The rattlesnake recovery is almost over
Working people feasted on relief. Will they choke on austerity?
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The CARES Act may go down in history as one of the most radical economic moves ever made by the United States government. In one swift, bipartisan blow the state printed hundreds of billions of dollars, distributed them to everyone in the country, suspended debt payments, and disarmed landlords by freezing evictions.
These are the very sorts of moves liberal orthodoxy -- right and left -- has long said would destroy the economy. Instead, they have laid the foundation for the most unlikely economic recovery ever. The great irony now: the scramble to suppress this precedent for working and poor Americans may end up wrecking the bounceback after all.
The impact of the CARES Act is like a rabbit moving through a rattlesnake. It is a huge bulge of wealth working its way through the economy, slowly being digested by business.
It started in March with a $610 billion appropriation for direct stimulus payments and enhanced unemployment. Personal income swelled 12% in April, far and away the largest one-month increase ever. Because the CARES Act also extended new forbearance protections to mortgage debtors, froze evictions on at least a quarter of renters, and suspended federal student loan repayments, the bulge in disposable income was even larger -- a 15% growth that same month.
One-time $1,200 checks drove most of this gain, so income dropped immediately after April, but wages are still up 3.4%. Employers have eliminated lower-wage service industry positions, with the workers shifted onto government support payrolls.
The bulge then moved down the line, showing up in spending. Personal consumption expenditures (PCE) dropped in both March and April, but shot up 15.7% in May and June, one month after the spike in income. The increase was even more dramatic for personal spending on durable goods -- products meant to last three or more years -- rising a full 49% over those months. Spending has yet to decline, though figures have clearly leveled off with only negligible rises in October.
Why has increased spending lasted longer than the income boost, and why did it support disproportionately expensive purchases? Because the bulge also moved onto household balance sheets. Quarter-on-quarter personal savings increased by 171% -- an unparalleled surge -- and families paid down tens of billions of dollars in non-housing debt (i.e. the debt not covered by forbearance protections).
All of this additional consumer cash has in turn fed a sharp increase in manufacturing capital outlay. Like personal expenditures, the bulge started in May, but sharply accelerated in June and July, after durable goods expenditures began to slow. It is still going up, though like unemployment it has begun to retrench over the last month.
So now that the rabbit is halfway digested, what happens next? The boost in income, savings, and debt reduction is almost exhausted, spending in turn has clearly peaked and will soon decline, capital outlays are beginning to slow, and the labor market is growing weaker. More importantly, forbearance programs, extended unemployment payments, and eviction moratoria will all come to an end in just a few weeks.
Policymakers may extend these protections for now, but sooner or later they have to either let the creditors collect or make them write down the debts. If they turn the landlords and bankers loose, the economy will swallow another creature, this one poisonous for millions of families. Student loans alone will cost consumers $7 billion every month, while up to 5.8 million adults could lose their housing, with knock-on effects for employability and future housing costs.
This bulge will work its way down the snake too -- first incomes will drop as 14 million families lose unemployment benefits and reinstated debts drain disposable income. Savings will continue their decline, debt will rise, with new interest costs further squeezing household budgets. Expenditures will have to decrease, especially for durable goods, and manufacturers will curtail investment.
The hope is that COVID vaccines will add enough juice to the economy to cover these costs, but why are we trying to hit that moving target? Because desperate people make for cheap labor, and business benefits when austerity squeezes GDP out of labor’s hands and into capital’s.
Maybe more importantly, however, this year proves that landlords and most creditors are pure parasites on the economy and our country’s leaders don’t want that lesson to sink in. This summer nearly a third of American families couldn’t cover all of their housing payments, and yet the quarter saw the fastest economic growth ever. At least 42 million people are not paying their student loans, and yet the recovery continues. Landlords and debt collectors got nothing, and not only did it not hurt the economy, it probably boosted it.
So why not write the debts off altogether and impose a 33% rent cut across the board? Assets would lose value and corporate balance sheets would suffer, but either they swallow that beast or workers will. Politicians from both parties have already made that choice, and this spring they are set to shove it down our throats.
Our only investment advice: Remember where the money comes from.
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Photo Credit: Brent Myers / Flickr photo