Is the real economy getting better? Or are we merely trying to convince ourselves it is better?
One signal that people are feeling safer and more confident to be in enclosed spaces with strangers is the TSA airport passenger security screening numbers. On April 10, 2021, the TSA screened 1.378M passengers. One year ago, 93,645 passengers were screened ---maybe somedays had more TSA employees than passengers. During the normal “before times” TSA would screen 2 to 2.5M passengers daily. Message: thirteen times more people are flying now than at the COVID peak but still far below “normal”….. but getting better. (1)
The number of people working in the U.S. increased by 916,000 in March of 2021. According to the Bureau of Labor Statistics, the “national” unemployment rate is 6.0%. While this is down from the 10% peak in the Spring of 2020, it is still 2.5% higher than the pre-COVID high. While the 6% number is laudable, it does not apply evenly across all parts of the country or races. Black workers are still unemployed at 9.6% while White workers are unemployed at 5.4%. (2) South Dakota is ranked #1 with unemployment at 2.9% (small state, rural and agriculture based). Hawaii has the highest at 9.2% unemployment (economy is mostly tourism). (3)
Interesting notes about South Dakota: 1) their total labor force (number of people working) grew from 463,200 people in February 2020 to 471,900 people February 2021 --- this is total number of workers in the state; 2) unemployment by county is widely varied from a low of 2% to as high as 8.9%. None of this may interest you but I grew up and went to college in South Dakota so I am interested. (4)
If you have not noticed, the residential real estate market is red hot. The median home price in California is $699,000 and up 20% over the same time in 2020. (5) According to Zillow, the national median home price is $269,039 in January – an increase of 9.1% from the previous year. Kentucky, Alabama, Oklahoma, Arkansas, Mississippi and West Virginia all have median home prices below $150,000….South Dakota is $167,000. (6) Five years ago, when we sold the house I grew up in, my siblings and I were excited to get $66,500. What can I say, it was a nice home but in a small town.
In addition to the huge demand for homes and limited homes for sale, price increases are due in part to the current cost of lumber. According to the National Association of Home Builders, lumber prices have increased 180% since the Spring of 2020. (7)
The third leg of the housing-stool is the labor shortage. This has been a problem for a decade or longer. According to the 2020 Construction Outlook Survey by the Associated General Contractors of America (AGC), 81% of construction firms have trouble filling both salaried and hourly craft positions, and 72% anticipate labor shortages to be the biggest hurdle in the next year. (8) This could be a sign of a strong economy.
The US Manufacturing PMI was revised slightly higher to 59.1 in March of 2021 from a preliminary of 59, pointing to the second-highest growth in factory activity on record—(anything over 50 is considered good). The overall expansion was supported by the steepest rise in new orders since June 2014, although production was reportedly held back by supply shortages. Supplier lead times lengthened to the greatest extent on record. Output expectations strengthened to the second-highest for over six years, as firms were encouraged by hopes of a successful vaccine roll-out, fresh stimulus and a resulting boost to new sales. (9)
Manufacturers of shipping containers (big steel metal boxes) cannot keep up with the global demand. (10) At peak times, there can be up to 40 container ships anchored off the ports of Long Beach and LA waiting to load and unload cargo. It requires almost 8,000 trucks to transport those goods daily from the port to distribution centers located in the Inland Empire….and we wonder why the LA freeways are a mess. (11)
The Conference Board Consumer Confidence Index® surged in March to its highest reading in a year, after a modest increase in February. The Index now stands at 109.7 (1985=100), up from 90.4 in February. The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—climbed from 89.6 to 110.0. The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—also improved, from 90.9 last month to 109.6 in March. (12) This is a signal, the consumer thinks the economy is getting better.
Early in 2021, I was reading about forecasts that the Gross Domestic Product (GDP) growing in the U.S. predicted at 3 to 4%. Wow, we have not seen GDP grow by 3%+ since before 2008. Now multiple sources are predicting U.S. GDP to grow by as much as 8% in 2021 with unemployment dropping to 5.1% later this year and to 3.9% by 2022. (13)
The International Monetary Fund is projecting global growth of 6% in 2021 and moderating to still a very respectable 4.4% in 2022. (14)
Interest rates have gone up in the last few months. This, I believe, is actually a good thing. The anemic rates of the last ten years have been great for borrowers but horrible for savers and were a result of the weak economy. Higher rates are a sign of a stronger economy. (15)
The Federal Reserve is expanding their balance sheet by buying bonds to put additional money into the economy. (16) This is one reason for the fast recovery from the COVID-crash economy. I believe this is a good thing. It appears the Federal Government has a better chance than in the past to create a much-needed and overdue infra-structure plan to repair / replace / create roads, buildings, rail systems, broadband internet, etc. Yes, that means more borrowed money that needs to be repaid by hopefully this generation and not the next generation. Yes, this could mean higher taxes for some corporations or maybe even for me. No, I am not anxious to pay more taxes, but in my opinion, this infrastructure spending (though not a perfect plan) will make our economy and country stronger for this generation and the next.
Labor shortages could lead to higher wages which in turn could lead to a higher cost of goods for consumers which means inflation. Not long ago the biggest fear facing our economy was deflation. Inflation in the two to three percent range is a sign of healthy, growing economy. Inflation, in moderation, in my opinion is a good thing.
The stock market has surged from the panic levels of COVID of late March 2020. The stock market is known as a “leading indicator” of what is going to happen in the economy. What this means is that the stock market does not immediately reflect what is happening in the economy now. Rather, the stock market indicates what the economy is likely, probably, maybe going to do in the future. No guarantees. (17)
Last spring was a prime example. Roughly speaking, COVID arrived in America, kids were sent home from school, business were ordered to close and people told to stay home. A logical reaction was to think the economy is going to shrink dramatically and therefore the stock market will crash. Yes, the economy shrank dramatically and the stock market immediately went down…a bunch. But when the world didn’t end and people began to see that the economy would recover, the stock market began to go up well before the economy really got better.
In so many ways, in my opinion, in the short-term, the stock market is reactionary of what people think the economy is going to be doing in the next few weeks or months.
We all know what the economy is going to do. It is not a deep, dark well-hidden secret. In the short-term, it will grow and then we have a recession. Then after a while it will start to grow again. Then grow faster. And then we have another recession. In the longer-term, repeat the cycle. Some recessions are big and bad like in 2000 or 2008…while others are so short and shallow, we forget they ever occurred like in the early 80s or 90s. It is a cycle. Just like the seasons. (18)
In my opinion, the stock market is driven by real numbers like manufacturing, company profits, international trade, consumer spending, supply and demand in addition to the emotional feelings people have about anticipating the short-term future. Therefore, the ebb and flow of economic growth could also affect the consumers ability to spend and as a result affect the ebb and flow and company profits.
The stock market will grow, then shrink a bit. Grow more. Shrink a bit. Grow even more. Shrink a bit. Grow even more. Open the footnote referenced. I challenge you to find the one time that the stock market went down and did not recover from that low level to go on even higher. I am not saying it CANNOT happen. I am merely pointing out that it has not done it before. (19)
Plan your finances around how much money you will need to spend for the next two to five years. One way to take a conservative approach with this money could be to keep it in cash or short-term bonds. Before making an investment decision is it important to consider all investment options, related features & costs, and consult with a financial representative.
What to do with the rest of your wealth?
You should talk to financial professional regarding your financial wealth that is to provide for your needs during your lifetime and the legacy you hope to leave to future generations as if the “worst-case-ever” -- that has never happened before --- is a certainty.
What should you do? Make a plan. Set your priorities. What is important? Plan for different time frames. Plan for both good and bad economic times. How much money will you need and when? Be rational. Understand yourself and your options. Consider consulting a professional. Depending on your risk level and your financial situation you may want to be very conservative with the two- to five-year money. Consider making a reasonable return with your five- to ten-year money. Then with the longer-term-eleven-year plus money, find a way to achieve a return that exceeds inflation and taxes by at least five percent. Hypothetical example, let’s assume you believe inflation will be 2.5% for your lifetime, taxes will lower your returns by 25%, then you need to earn 10% annually on your investment (10% less tax of 2.5% less inflation of 2.5% = 5% net to grow). Historically, the stock market has done that. (20)
Bottom line. Yes, I believe the economy actually is getting better. No guarantees….But I am sleeping well.
Call or email us with your questions. Wollman Wealth Designs, Inc is financial advisory firm located in Escondido, California partnering with clients both locally and around the country.
The views and opinions expressed are those of the author, and the information should not be construed as individual investment advice, or as the opinion(s) of Voya Financial Advisors.