Location Strategy Top 10 Chartbook

The Curious Case of 2023’s Hidden Stimulus.

The economy appears to continue to grow in the face of rate increases designed to cause a economic slowdown to stop inflation. Yet jobs numbers are up and I hear from many of you that you are seeing near record sales. We’ve talked before about the magic spreadsheets at the BLS accounting for some of those job numbers, but it’s undeniable that the economy continues to grow. How is that? The answer is $1 trillion of “secret stimulus” from the Federal government.

Over the past 12 months the US government spent $6.7 trillion, up 14% YoY (that’s about $1 trillion extra):

This pushed the Federal deficit about $1 trillion higher than last year:

And since deficit is largely debt funded, you can see that same $1 trillion increase in interest payments on the Federal debt:

The basic equation for GDP is GDP = C + I + G + NX, where C is personal consumption, I is business investment, G is government spending and NX are net exports. How do we know it’s a stimulus-induced effect? Consumer spending and business investment are flat, and net exports are down. The chart below shows the impact: Federal government tax receipts have fallen by some $440 billion, more than they fell in 2020.

So “secret stimulus” from government spending is the most likely factor for continued growth during the fastest series of rate increases by the Fed in history. A less charitable interpretation would suggest that having gotten caught with their hands in the cookie jar printing money at the Fed, the government has now turned to try and inflate the economy with fiscal policy instead. How this ends is probably not great, but the CBO forecasts similarly large deficits for next year, so we can probably expect stimulus-driven growth to continue at least through 2024, which coincidentally is also a presidential election year.

If banks help do the Fed’s work by tightening lending standards as rates are rising, it’s going to be very difficult to engineer a soft landing.

The Federal Reserve did raise rates this week, but the probability of further increases remains relatively low. Most economists see the July increase as the end of the hiking cycle.

Goldman’s economists have lowered their projected likelihood of a recession occurring over the next 12 months.

Barclays’ economists have pushed their economic contraction forecast out to next year.

After a brief pause, home prices increases continue to outpace wage growth.

Part of the reason is that residential construction has been running well below household formation for over a decade.

The AEI Housing Center analysis suggests that the year-over-year home price changes never dipped below zero in this cycle and are now rebounding.

Backlog is increasing again.

The scatterplot below suggests that US rental cost increases have been too high over the past decade, given supply fundamentals.

Extra cash tends to burn a hole in Americans’ pockets.

US adults who financially support (or don’t support) their parents:

Where nearshoring relocations from China are going.