Could the US economy contract at the opening of 2021?

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by Shaun Richards

The US is in a rather awkward interregnum period between Presidents which is more noticeable at times of change. One way of looking at this is through the plans for another fiscal stimulus. Back on the 5th of November we looked at the plans of the now President elect Biden.

Vice President Biden has proposed a wide
range of changes to the tax code and government spending. In total, he is calling for $4.1 trillion in tax increases and an additional $7.3 trillion in government spending over the next decade.

So a US $3.2 trillion boost was the plan back then and it had the advantage that President Trump has been a fan of fiscal policy and the Federal Reserve was happy to oil the wheels.

Federal Reserve Chairman Jerome Powell called Tuesday for continued aggressive fiscal and monetary stimulus for an economic recovery that he said still has “a long way to go.”

Noting progress made in job creation, goods consumption and business formation, among other areas, Powell said that now would be the wrong time for policymakers to take their foot off the gas. ( CNBC on the 6th of October).

So on the surface everyone was singing along with David Bowie.

Fashion, turn to the left
Fashion, turn to the right
Ooh fashion
We are the goon squad and we’re coming to town
Beep-beep, beep-beep

The Deal

From the New York Times yesterday.

WASHINGTON — Congressional leaders on Sunday reached a hard-fought agreement on a $900 billion stimulus package that would send immediate aid to Americans and businesses to help them cope with the economic devastation of the pandemic and fund the distribution of vaccines.

As you can see that is almost a PR release a theme which continues here.

While the plan is roughly half the size of the $2.2 trillion stimulus law enacted in March, it is one of the largest relief packages in modern history.

The agreement also meant they could stop doing this which was frankly embarrassing. From CNBC on Friday.

JUST IN: House passes two-day funding bill to prevent government shutdown

As to the details here is the New York Times again.

Although text was not immediately available, the agreement was expected to provide $600 stimulus payments to millions of American adults earning up to $75,000. It would revive lapsed supplemental federal unemployment benefits at $300 a week for 11 weeks — setting both at half the amount provided by the original stimulus law.

That makes you wonder what people have been doing in the meantime and I guess the pictures of long queues at US food banks have given us at least a partial answer. There is help for businesses too.

The measure would also provide more than $284 billion for businesses and revive the Paycheck Protection Program, a popular federal loan program for small businesses that lapsed over the summer. …….The agreement is also expected to provide billions of dollars for testing, tracing and vaccine distribution, as well as $82 billion for colleges and schools, $13 billion in increased nutrition assistance, $7 billion for broadband access and $25 billion in rental assistance.

The Precious! The Precious!

Whilst all this was going on the US Federal Reserve was able to focus on its main priority.

In light of the ongoing economic uncertainty and to preserve the strength of the banking sector, the Board is extending the current restrictions on distributions, with modifications. For the first quarter of 2021, both dividends and share repurchases will be limited to an amount based on income over the past year. If a firm does not earn income, it will not be able to pay a dividend or make repurchases.

Sounds as if they are being tough doesn’t it? But then there was this via CNBC.

JPMorgan Chase, the largest U.S. bank by assets, announced in the minutes after the Fed’s test results that its board had approved a new share repurchase program of $30 billion starting in 2021.

Bank share prices joined the new party.

Bank stocks rose across the board in after-hours trading with JPMorgan up 5.3%, Goldman Sachs up 4.4% and Wells Fargo up 3.5%.

House Prices

We are kind of staying with the banks again as we note a consequence of all the Federal Reserve easing. From CNBC.

Mortgage rates set yet another record low last week — the 15th this year and the second record in as many weeks…….

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($510,400 or less) decreased to 2.85% from 2.90%, with points decreasing to 0.33 from 0.35 (including the origination fee) for loans with a  20% down payment.

Which has led to this.

As prices rise, home equity multiplies. In the past year, homeowners with mortgages, representing about 63% of all properties, have seen their equity increase by 10.8%, according to CoreLogic.

That equates to a collective $1 trillion in gained equity, or an average $17,000 per homeowner, the largest equity gain in more than six years.

Bond Market

There has been quite a change from the 3.15% of the benchmark ten-year yield to the 0.9% as I type this. This has been a road accompanied by a balance sheet expanded to US $7.3 trillion including over US $4.6 trillion of government bonds ( US Treasuries). That seems set to continue for the forseeable future.

In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.

US Dollar

I though I would add it to the list as maybe we are seeing a change. What I mean by that is the US Federal Reserve has been pursuing a policy of benign neglect towards the US Dollar and it had been weakening. For example the broad index hit 123.6 in April but in November was 114.4.

But driven by the new Covid variant in the UK it has rallied over the weekend by 1% versus the Euro and by 2% versus the UK Pound. Although there is an undercut which is that it seems the UK has detected it in scale first because it tests much more in this way that others. So there may well be a catch up elsewhere…..


So far I have mostly noted the financial world. So let us now look at what is called main street where we have already noted the food bank issue and can now add in this.

New US unemployment claims for the week that ended Saturday totaled 885,000, the Labor Department said Thursday. It was the highest reading in 14 weeks. ( Business Insider)

So a signal of another downturn heading in the opposite direction to the current consensus as show below.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2020 is 11.1 percent on December 17, up from 11.0 percent on December 16.  ( Atlanta Fed)

I am not sure how they got to that number even when things looked better. But with the Covid pandemic apparently worsening I fear for the first quarter of next year. Could we see another contraction? From @Covid19tracking on Friday.

Our daily update is published. States reported 1.9 million tests, 242k cases, 3,438 deaths, and 114k people currently hospitalized with COVID-19 in the US. Both case and hospitalization counts from today are all-time highs.




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