The guest commentary below was written by written by Daniel Lacalle. This piece does not necessarily reflect the opinions of Hedgeye.

Disappointing Growth Shows Stimulus Diminishing Returns - 03.23.2020 call me in the morning cartoon  1

The United States economy recovered at a 6.5% annualized rate in the second quarter of 2021, and gross domestic product (GDP) is now above the pre-pandemic level.

This should be viewed as good news until we put it in the context of the largest fiscal and monetary stimulus in recent history.

With the Federal Reserve purchasing $40 billion of mortgage-backed securities (MBS) and $80 billion in Treasuries every month, and the deficit expected to run above $2 trillion, one thing is clear: The diminishing effect of the stimulus is not just staggering, the increasingly short impact of these programs is alarming.

The GDP figure is even worse considering the expectations. Wall Street expected a GDP growth of 8.5% and most analysts had trimmed their expectations in the past months.

The vast majority of analysts were sure that real GDP would comfortably beat consensus estimates. It came massively below.

What is wrong?

In recent times, mainstream economists only discuss the merit of stimulus plans based on the size of the programs. If it is not more than a trillion US dollars it is not even worth discussing. The government continues to announce trillion packages as if any growth at any cost was acceptable.

How much is squandered, what parts are not working and, more importantly, which ones generate negative returns on the economy are issues that are never discussed.

If the eurozone grows slower than the United States it is always blamed on an allegedly lower size of stimulus plans, even if the reality of figures shows otherwise, as the European Central Bank (ECB) balance sheet is significantly larger than the Fed’s relative to each economies’ GDP and the endless chain of fiscal stimulus plans in the eurozone is well documented.

In the United States, we should be extremely concerned about the short and diminishing impact of monster stimulus plans. Paul Ashworth at Capital Economics warned that this is more evidence that stimulus provided surprisingly little bang-for-its-buck, and reminded that “with the impact from the fiscal stimulus waning, surging prices weakening purchasing power, the delta variant running amok in the south and the saving rate lower than we thought, we expect GDP growth to slow to 3.5% annualized in the second half of this year”.

The so-called consumption boom that many expected for 2021 and 2022 after the high savings increase of the lockdowns is now more than questioned.

Real consumption probably contracted in May and June, the consensus has made downward revisions to income growth estimates, and the saving rate is estimated to have fallen to 10.9% in the second quarter, very close to the trend-average of 9%.

Furthermore, residential investment contracted by 9.8% and Federal non-defense spending contracted by 10.4% even with massive deficit spending.

The 0.8% monthly increase in headline durable orders in June was also a lot smaller than consensus had expected. Excluding transport, it was worse, at just 0.3% month-on-month rise.

Additionally, inflation is eroding citizens’ purchasing power and weakening the margins of small and medium enterprises.

This, again, is the proof that neo-Keynesian “spend at any cost” policies generate a very short-term sugar rush followed by a long-term trail of debt and zombification.

This disappointing 6.5% annualized gain in second-quarter GDP, well below the consensus at 8.5%, is even worse considering the monster size of the fiscal and monetary stimulus, with declines in residential investment and a bigger drag from inventories.

Something is very wrong when the U.S. GDP is growing at 6.5% but salaries grow only at 3.5% with inflation at 4% annualized and the PCE price index at 6%, weekly jobless claims at 400k, and continuing claims at 3.3 million.

In March 2020 jobless claims were coming in at about 220,000 a week.

With these figures, it is not a surprise to see that the University of Michigan consumer confidence index has fallen to a five-month low of 80.8 in July, from 85.5, driven by both the current conditions and expectations indices, with the former falling from 88.6 to 84.5, and the latter showing a slump from 83.5 to 78.4.

The 0.6% increase in retail sales in June was a decline in real terms, as consumer prices rose 0.9%. Additionally, May’s decline in headline sales was revised up to a worse figure, 1.7% from 1.3% previously published. Is this a healthy economy? No.

The entire stimulus plan is doing nothing to improve the job recovery or the real economic improvement. The real economy collapsed due to the lockdowns and is recovering thanks to the vaccination and re-opening, almost everything else of those trillions of dollars spent on questionable programs is generating no real effect.

We can even say that jobless claims should be half of what they are today in a normal recovery and that massive government intervention is slowing the improvement.

We discussed recently in this column that the recovery would be stronger without such massive stimulus and that debt would not rise exponentially.  What cannot be denied is that the government and economists need to start looking at these programs and monitor their results, not just add another zero to the next stimulus program and hope for the best.

The disappointing quarter GDP is also a concern because the slowdown will likely be abrupt and leave a trail of debt that will be very difficult to reduce. However, if governments can spend all they want, they will always blame the weak results on not spending enough.

Does this mean that nothing should have been done? No.

To ensure a robust recovery and lower inflation the government should have implemented supply-side measures, tax rebates, and support job creation boosting business start-ups and helping small and medium enterprises, not bloating federal programs that have nothing to do with Covid-19 under the excuse of the pandemic.

This is yet another proof that you cannot print and spend your way to prosperity.

The lesson is that artificially bloating GDP and inflation always hurts the economy in the long run, especially the middle classes, who suffer more the loss of purchasing power and the difficulty to save.


This is a Hedgeye Guest Contributor note by economist Daniel Lacalle. He previously worked at PIMCO and was a portfolio manager at Ecofin Global Oil & Gas Fund and Citadel. Lacalle is CIO of Tressis Gestion and author of Life In The Financial MarketsThe Energy World Is Flat and the most recent Escape from the Central Bank Trap. This piece does not necessarily reflect the opinions of Hedgeye.