Is This as Good as it Gets? (Economic Webinar)
As we enter the second half of 2021, our theme is “is this as good as it gets?” which interestingly enough was the same theme in Q4 of 2017. Looking at similarities from 2017, consumer confidence was at a 15-year high and we are also at a high level today. Unemployment dropped to 4.1% in 2017 and is also coming down in 2021. Our commodity prices went up in 2017, similar to what they are doing today, and we also had fiscal stimulus in both years. We are seeing continued GDP growth as we did back in 2017 and saw robust returns in the equity market—north of 21% in 2017. Similarly, we have fantastic stock market returns this year.
So that takes us back to the theme and question we’re asking ourselves today, which is “is this as good as it gets?” The answer is “sometimes yes, sometimes and no” depending on the variable we are analyzing.
Consumer confidence leads to consumption – so when we feel good about our jobs, income, raises and bonuses, we go out and consume. And, when we consume, we drive GDP growth—it’s all connected. Today, confidence continues to rebound and we have the highest rating we’ve seen since February of 2020 and are back to pre-pandemic levels. So, is this as good as it gets? It could get better because confidence is driven by the labor market and asset and stock market prices which have been robust so far, but we do forecast confidence continuing to improve over the next year or two. Interestingly, consumer expectations never really suffered during the pandemic, which is likely a result of stimulus. While this is unlike anything we have seen in the past, we have no reason to believe consumer expectations will go down as we come out of the recession and vaccinations rates improve.
The return to work has been at play for a while now, but it’s starting to pick up speed. The unemployment rate spiked to 14.7% in April of 2020 and has now come down to 5.9% as of June 2021 and have unemployment claims have dropped as well. And while we’re not all the way back to pre-pandemic levels, we are well on our way, which is positive for consumer consumption. By the end of the calendar year, we forecast an unemployment rate of 5%.
The labor force participation rate dropped to the lowest reading in history during the recession and while it is recovering, we are still a full 2% below pre-pandemic times. Seven million people in the U.S. are still not in the workforce due to stimulus payments, childcare issues and fear of COVID-19, and we also know many Americans chose early retirement during the pandemic. We’re not confident it will get all the way back to where we were when labor force participation was at 64%, but we’re going in the right direction.
Personal income and money supply are good for the economy
Even with 7 million fewer people in the workforce today than pre-pandemic, incomes are good. We have $10.2 trillion in wage and salary disbursements and 21 trillion in total personal income, which is positive for consumption and GDP growth.
Equally positive is the massive buildup of savings that were accrued during the crisis, resulting in a $5 trillion increase in money supply. This dry powder will help fund expansions and grow the economy. Also, worth noting in the child tax credit payments that will affect 39 million households starting July 15. So, is this as good as it gets? Not at all. Wages will continue to grow as more people come to the labor force and incomes increase.
Household net worth is climbing
Household net worth is the highest it’s been since 2006, and today we have 137 trillion in assets with stock market and housing prices skyrocketing. And while the growth rate may be as good as we’ll see, stock prices should continue to grow over the next few years and will continue to drive household net worth.
GDP and economic growth
As we make our way through the “great recovery” period, we expect 7-9% GDP growth through the end of the year, bringing calendar year GDP growth in a range of 6-7%. Once we enter the “great plateau” from 2023 and beyond, we anticipate modest growth rates of 2-2.5%.
Recent spike in interest rates
Back in March and April 2020, we saw some of the lowest interest rates we’ll see over the next 10 years, but we can expect rates to stay low and they’re not a threat to the housing marketing, real estate values or stock markets. We’ll likely see interest rates increase in the spring of 2023.
S&P 500 returns have been outstanding over the last 10 years, up approximately 300%.The stock market will continue to grind higher, so while we may not expect the magnitude of returns we saw in years past, we anticipate high single-digit returns in the next 10 years.
Earnings are always a driver as we look at stock market returns, and during the 2020-time period, we saw earnings growth rates sell off and down 20%. in 2021, we expect 40-50% earnings growth rate, which will drive stocks higher. This is typical and expected as the economy reopens. When you look at the great recession of 2008, earnings were down 40% and grew 50% by 2010—similar to what we’re seeing now. Once you have a contraction, you will see big growth numbers.
The big takeaway when we look at the increase in valuations is that you shouldn’t sell stocks just because valuations are high and expect earnings to grow as the economy expands.
Fundamentals of the U.S. Economy:
Real GDP: 6.3%
Fed Funds: 0.25%
10-Year Treasury: 1.75%
S&P 500: 10-18%
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This article is for informational purposes only and is not intended to be investment advice. The projections in this article are based on information as of a specific time and are subject to change. Please contact your investment advisor with any questions.
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