It Was a Week for Feeling Good About the US Economy

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Something changed in the water this week.

The US economy is still generally characterized by the conditions of the last year. The labor market is robust. Growth is surprisingly strong. And inflation is high. And yet, suddenly people are feeling good?

President Biden used this week to tout the success of “Bidenomics,” in a sign that the White House is feeling confident enough about current economic conditions that it’s ready to do a little bragging.

But even before that, there’s been an array of green shoots, or at least a sense that maybe things aren’t so bad, even if the Federal Reserve insists that it isn’t done with its fight to bring inflation back to target.

For instance, on Wednesday the popular economic pundit Noah Smith wondered if the “Vibecession” — a term coined by Bloomberg Opinion contributor Kyla Scanlon last year — has finally come to an end. 

Before that, the legendary Ed Yardeni wrote on Tuesday that: “The permabears will have to postpone their imminent recession yet again based on today’s batch of US economic indicators, which suggests that our “rolling recession” is turning into a “rolling expansion.”

And earlier on Monday, Neil Dutta of Renaissance Macro Research declared that all of the recession predictions have now officially failed.

Again, the weird thing is that not that much has changed. One leg of the economic strength is that housing continues to look robust despite the surge in mortgage rates. But housing has been surprisingly resilient for some time.

The stock market keeps defying the bears, with the S&P 500 up over 14% year-to-date. But again, we’ve seen asset price resilience in the face of higher rates all year.

One thing that is true is that consumer confidence is ticking up. Both the Conference Board and UMich surveys showed signs of life, with the former hitting its highest level in over a year.

So the survey-based measures that formed the crux of the Vibecession idea last year are turning. There is data showing people are feeling better. Maybe between that and the rise in the stock portfolios of pundits and economists, there’s just a growing sense that brighter days are ahead.

Still, one of the big questions is

It’s genuinely interesting that the Fed did one of the fastest rate-hike cycles in history — far faster than even the hawkish economists were calling for at the beginning of 2022 — and the economy hasn’t fallen apart. 

Not only did we have the rate-hike cycle, we even had a mini-financial crisis back in March, with the collapse of Silicon Valley Bank and others. And so all of the normal pieces seemed to be in place to bring about the recession. It’s true, too, that there are signs of a slow-moving credit crunch.

But one answer as to why all of this doesn’t seem to matter this year might simply be that the government — and this is partly where Bidenomics comes in — keeps spending a lot of money. One thing that we’ve seen is that US deficit spending is very high right now, and is especially high relative to the current cyclical strength in the economy.

Historically, the federal deficit as a percentage of GDP moves up and down with the unemployment rate. And the intuition between the two should be self evident. When unemployment is high, tax receipts fall and general welfare spending has to rise. When the unemployment rate falls, tax receipts rise and public transfers fall. So they move together.

But that hasn’t really been happening now. The deficit as a share of GDP is around levels it was at in 2011, when unemployment was closer to 8%.

Now it’s worth not getting too ahead of ourselves on the Bidenomics aspect of the above chart. Yes, the public investments in infrastructure, the Chips Act, the IRA and so on, are a form of sustained expansion, but the breakdown between unemployment and the deficit started even before Covid. So this is a longer and deeper trend worth keeping an eye on.

But regardless of the underlying reasons, the effects are potentially significant.

This week we published an episode of the podcast with James Montier a longtime strategist at GMO, discussing his recent mea culpa, of sorts, regarding a 2012 piece he had written on the trajectory of corporate profits.

Without getting too much into the weeds, Montier had argued that the high level of corporate profit margins would inevitably have to come back down to earth. But they haven’t really. And per Montier, corporate profitability is in part a function of government deficits (see Nathan Tankus on the Kalecki-Levy profits equation

Back in February we did an episode of the podcast with Fabio Natalucci of the IMF, in which we talked about financial stability risks. Of course, this was before SVB, but one topic that came up is that in a period of high NGDP, you’re less likely to get financial crises because by and large entities can pay their bills when there’s a lot of money flying around. 

Inflation is bad, and it’s better to have real growth. But at the end of the day, the crucial thing for financial stability — and not having a cascade of bankruptcies and defaults — is that companies and banks have the nominal dollars on hand to pay their debts, pay the rent and their employees. 

All told, we can probably tell some story about how because of structural reasons and policy choices, the recent rate hikes were just not as powerful as expected — thanks in part to the firehose of cash that continues to pour into the economy from the federal government.

The question, then, is what does that mean for inflation and will the Fed still need to generate a recession to get as back to target?

But we can resume that debate next week. This was a week of good vibes. Let yourself enjoy the weekend and the July 4th holiday ahead.

On the podcast this week

It was another busy week on the podcast, beginning with the return of Zoltan Pozsar. The former Credit Suisse AG strategist left the bank earlier this year and we’ve all been wondering where he’ll end up next. In this episode, he reveals that he’s setting up his own research firm to further explore his Bretton Woods III thesis. We also got an update on how he’s thinking about the banking system after all the drama.

• Listen: Zoltan Pozsar on His Next Big Move and the Coming Monetary Divorce
• Read the story: Zoltan Pozsar Re-Emerges, Creating New Research Firm to Track Bretton Woods III

As mentioned above, we also spoke with GMO strategist James Montier about corporate profits and valuations. James published a paper back in 2012 predicting that profits would mean revert, but that hasn’t happened. So the big question is why? And what does it mean for valuations now?

• Listen: James Montier Explains Why Corporate Profits Keep Going Up
• Read the transcript: James Montier On What He Got Wrong About Corporate Profits

fans around? A couple of weeks ago, as part of the Bloomberg Invest event in New York, we recorded a live episode with the actor Ben McKenzie, who had a starring role on the hit show. Now, he has a side gig investigating crypto and all the frauds that seem to go along with it.

• Listen: What Ben McKenzie Learned When He Started Investigating Crypto
• Watch: What Ben McKenzie Learned When He Started Investigating Crypto
• Read the transcript: Ben McKenzie on Crypto and the ‘Golden Age of Fraud’

Reading reccomendations

We also asked Ben McKenzie for some reading recommendations. Of course, you should check out Ben’s own book, Easy Money: Cryptocurrency, Casino Capitalism, and the Golden Age of Fraud, which he co-wrote with Jacob Silverstein and which comes out next month.

But Ben also recommended Dan Davies’ Lying for Money: How Legendary Frauds Reveal the Workings of the World,  Zach Carter’s The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes, and Jesse Eisinger’s The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives

What we're reading

- AI’s killing the old internet

- Brad Setser’s bombshell report on China’s FX reserves.

- Branko Milanovic argues that the world is getting more equal

- Crypto investing firm Paradigm is not just going to invest in crypto anymore

- Republican Senator challenges Teamsters boss to an MMA fight.

Harry Markowitz