The guest commentary below was written by written by Daniel Lacalle. This piece does not necessarily reflect the opinions of Hedgeye.
There is an overly optimistic consensus view about the speed and strength of the United States’ recovery that is contradicted by facts.
It is true that the United States recovery is stronger than the European or Japanese one, but the macro data shows that the euphoric messages about aggregate GDP growth are wildly exaggerated.
Of course, Gross Domestic Product is going to rise fast, with estimates of 6% for 2021. It would be alarming if it did not after a massive chain of stimuli of more than 12% of GDP in fiscal spending and $7 trillion in Federal Reserve balance sheet expansion. This is a combined stimulus that is almost three times larger than the 2008 crisis one, according to McKinsey. The question is, what is the quality of this recovery?
The answer is: extremely poor. The United States real growth excluding the increase in debt will continue to be exceedingly small.
No one can talk about a strong recovery when industry capacity utilization is at 74%, massively below the level of 80% at which it was before the pandemic.
Furthermore, labor force participation rate stands at 61.5%, significantly below the pre-covid level and stalling after bouncing to 62% in September. Unemployment may be at 6%, but it is still almost twice as large as it was before the pandemic.
Continuing jobless claims remain above 3.7 million in April. Weekly jobless claims remain above 500,000 and the total number of people claiming benefits in all programs — state and federal combined — for the week ending March 27 decreased by 1.2 million to 16.9 million.
These figures must be put in the context of the unprecedented spending spree and the monetary stimulus. Yes, the recovery is better than the Eurozone’s thanks to a fast and efficient vaccination rollout and the dynamism of the United States business fabric, but the figures show that a relevant amount of the subsequent stimulus plans have simply perpetuated overcapacity, kept zombie firms that had financial issues before covid-19 alive and bloated the government structural deficit and mandatory spending.
Would the United States economy had recovered as fast as it has without the deficit-spending stimulus plans? Maybe. I believe so because the entire recovery, both in markets and the economy, has been driven by the vaccine news and the process of inoculation.
Most of the programs that have been implemented have had a small impact compared to the re-opening of the hospitality sector and the vaccinations. The entire economic crisis came from the lockdowns and the virus and the entire recovery is the re-opening and the vaccinations.
My main concern is that this monster deficit and debt program has been set as the minimum for the next crisis. No one has analysed if the spending plans have been effective.
In fact, in the eurozone no one seems to be concerned about the fact that countries that have spent between 20 to 30% of GDP in stimulus plans are now in stagnation.
The mainstream message seems to be that if the spending plans have not worked it is because they were not large enough. Very few seem to be discussing the waste in public funding when the number one drivers of the recovery are the vaccine roll-out and the re-opening of the services sector.
It seems that governments want to convince us that they have saved the world when the reality is that the misguided lockdowns were the cause of the economic debacle and lifting them is the main cause of the recovery. In the process, trillions have been squandered.
It is dangerous to accept that government spending no matter how much and what for is the only solution and even more dangerous to believe that the shape of the recovery is only a function of the size of the stimulus package.
The problem was the virus and the government-imposed lockdowns, the solution is the vaccine and the re-opening. The problem was caused by government’s lack of prevention and excess of interventionism and the solution is not more intervention.
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 Markets, The Energy World Is Flat and the most recent Escape from the Central Bank Trap. This piece does not necessarily reflect the opinions of Hedgeye.