A scene in the United States – Comment by Hon de Zhang

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This afternoon at 2:45 p.m. – Eric the Lister

The US government deficit is now about 20% of GDP. You will get amazing economic growth for it. At least in the short term.

You don’t have to be an Einstein: throw a huge sum into an economy that is already recovering from some kind of meteor impact, and you get a shot. Performance location USA. The various stimulus packages of the previous and new government together form the bank.

When the crisis hit last year, policymakers called it the CARES Act. The amount of aid provided in that context is more than $ 2,000 billion. Another $ 900 billion package came in December, and the new administration pushed the $ 1.9 billion package through Congress earlier this year. How much it is is clear from the first map.

The Netherlands makes different choices
In the first 12 months of March this year, the federal government recorded a budget deficit of more than $ 4,000 billion, which is almost 20% of GDP! Compare it with the Netherlands. In the Federal Economic Outlook, the CBP estimated the Dutch government’s budget deficit at 4.3% of GDP last year and a deficit of 5.9% for the current year. Clearly different choices are made here.

Leading economist Larry Summers has been arguing for some time that the size of those American parcels has ‘dropped the pot’ (my words) and that things will eventually go wrong. For now, this is absolutely clear in any case: if you throw so much money into the economy, there will be a strong renaissance in cost and operation.

U.S. consumers have already received checks from the government last year under the CARES Act. The December package again includes checks for $ 600 per person. 4,400 new checks per year for anyone not earning more than 000 75,000 are part of the latest incentive package. That’s a lot of people.

Retail explosion
I don’t know how far the distribution of those checks will go, but it is delivered: retail is exploding. In March, they were up 9.8% compared to February and 27.7% compared to March 2020. Now comparisons to a year earlier may make less sense because last year’s spending was a success.

Hence the so-called ‘basic effect’. The biggest blow to retail came in April last year. If the expenditure in April this year is the same as in March, the annual growth rate will appear to be 50%. However, such comparisons say more about last year’s blow than now. In the following diagram I show the absolute quantities of turnover. Seen this way too, the costs are enjoyable.

Labor market and business confidence are strongly advancing
Progress is now being made in the labor market, which has fallen somewhat in recent months. Weekly new claims for unemployment benefits fell sharply in the week of April 10: from 567,000 a week earlier to 769,000. Easter may have played a part in this. So we have to wait and see if the decline will continue, but for now it is definitely a very positive development, which fits the picture defined by other indicators.

So it is not surprising that the confidence of entrepreneurs is growing. The NFIB index, which measures confidence in SMEs, rose to 98.2 in March from 95.8 in February. Some regional codes of business optimism for April have also been released.

The Billy Fed index (measuring business confidence in the Federal Reserve District of Philadelphia) rose to 50.2 from 44.5 in March. The last time this code was high was in 1973, almost 50 years ago! The New York Federal Reserve’s Empire State Index rose to 17.3 in April from 17.4 in March.

Consumer and entrepreneurial confidence are slightly ahead of actual production. But life also begins to emerge there. In March, manufacturing output in the United States increased by 2.7% compared to February and 3.1% compared to March 2020. Growth in ‘commercial equipment’ production is particularly strong at 5.7% per annum, which is a sign that companies are investing significantly.

Ideal, but there is also total inflation in the pipeline
Of course this is all wonderful. But this raises questions. I leave here the question of the stability of public funds. It’s not too harsh. The question of what will happen to inflation in such a strong recovery is even more urgent. The answer to that question is twofold.

Not much is happening at the consumer level right now. US inflation rose somewhat in March, but it was mainly the result of higher energy prices. ‘Major inflation’, i.e. inflation other than energy and food is still below 2%. But before the storm it may be quiet. There is a lot of inflation in the pipeline.

This was associated with increased raw material prices, but with logistics disruptions around the world leading to an increase in commodity prices and limited availability of various commodities. The following diagram shows the growth of US manufacturer prices. To encourage this a bit, but to show the most recent growth with a little more certainty, I will show the price growth over a period of 3 months and then express it as an annual growth percentage. So if the pace of the last 3 months continues for a year.

Unfortunately these series did not go back to 2010 or at least I could not find them again. However, this image can be found anywhere else in the world. In Germany, for example, wholesale prices are published, for which a long historical series is available. Again, I took the change over 3 months and changed the growth rate on an annual basis. The increase in the last 3 months is the highest since the early 1970s.

Keep in mind that the European economy is not growing as fast as the US economy. So economists actually call ‘spending push’ inflation rather than ‘demand bull’. But in the United States, this ‘demand bull’ may apply, and now the economy is being stimulated with stimulus packages.

The big question now is whether this rise in ‘inflation in the pipeline’ will continue, and how far it will end up in consumer prices. The relationship between producer prices and consumer prices is not very tight. Now that we observe that it is very unusual, every prediction is surrounded by significant uncertainties.

Wages are an important link in the inflation process. As costs rise sharply and entrepreneurship production expands significantly, new staff must be added. Despite the fact that 10 million people are paid less than they were before the epidemic, the labor market already seems to be tightening considerably. This affects wage formation.

In a recent business study conducted by the Philadelphia Federal Reserve, I expressed the confidence shown above and asked some questions about wage increases. The answers show that a tight labor market and minimal inflation in the pipeline could translate into higher wages and price increases. Nearly 60% of respondents said labor expenditure budgets have increased since the beginning of this year. Nearly 40% thought they should be allowed to raise wages earlier than planned, while 21% thought they should start a pay rise earlier than planned. In terms of total wage costs, companies expect it to increase by an average of 4 to 5% this year.

I think there is a good chance that US inflation will rise significantly this year. Initially, this was the result of overcoming the cost increases that had already occurred. Late in the year, 2022, the inflation process will begin on the basis of higher wage increases, as well as continued rapid growth in spending and production.

According to documents released by the central bank in March during the last meeting of the FOMC (policy-making body), none of the 18 members expected an interest rate hike this year. It turns out well. Only 4 out of 18 FOMC members expect a first rate hike by the end of 2022, and only 7 out of 18 expect a first rate hike by the end of 2023. Therefore, most people expect the central bank to leave interest rates unchanged for almost 3 years. I can’t imagine it.

China is mired in epidemic economic damage
The Chinese economy has already begun an interesting recovery over the course of last year. In the first quarter of 2020, the Chinese economy contracted by 9.8% compared to the previous quarter, but since then quarter growth rates have been reported at 11.5%, 2.7% and 2.6%, respectively.

This morning (Friday, April 16), Chinese statisticians announced quarterly growth of 0.6% for the first quarter of 2021. Due to the underlying effect, year-on-year growth was 18.3%. This is an interesting figure, but it is still a part of it. If you put the last 8 quarters together, there is still 12.2% growth or 6.1% per year. This is very interesting because it indicates that the production loss as a result of the infection is more than fully compensated. Therefore, it is no longer known that there was an epidemic from the GDP level, which is similar to the way the economy continued to grow during epidemics.

It became clear over the course of the past year that consumer spending had recovered less smoothly than industrial production. March figures suggest the picture is changing. Consumer spending is also rising rapidly now. Retail sales were up 34.2% in March from a year earlier (33.8% in February). Industrial production growth, on the other hand, weakened somewhat: + 14.1% in March and + 35.1% in February.

boerenbusiness.nl

Eric the Lister

Eric Boranbins is the Editor-in-Chief. As the heir to a farming family, the farmer’s blood flows through Eric’s veins. He sees himself as a generalist, but prioritizes economics, trends, markets and marketing.

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