a panicked Federal Reserve predicting unemployment over 30 percent.  Since then, we have read their series of four rapidly improving predictions for increasing economic recovery. Is the Fed now predicting a worsening pandemic requiring more stimulus money? The Fed has already poured massive amounts of liquidity into this economy assuming that this would be the worst recession since the Great Depression, but their assumptions so far have been off the mark.

Going back nine months to March 22 James Bullard, president and CEO of the Federal Reserve Bank of St. Louis, told Bloomberg News that he believed unemployment could hit or exceed 30 percent in the second quarter. On March 24, his Federal Reserve Bank backed up those prediction with detailed data, saying the coronavirus outbreak would cause 47.05 million layoffs in the second quarter of 2020, resulting in 52.81 million unemployed, a 32.1 percent unemployment rate!

The actual peak jobless rate was 14.7 percent in April, which was cut in half within six months. The highest number of unemployed was about 20 million (in April), not the feared 52.81 million. During the past six months, the Fed has ratcheted down its predicted average unemployment rate for the year from 9.3% in June to 6.7% last week. They have also reduced their full-year GDP loss from -6.5% in June to -2.4% in December, all the while talking fearfully about COVID and its expected 2021 impact.

Should we also start to worry about inflationary implications? Specifically, a very-low unemployment rate can cause inflation. But even when the rate is very low, it usually takes a long time for inflation to gather any momentum. We had a 3.5 percent unemployment rate for two years in the last Trump-driven cycle, but that apparently was not long enough to trigger significant inflation.

Congress, the Fed, and the media have now joined hands to say that the solution to our “stalled” economy (which in fact is still recovering despite new COVID-19 lock downs) is to throw more money into the economy to stimulate economic growth.  Do they fear what a Biden administration and lock downs in blue states could cause in 2021?

Once again, many politicians and health officials visualize “one size fits all” COVID solutions. Strong-arm tactics in closing businesses and schools are anticipated.  Instead of considering age groups or health profiles of those at greatest risk for COVID-19 hospitalization and death, blue-state politicians continue to restrict nearly all small businesses (while inexplicably allowing large businesses to flourish).  They promise relief for destroyed lives by creating trillions in cash out of thin air for those thrown out of work.

Why close schools and force children into house arrest when children are almost risk-free? Of over 340,000 deaths in the USA attributed to COVID-19 this year, fewer than 50 have been age 5-14, while a high percentage of COVID deaths are related to co-morbidity causes. COVID is a disease with over a 99 percent survival rate for those under age 70.

Stimulus since the second-quarter lockdowns was the most generous Wall Street has ever seen. The recession was not long enough to be deflationary since GDP really only fell in two months. Recovery starting in May and June came relatively quickly for most businesses.  However, the March-April drop was unprecedented. There are still more than 10 million people out of work, and threatened new lockdowns will only make that worse. Labor slack remains a key to low inflation. It could take years before the unemployment rate declines below 4 percent again, let alone 3.5 percent.  In that environment, any inflationary impulse should remain dormant.

But could excess liquidity and huge amounts of cash sitting on the sidelines create declines in dollar purchasing power?  Our world may become very hard to predict until the U.S. finds a way to Make America Great Again!