Now (First Quarter 2021) is the time not to follow the crowd. Current economic indicators are very positive for 2021. First and foremost, no one can “tell” the future. The best that anyone can do is to predict the future. One of the ways to predict the future is with an economic indicator. An economic indicator is a metric used to assess / evaluate / measure the overall state of economy.
Some indicators to note are:
The Help-Wanted Index measures how efficiently employers are matching jobs to the available workforce (the unemployed). The index has been around since 1951. The index is considered a leading indicator of unemployment. It has now returned to pre-COVID levels – meaning employment will continue to grow. Note – we did not say has returned to previous (Trump administration) levels but toward more normal levels (see below).
To support our optimism regarding employment, the unemployment rate fell to 6.3% in January of 2021. This was a fall of 0.4 percentage points and the number of unemployed decreased to 10.1 million.
Some context is appropriate at this point. Each of us has cognitive biases which are systematic patterns of deviation from the norm, or what is perceived to be rational judgment. One such bias is the recent memory bias. This type of bias considers the most recent events as being normal, or the way things should be. An example is the record low unemployment rate under the Trump administration which was 3.5 percent prior to COVID.
Economists believe that full employment is closer to 5 percent. This is because, on average 5 percent of the population will be out of work due to accident, illness, business failures and natural disaster. A cautionary note: If unemployment falls too much, inflation will rise as employers compete to hire workers and push up wages too quickly.
Personal Saving Rate
Personal Savings Rate is the ratio of personal saving to disposable personal income. Personal savings is equal to personal income less personal outlays and personal taxes. It is the percentage of personal income that is available to provide funds to capital markets (note the run up in stock prices) or to invest in real assets such as residences (note the shortage of home inventory and high lumber prices). The current rate is 13.7 percent and is the highest recorded since April 1975.
M1 Money Supply
The M 1 Money Supply is the total of all currency and other liquid instruments in a country’s economy on the date measured. The M1 Money Supply, which includes physical currency and coin, demand deposits, travelers’ checks, other checkable deposits, and negotiable order of withdrawal (NOW) accounts, has risen by a an unprecedented 70% since January 2020.
An increase in the supply of money has the effect of lowering interest rates, which in turn, generates more investment in capital markets and real assets (see above), thereby stimulating spending. Businesses respond by ordering more raw material and increasing production. The increased business activity raises the demand for labor (good news for employment).
Other areas to consider —
Weak dollar policy
In general, a weak dollar is good for economic growth because it makes American products more competitive relative to foreign-made products, both at home and abroad. However, a strong dollar, (which the Trump administration strived for) is primarily focused on America being strategically strong from a global perspective. The Biden administration, though not formerly stated, has indicated a preference for a weak dollar. On the other hand, Janet Yellen (Secretary of the U.S. Treasury) has affirmed the United States’ commitment to market-set currency rates (strengthen the dollar). It should be noted that American presidents have limited control over the dollar’s value; however, their words and their policy choices can “weaken” or “strengthen” the dollar.
What are we to make of the perceived conflict in opinions? The capital market is the best indicator of the direction of the dollar and investors in the capital markets are heavily shorting dollars. What does it mean to short the dollar? Short-selling, means that the market is betting the price of the dollar will fall (weak dollar policy).
Business failure rate
The U.S. Bureau of Labor Statistics shows that approximately 20% of new businesses fail during the first two years of being open, 45% during the first five years, and 65% during the first 10 years. These statistics have not changed much over time and have been consistent for over 30 years. Recent memory bias (the evening news) has us believe the U.S. economy is crashing because of the unprecedented business failures in 2020. This is not the case, what did occur was an acceleration in normal business failures. To support this assertation, here are some under reported facts:
- As of mid-September (most recent data available), applications to start new businesses across the U.S. are up 19 percent from mid-September 2019.
- Indications from businesses likely to hire employees are up 12 percent for this same time frame
- A working paper (September 2020) from the National Bureau of Economic Research – “Venture Capitalists and COVID-19” concluded that more than 52% of U. S. startups have been positively impacted by the pandemic.
- Bloomberg reports (September 2020) that the total number of business bankruptcies for the calendar year is down compared to previous years.
In summary, the reasons for optimism are: decreasing unemployment which is quickly returning to near normal levels; U.S. personal savings rates at historic highs has increased the M 1 Money Supply making funds available for the purchase of securities and real assets; and the business indicators (once you get past the evening news) are quite good – yes there has been a pruning of weak businesses but this has allowed for accelerated growth of startups.
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