What You Need to Know
- Multiple indicators point to a recovery underway, and struggling sectors are poised to benefit.
- As more Americans are vaccinated against COVID-19, consumers will resume normal activities — and spending.
- Any tax increase to pay for the stimulus is unlikely before 2022.
With the next stimulus package expected to be approved in a matter of weeks, the pieces needed to give the economy an added boost are nearly in place. Multiple indicators point to a recovery already underway, and sectors that are still struggling — such as travel, leisure, dining, entertainment and hospitality — are poised to benefit.
More 64 million Americans have now received the COVID-19 vaccine, according to data from the Centers for Disease Control and Prevention. While the rollout has been far from smooth, it’s happening. In the coming months, consumers will re-emerge and resume normal activities such as shopping, traveling and eating out. The U.S. personal savings rate is currently at 20.5%, compared with the historical norm of 5%. This adds up to significant pent-up demand that will translate into spending.
The amount of money the U.S. is spending to help the country recover is staggering. When you add together the fiscal and monetary stimulus over the past 11 months to the next $1.9 trillion package, it amounts to 55% of U.S. GDP. To put this into perspective, during the last financial crisis in 2008, fiscal and monetary stimulus accounted for just 5% of U.S. GDP.
As the country awaits the next round of stimulus checks, there are several macroeconomic factors to consider when allocating portfolios.
Data and Leading Indicators Point to Recovery
Retail sales for January jumped 5.3% year-over-year, which is highly noteworthy, considering the expectation was for a 1.2% rise. Industrial production and capacity utilization rates have beaten expectations over the last three months, and new housing permits are also at a 15-year high, up 22.5% year-over-year.
Another sign that the economy is heading in the right direction is commodities prices, which act as a leading indicator of economic activity. Copper neared a 10-year high in the last few weeks, a strong sign of expectations for global growth, improved profits, increased inflation and upside in the equities market. Other metals are telling us the same thing: Aluminum is up 50% from March lows, and steel is up 173%.
When considering inflation expectations, just look at the bond market. Over the last month, the 10-year bond yield has gone up 36 basis points, a remarkable jump considering yields typically move by one to three basis points at a time. Thirty-six basis points in a month is a big move, indicating that market participants anticipate a rise in inflation.
Keeping an Eye on Policy
In late February, Treasury Secretary Janet Yellen spoke about the necessity of the next stimulus package and expressed that she was open to further stimulus down the road. House Speaker Nancy Pelosi has said she would like to get the $1.9 trillion package passed quickly, and while I believe stimulus is necessary and has helped us get through the past year, I am a bit concerned about policymakers’ interest in even more after this $1.9 trillion is passed.