Opinion
The big spending that could keep the US out of recession
The doomsayers were wrong with dire predictions late last year – and they could be off the mark this time, too.
James WeirContributorLate last year, Bloomberg reported that 100 per cent of surveyed economists expected the US economy to enter recession in early 2023, and strategists warned of calamitous markets. That didn’t happen – while GDP growth is just over 2 per cent a year, the US stock market rose 20 per cent to end-June this year.
Now there is another growing consensus that the US economy is set for a recession next year, with the usual talk of America sneezing and the rest of the world wrestling with swine flu.
When you add in a dysfunctional US congress and an approaching election plus continuing problems in China, it’s clear why the bears are again on the prowl.
The problem is that economists try to fit today’s circumstances into a historical analogy – namely, “what’s happening with inflation and interest rates today is not dissimilar to the 1970s/1980s/whatever period” – and base their forecasts on what transpired then.
The thing is that no previous episodes of rising interest rates were preceded by the US government shoving 25 per cent of gross domestic product into household bank accounts, which was what happened with the COVID-19 stimulus cheques. That massive fiscal injection had two effects: first, it set the economy on fire, sending unemployment levels to 50-year lows; second, households had never enjoyed such a large savings buffer to cushion against rising prices. As a result, the US economy’s resilience surprised orthodox economists and strategists at the time.
Now a grim picture is being painted on concerns that the US Federal Reserve is going to increase interest rates again, that rising bond yields will make shares increasingly less attractive, that the long-standing inverted yield curve will somehow work its voodoo, that consumer confidence is falling, and that households are running out of those excess savings. When you add in a dysfunctional US congress and an approaching election plus continuing problems in China, it’s clear why the bears are again on the prowl.
However, if you look hard enough, just like last year there are some signs pointing in the other direction – signs that tend not to feature in most forecasts. Again, just like last year, they revolve around some significant fiscal injections and consumers who might be in a better spot than economists give them credit for.
Government spending programs
The first of those fiscal injections is the interest the US government is paying on the more than $US33 trillion ($52.25 trillion) of bonds on issue, which has risen over the past three years from $US500 billion a year to more than $US900 billion. That may not be going into the pockets of the people who would spend it all, but it’s still going into the economy.
The second is the three signature pieces of legislation dubbed “Bidenomics” – the CHIPS Act, the Infrastructure Act and the Inflation Reduction Act (IRA), which between them earmark more than $US2.25 trillion of government spending.
This amounts to more than 12 per cent of the US economy being injected through government spending programs – on top of the usual budget items. Further, the IRA – which basically invites any company with a decarbonisation project to apply for tax deductions, rebates or subsidies – is open-ended, and Goldman Sachs estimates the amount being spent has increased from the original projection of $US780 billion to more like $US1.2 trillion.
When you add it up, a tonne of money is being thrown into the economy, and those three government policies have catalysed a tsunami of corporate spending. Real manufacturing construction spending has doubled to $US1.9 trillion over the year since they were passed.
As for the consumers, while it’s true they’ve almost run out of excess savings from COVID-19, there’s still a base level of savings, plus household bank deposits are more than four-fold higher than before COVID-19 at $US4 trillion. Then there’s the 50 per cent rise in money market fund balances to about $US6 trillion, and a similar rise in home equity to almost $US32 trillion.
In other words, American consumers have a lot left in the tank to maintain that legendary appetite for spending.
The US economy could hit a recession-sized bump in the road, but it’s far from a certainty. Smart investors will know better than to put their faith in economists and strategists who get things wrong as much as they get them right.
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