Human nature is captivated by negative emotions more than positive. Perhaps it’s related to our innate flight or fight protective DNA that causes the media to sell disconcerting stories rather than the favorable news. In the financial world we hear of scary individual debt liability levels hitting new records almost every year without considering asset values. The media warns us every year about future inflation and debt costs rising, yet personal savings are at record levels, borrowing rates have been falling for 4 decades and debt service obligations are the lowest on record. Current conditions are conducive for home buying and personal consumption as long as unemployment is falling and a Covid free economy reopens in 2021.
For 2020 and 2021 consumer spending and optimism are tightly connected to the fear of the Covid pandemic and the level of fiscal and monetary stimulus being applied to compensate for a demand shortfall until a full economic recovery can be realized. Normally when unemployment soars above 10% during a major economic contraction, incomes crater and consumer default rates surge. Thanks to trillions in handouts and record low interest rates, individual car and mortgage defaults actually fell to record lows during the Covid contraction, which is more indicative of a record expansion phase in the economy. Terminating Federal stimulus in the 2nd half of 2020, well before a vaccine allows the economy to open, is risky, but for now the consumer is in good shape.
The devastating Covid-19 shutdown of the economy in March of this year created the sharpest one quarter decline of household wealth in history. Yet very little media attention has been focused on the sharpest rebound of wealth in history during Q2, due to federal stimulus. Not only are personal assets hitting new records, but personal savings are $2 Trillion above normal, waiting to be spent when the economy opens. We should expect a sharp continuation of this above trend wealth creation during Q3 before slowing towards trendline growth by the end of 2021.
The stimulus and Federal Reserve backstopping of the financial system have boosted confidence and started a V rebound in the economy. While economic consensus estimates are forecasting Q3 growth near 25%, Goldman Sachs and the automated Atlanta Fed estimates look for growth between 35 and 32% respectively. When the economy is mostly open (2021) and stimulus is reduced, the GDP will fall back towards 3%. However, despite the continuing hardships of small businesses that are not publicly traded companies, the economy has a strong tailwind that is unlikely to allow rising unemployment without injecting more fiscal steroids into the economy.
The big picture in the charts above is a positive sign that our consumer led economy can resume its prior growth trend once the country is inoculated from Covid in 2021. Short term, Q4 GDP growth estimates of 5 to 10% will fall if the now expired stimulus package isn’t reconstituted for another $1 plus Trillion wave of spending soon to protect payrolls during Covid’s indoor winter season. Airline travel has plateaued at more than 65% below normal levels with huge labor terminations looming. Hotels and restaurants are seeing unsustainable 30 to 50% reductions in business. These metrics actually reflect a significant improvement over the past 6 months, but reveal a nervous consumer and small business employer on the verge of bankruptcy while waiting on a fragile bridge to a much brighter future in 2021.
In this year of Covid that invited a massive Government economic contraction and a record Government infused expansion, the disparity of haves and have nots is unusually extreme. Artificial stimulus is a blunt tool trying to rebuild a complex economy. However, while near term uncertainty and financial pain can resurface in Q4, the picture for 2021 has a boat load of personal savings, cheap credit and pent up demand anxious to be utilized once the pandemic fear is behind us.