Another Roaring Twenties?

 Financial FAQs

BEA.gov

The advance estimate of third quarter U.S. economic growth was 2.8 percent, slightly less than the 3 percent growth in Q2 but is showing few signs the post-pandemic recovery is slowing. It has defied the odds of a Federal Reserve engineered slowdown that made the cost of borrowing higher, jacking up the Prime Rate to an 8.5 percent high.

The manufacturing sector slowed down, but that hasn’t slow overall economic growth because consumers kept spending on consumer goods, dining out, travel and other leisure activities.

This has all the signs of another Roaring ‘20s that occurred after the Spanish Flu pandemic in the 1920s. I don’t mean it literally, of course, because the first Roaring Twenties of jazz and the Flapper era for women occurred after World War I. Yet the recovery from WWI and the Spanish Flu pandemic that killed an estimated 650,000 Americans also unleashed a spending and investment spree that is happening after the COVID-19 pandemic.

I’m using the analogy because this roaring 2020s could also last a decade due to the pent-up demand from government spending that is seeding so much private investment, with the U.S. economy still fully employed infrastructure and technology investments just beginning to kick in

Consumer spending surged 3.7 percent, and domestic investment grew 11 percent in the Bureau of Economic Analysis (BEA) report. This was mainly because consumer spending was holding up for the holidays and consumers had extra savings. The personal savings rate is holding at 4.8 percent.

Inflation also continues to decline. The price index for gross domestic purchases increased 1.8 percent in the third quarter, compared with an increase of 2.4 percent in the second quarter (table 4). The personal consumption expenditures (PCE) price index increased 1.5 percent, compared with an increase of 2.5 percent. Excluding food and energy prices, the PCE price index increased 2.2 percent, compared with an increase of 2.8 percent.

Now that inflation is back to the Fed’s target rate of 2 percent, Fed officials can concentrate on continuing to bring down their short-term Fed Funds rate, which will bring down the Prime Rate further, causing consumers to be even more confident about their future.

That is why, “Consumer confidence recorded the strongest monthly gain since March 2021, but still did not break free of the narrow range that has prevailed over the past two years,” said Dana M. Peterson, Chief Economist at The Conference Board.

“In October’s reading, all five components of the Index improved. Consumers’ assessments of current business conditions turned positive. Views on the current availability of jobs rebounded after several months of weakness, potentially reflecting better labor market data. Compared to last month, consumers were substantially more optimistic about future business conditions and remained positive about future income,” said Peterson.

ConferenceBoard

Much will depend on Friday’s official U.S. unemployment report but the independent ADP’s private-sector jobs report showed businesses added 233,000 new jobs in October, the biggest gain in 15 months. The report is not as accurate as the government’s nonfarm payrolls report, which comes out on Friday.

The Trade/Transportation, Education/Health sectors added 104,000 jobs, construction added 37,000 jobs (infrastructure), while manufacturing lost 19,000 jobs in the ADP report.

One historian wrote that after the devastation of World War I and the Spanish Flu pandemic, “Incredibly, the dire post-war economic predictions didn’t come true. At least not immediately. American consumers, who had patriotically scrimped and saved during wartime, began to live it up. Europeans also joined in, purchasing $8 billion in exports from America. Inflation ticked upward, and so did prices, but consumers were willing to pay anything for a taste of freedom.”

Sound familiar? Only this time the Fed’s inflation fight didn’t cause a recession, on the contrary—at least not yet. It’s a good place to be, just in case there might be other surprises in the future.

Harlan Green © 2024

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This Recovery Could Spawn Another 'Roaring Twenties'

 Financial FAQs

AtlantaFed.org

I wonder if our recovery from the COVID-19 pandemic could repeat the ‘Roaring Twenties’ jazz era of F Scott Fitzgerald. Why not? There are some surprising similarities.

The Roaring Twenties were named for the era that followed the Spanish Flu pandemic of 1920. It was a truly unique history. World War One was over and women had just won the right to vote with passage of the 19^th Amendment.

The COVID-19 pandemic wreaked as much havoc as World War One, with many more casualties. It resembled the Spanish flu epidemic in many ways—mask-wearing, business shutdowns, and more the 650,000 Americans dying then vs. the one million estimate of American deaths from COVID-19 and its variants.

And there was a very strong recovery as from today’s pandemic.

“By the dawn of the 1920s, the second Industrial Revolution had transformed the United States into a global economic power and drawn millions of Americans to cities,” said Britannica.

There is a growing chorus that suggests Americans could have a similar result from the COVID pandemic because of $ trillions poured into the U.S. economy as recovery aid as well as future economic growth.

Christopher Smart, a former Senior Treasury official writing in last week’s Barron’s Magazine, estimates that the Biden administration will mobilize a stunning $3.5 trillion in public and private money over the next decade that I believe could spur a ‘Roaring 2020s’ (my term) over the rest of this decade.

He reports that communiqués coming out of the just finished G-7 economic summit in Japan “confirm a rare moment in which leaders gather with both mandate and money to launch a golden age of industrial policy.”

Could it spur a third Industrial Revolution? No, but it will certainly give a boost to the current Information Age that is spawning its own Digital Revolution with $ billions being poured into chip manufacturing and modernizing the U.S. infrastructure.

This is already happening, even in the face of debt ceiling negotiations that could crimp the next fiscal year budget.

For instance, the Atlanta Federal Reserve just announced it had upped its estimate of second quarter GDP growth to 2.9 percent q/q, while other prognosticators have been more cautious, such as Goldman Sachs (2.0 percent q/q) and B of A (1.2 percent q/q)

GDP grew 1.1 percent in Q1 down from 2.6 percent in Q4 2022, according to the US Bureau of Economic Analysis (BEA)., but some indicators are showing stronger growth ahead, rather than a recession.

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2023 is 2.9 percent on May 17, up from 2.6 percent on May 16. After this morning's housing starts report from the US Census Bureau, the nowcast of second-quarter real residential investment growth increased from -6.3 percent to 0.6 percent.:”

The real estate sector has traditionally been a leading indicator of growth, and it is feeding an extreme housing shortage.

For instance, "Sales in the second half of the year should be notably better than the first half as job gains continue and more favorable mortgage rates are expected," said NAR chief economist Lawrence Yun. "Sales of new homes are already matching 2019 pre-COVID activity and are expected to increase in 2023, largely due to plentiful inventory in this segment of the market."

Much of the coming industrial growth touted by the G-7 is already baked into the cake of future spending because the Ukraine war and Chinese belligerence has caused a large increase in military spending, with many countries expending more money and resources on mitigating global warming as well.

In fact, the Ukraine war is also causing a faster switch to alternative energy sources and away from fossil fuels. Who knows what may happen next, but with the West now united in purpose, a younger, energetic generation of Americans wanting to be seen and heard, the future has never looked better.

Harlan Green © 2023

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Who Owns America?

 Financial FAQs

seekingalpha.com

Kurt Andersen’s new best seller, Evil Geniuses, The Unmaking of America (2020, Random House), gives a terrific history of the current Gilded Age we are suffering through that has largely benefited Big Business and its enablers.

Just since 1980, Big Business has occasioned the transfer of some $1 trillion per year in income and wealth from salaried workers that comprise 80 percent of our workforce to corporate shareholders and business owners.

“Until 1980, America’s national split of “gross domestic income was around 60-40 in favor of workers, but then it began dropping and is now approaching 50-50. That change amounts to almost $1 trillion a year, an annual average of around $5,000 that each person with a job isn’t being paid,” said Andersen.

We know this wealth transfer to be true from other sources including that of economist Thomas Piketty, sure to be a future Nobel prize-winner in his best-seller, Capital in the Twenty-First Century that documents the history of income inequality from the last Gilded Age in the early 1900s.

Our last period of greatest inequality was at the turn of the 20^th century before income taxes were instituted and President Teddy Roosevelt’s trust-busters broke up the likes of Standard Oil.

Piketty showed the growth rate of capital—i.e., by the owners of businesses and financial assets—has historically been more than double that from wages and salaries of employees since the Industrial Revolution; except for a short period between 1914-1945, when major upheavals and “the consequent advent of new regulations and tax policies along with controls on capital reduced capital’s share of income to historically low levels in the 1950s.”

Andersen echoes Professor Piketty’s history, showing the slow rollback of New Deal policies with the election of Margaret Thatcher in 1979 and Ronald Reagan in 1980 that marked the beginning of the conservative counterrevolution.

Andersen wants to answer the question; How can we remake America after the COVID-19 induced recession? Looking at the history of the last great pandemic, the Spanish flu of 1918-19 that killed some 600,000 Americans, will help us to understand what we should do since we know what happened next—a recession that lasted approximately two years, then the ‘roaring twenties’.

The roaring 1920s was a euphoric surge in optimism from the devastation of World War I and that pandemic for Americans. Credit was expanded exponentially and American went on a spending spree, resulting in massive bubbles in household debt and stocks that resulted in the Great Depression.

Inequality was as great then as it is today. It unfortunately took the Great Depression and another World War to level the playing field in the 1950s to 1970s, until the Thatcher and Reagan-induced counterrevolutions.

Who should own what share of the national wealth has been at the center of all revolutions. It has to do with the “respective shares of global income going to labor and capital and on how those shares have changed since the eighteenth century,” in Piketty’s words.

So answering the question of who should own America is answering the question of whether our gross domestic income comes to be shared in a more equitable fashion, if we want to end this Gilded Age and preserve our democracy from future counterrevolutions.

Harlan Green © 2020

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Why Brexit?

Financial FAQs

Brexit, the British vote to exit the European Union, was precipitated by many factors, including Brit’s fear of loss of sovereignty due to the Schengen requirement that it open its borders to citizens of other EU countries.  And it may lead to a breakup of the Eurozone.

It was a real fear—that eastern Europeans would deprive Britons of jobs by migrating from countries whose wages were lower. Great Britain’s minimum wage is more than double that of countries such as Poland, Czech Republic, and Romania, for instance, which has meant that some 1 million immigrants from other EU countries have migrated to Great Britain seeking better paying jobs, and pushing out many blue collar Brits in the process.

Graph: Trading Economics

So there was good reason for the Brexit vote. Great Britain’s unemployment rate only came down to 5 percent in 2016, after hovering at 8 percent since 2008, the end of the Great Recession, largely due to misguided economic policies.

Britain’s Prime Minister David Cameron was hoisted on his own petard when he called for the referendum that precipitated Brexit, in other words. He was a strong supporter of German austerity policies that led to two recessions in most of the EU, policies that advocated cuts in government programs combined with higher taxes for Eurozone countries.

Poor job prospects in many of those countries hardest hit by the Great Recession prompted the flight to countries least affected, such as Great Britain, even though Great Britain was still suffering from job losses. The Guardian has been trumpeting this truth since Cameron’s austerity policies were instituted in the Conservative Party’s 2010 ascent to power.

“Austerity – which has affected the living standards of many working people – was not imposed by the EU, but was a choice by the current government. When public finances are tight, the economic contribution made by migrants ought to be welcomed. But the climate of cuts allowed migrants to be blamed and Britain’s contribution to the EU – at £8bn, just 1.2 percent of public expenditure and outweighed by our economic gains from membership – to take on disproportionate significance.”

Many major economists have written about the failure of austerity policies since the end of the Great Recession, including Nobelist Paul Krugman.

Graph: Slate.com

“Since the global turn to austerity in 2010, said Krugman in the Guardian, “every country that introduced significant austerity has seen its economy suffer, with the depth of the suffering closely related to the harshness of the austerity. In late 2012, the IMF’s chief economist, Olivier Blanchard, went so far as to issue what amounted to a mea culpa: although his organisation never bought into the notion that austerity would actually boost economic growth, the IMF now believes that it massively understated the damage that spending cuts inflict on a weak economy.”

Maybe we should also mention it is the reason why the Eurozone is in danger of breaking up, all because of not knowing how to deal with the huge amount of debt incurred during and by the Great Recession. All countries suffered, as they did after WWII. But the western world had visionary leaders then, willing to rebuild those European countries in particular with something called the Marshall Plan—some $17 billion in loans and grants—one quarter of which went to Great Britain.

It was also a time when 50 percent of German debt was forgiven—that is, cancelled. But are there any such leaders today that might help Greece and Portugal, at the very least? Unfortunately, we are instead harking back to WWI history, and the punitive demands made on Germany for war reparations that precipitated Hitler and WWII.

London School of Economics Professor of Economic History Albrecht Ritschl conducted research into how Germany was able to pay off its debts after the two World Wars. Ritschl looked in detail at the financial assistance that was paid to Germany under the Marshall Plan, in which the US gave that $17 billion – around $160 billion in today’s values – in economic support to help rebuild European economies. He showed that while the transfers were tiny, the cancellation of debts was worth as much as four times the country’s entire economic output in 1950 and laid the foundation for Germany’s fast post-war recovery.

If we had such leaders today, could it have prevented Brexit and the possible breakup of the Eurozone—and maybe the European Union, as well?

Harlan Green © 2016

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