Yes, that’s ‘trillion’ with a ‘T.’ How many zeros does a trillion have? 14. Well, the last two are really overkill. So 12. 🙂
With the passage of the latest bill, the United State has now teed up more than 4 and a half of these trillion-dollar bundles. Let the spending begin! As always, I will add no social or political commentary … focusing only on the economic implications.
How will the money be spent? .
Spending $4.5 trillion is fun! “
Repaying it, however, may be less fun. But that’s another discussion for another day. For today, let’s briefly focus on the latest stimulus bill, the impact it may have on savings rates, pent up demand, and potential GDP impacts. Let’s dive in.
If you are new to my blog, or you need a refresher on the SHI10, or its objective and methodology, I suggest you open and read the original BLOG: https://www.steakhouseindex.com/move-over-big-mac-index-here-comes-the-steak-house-index/
Before COVID-19, the world’s annual GDP was collectively about $85 trillion. Then it shrank … then bounced back! We can thank global fiscal and monetary policy for the bounce. According the the Q3, 2020 ‘preliminary’ numbers, annual US GDP is back UP to about $21.1 trillion. And still, together, the U.S., the EU and China continue to generate about 70% of the global economic output.
It attempts to predict the direction of our GDP ahead of official economic releases. Historically, ‘personal consumption expenditures,’ or PCE, has been the largest component of US GDP growth — typically about 2/3 of all GDP growth. In fact, the majority of all GDP increases (or declines) usually results from (increases or decreases in) consumer spending. Consumer spending is clearly a critical financial metric. In all likelihood, the most important financial metric. The Steak House Index focuses right here … on the “consumer spending” metric. I intend the SHI10 is to be predictive, anticipating where the economy is going – not where it’s been.
If the SHI10 index moves appreciably -– either showing massive improvement or significant declines –- indicating growing economic strength or a potential recession, we’ll discuss possible actions at that time.
Here’s a great visual, courtesy of the Wall Street Journal:
The graphic does a great job … it really helps us visualize where the $1.9 trillion will be spent.
But while fascinating … for the moment, we’ll focus on the $410 billion that will be spent via $1,400 checks to individuals who qualify — generally individuals making less than $75,000 per year. Many of these folks would be amongst the 11,000 people surveyed by the FED for their annual “Report on the Economic Well-Being of U.S. Households,” and were asked the question: “How would you cover a $400 emergency?” 4 in 10 responded they would have difficulty coming up with money to pay the $400 expense — and 12% said they would be unable to cover that cost by any means.
No longer. All of a sudden, a whole bunch of people who rarely had excess cash will have quite a bit. Think of this as “kinetic GDP.”
What will they do with it? Some will be saved — similar to prior stimulus funds — and much of it will be spent. On what? For GDP purposes, the “what” is less important than the “how much” answer. Remember, all told, the three stimulus bills will unleash over $4.5 trillion into the US economy. That which is not saved will be either spent or invested.
What does $4.5 trillion buy the US? For one thing, it bought the United States a “V” shaped economic recovery from the Covid-19 crisis. Here’s a graphic summary of industrial productions, courtesy of Yardeni Research:
Yep: That’s a “V”. And even before any portion of the the latest $1.9 trillion hits the streets, the official first quarter 2021 (annualized) GDP forecasts are already staggering:
Three different models. Three different predictions over 8% for Q1 2021 GDP growth. Staggering. Before the $1,400 hits checking accounts. Amazing.
Inflationary? Perhaps. There are arguments on both sides of that issue. But after the more than $2.6 trillion from the first two stimulus bills had already made its way into the US economy, today the latest CPI numbers were released:
Summarizing, after about a full year and $2.6 trillion of stimulus, the CPI — excluding food and energy costs — actually declined. Clearly, the jury remains “out” on the inflation question.
But the verdict is “in” on GDP growth: 2021 continues to appear like records will be set. 2021 will be a barn-burner. Staggering.
Hmmm … I find myself using that word quite a bit today. 🙂