The US economy is entering a rude boom. It has tailwinds from monetary and fiscal policy, vaccine policy and catch-up growth plus, in due course, renewed investment into shale oil. So much we already know.
But, before long, it will also turn on its head, via Goldman:
1. Senate passage of the nearly $1.9trn American Rescue Plan Act (ARP) marks a big political victory for President Biden and will give another jolt to an economy that is already accelerating.
2. …hospitalizations and deaths continue to decline. While some of this improvement probably reflects lags, another reason is that the most vulnerable populations in advanced economies such as the US and UK are now largely protected.
3. All this good news continues to put upward pressure on government bond yields, with negative spillovers to risk asset markets in recent weeks. At the longer end of the curve, we still see significant upside for both nominal and real yields.
4. Once tapering does start, our baseline remains that it will be another two years before the funds rate starts to rise. First, the suggestion in the December FOMCminutes that the tapering process will resemble 2013-2014 probably means steps of$10-15bn per meeting, which alone would take a year or more. Second, pushing core PCE inflation above 2% on a sustained basis will likely require a very tight labor market, in part because policy factors are likely to weigh on health care service costs(a whopping 20% of the index). And third, we expect GDP growth to slow toward trend after 2021, when the fiscal impulse—which depends on the change in the budget deficit—will inevitably turn negative.
What will this economy look like? I’m sure that the Biden Administration will get to work immediately on its next round of fiscal stimulus, this time focussed on infrastructure and a green new deal of some sort. This will be a very important input into growth.
Other than that, we’ll be back to where we were pre-pandemic, only worse. There’ll be zombie businesses all over the joint as the stimulus is withdrawn meaning no pricing power and fading margins. World trade will fade through 2022 as bottlenecks clear and the Cold War resumes. Chinese growth will continue to fall and commodity prices join in. Europe will stick to its insane surplus model. Developed economy asset prices and wages will be pressured as stimulus disappears.
This new secular stagnation will struggle with tightened Labor markets but I can’t see the latter winning with an ongoing reflation cycle. Not without massive new fiscal support which, if it doesn’t come, will necessitate more monetary.
So, what does this all mean? This:
- The current bond back-up is a head fake and long-end bonds will represent value before long.
- The equity value-rotation will reverse and the growth stocks being savaged today will come out on top again.
- The Australian dollar will ebb and flow with the role of the Fed.
There’s a lot hanging on a new (or continued) fiscal pulse (call it MMT if you like) in the US.