The current economic recovery is like no other recovery on record. Economic activity is snapping back much faster than it ordinarily would.
The reason for this is that the recession was also like no other. The severe economic contraction last Spring was man-made. There wasn’t an overheating of inflation or some other imbalance in the economy that acted as a catalyst for the downturn. Government edicts to shut down businesses and social distance caused the recession.
It is no wonder then that only a few quarters into the recovery, businesses are being formed at the fastest pace on record and employees are quitting jobs (a signal of confidence in the labor market) at the highest rate in 20 years. These types of statistics don’t usually appear until well into an economic expansion. We are still in the recovery phase.
And while the jobs data shows that unemployment remains high and the number of employed Americans is still below prior peaks, these statistics are misleading.
One only needs to take a stroll down almost any main street in America to see the help wanted signs in every other restaurant, hotel, and retail store. Job openings are through the roof. In fact, there is now a job opening for every unemployed person in America.
And that doesn’t even tell the whole story. The only reason the employment numbers matter is because wages are the primary source of income for most Americans. Jobs equals income which equals spending.
But personal income in April was 11% higher than its pre-pandemic high. Personal spending in April was 4% higher than its pre-pandemic high. And the savings rate has gone through the roof. The savings rate is about double where it was prior to the pandemic.
Income, spending, and savings are all up because the Federal government pumped over $5 trillion in stimulus into the economy (about a quarter of GDP). The normal link between employment and income was severed this cycle.
There are likely few who can honestly claim they are not better off today than they were in February of 2020.
Unfortunately, that hasn’t stopped the Federal government from wanting to pump more money into the economy. More free money is good politics.
More free money is apparently also good monetary policy if we are to believe the Fed. The Fed is still claiming with a straight face that it has to maintain interest rates at zero and pump over a trillion in liquidity into the economy each year because the labor market is weak.
Apparently, the Fed doesn’t have access to the personal income and spending report the government puts out each month.
The Fed’s reluctance to recognize the nature of the recovery is a problem. Not only because holding rates at zero is robbing Peter (you) to pay Paul (Goldman Sachs), but because if economic growth, inflation, and unemployment improve faster than the Fed anticipates, the Fed will be forced to play catch-up with interest rates and monetary policy.
Financial markets haven’t historically been fond of the catch-up game in interest rate markets. We doubt this time would be much different. Keep an eye on the economy. Overheating is perhaps the biggest risk to your portfolio today.
