Hyper Government Spending Created Hyper Labor Demand

Politicians are often good at sales but lacking in real world wisdom or the moral compass to act adversely to their political party for the good of our country. Last week our former Vice President Pence asserted that “labor participation rates were nearly at all-time lows”, to support his case for reducing taxes to stimulate the economy. However, the percentage of available workers with a job is at 20-year highs, just 1% off the record highs of the 1990’s. Such false or vacuous statements are incessant on both sides of the political aisle. This includes the current Administration’s passage of over $3 trillion spending programs in 2022 to save an economy that needed no saving after having already overstimulated. That was the time to drastically cut spending to pre-Covid levels with inflation at 40-year highs and unemployment near record lows, but as Lord Acton coined the phrase in 1887, “Power Corrupts and Absolute Power Corrupts Absolutely”. Politicians can’t help themselves to act outside of their self-interest any more than a crack addict can kick their habit. One side wants lower taxes and no spending increases while the other side wants more of both.

The labor market remains tight, jobs are plentiful in almost every sector outside of technology. However, we see more clarity now that the overall supply and demand for workers will normalize by the 4th quarter. The new normal for non-inflationary labor demand is likely to stabilize in the 6.5 to 8 million job opening range. By the time core PCE (personal consumption expenditures) inflation tests sub 4% in Q4 this year, unfilled jobs should be near these normalized levels. With Covid spending already guaranteed to continue over the next few years, any new election stimulus measures, as the economy slows over the next year, would quickly push inflation and job openings into an unhealthy new uptrend by 2025.

By raising our Federal spending an enormous 50% during the booming Covid economy, politicians can now claim to reduce annual deficits by letting some temporary programs expire. Our leaders are in the business of getting votes and spinning an insincere narrative of reality to perpetuate their hold on power. When Republicans and Democrats increased the baseline US budget by $2.4 trillion during the first couple years of Covid, it was under the pretense of an emergency or “temporary” replacement of lost income during a potential long-term lockdown of the economy. Not only did the economy return to normal more quickly than anticipated, but the pretend money excess spurred economic consumption of $2 trillion beyond our nation’s production capacity. High inflation and full employment were the logical results. Honest political leaders should have begun curtailing spending by the end of 2021 and more drastically in 2022 as the economy was clearly overheating. Only in the chimerical reality of the Matrix, where all democracies/republics reside today, can such reckless spending allow the political elite to dispense enough Blue pills to convince the masses that our economy needs to stay addicted to Covid emergency budgeting – forever. Instead of returning to pre-Covid $4.4 trillion Government spending, the myopic political leadership will maintain over $6.27 trillion spending plans and massive annual deficits as far as the eye can see. While a compromise may be needed regarding taxes, it’s easy to see below that a drastic reduction in Federal spending or at least 4 years of low to no increases should be the goal to return to normal low inflationary long-term growth. This would allow interest rates, inflation and the cost of capital to return to healthier pre-Covid levels without relying on our Federal Reserve to employ extreme monetary policies. Should the economy weaken over the next year and actually trigger a rise in unemployment near 5%+, we can be sure to hear about new campaign stimulus proposals as the Presidential election approaches. The political class can’t survive without a steady influx of crises that they indirectly create to provide cover for one-time spending efforts that become permanent and foster the next crisis a few years later. As stocks pull back this week, US Debt Ceiling negotiators on both sides are posturing to the public and blaming the other party in a way that they can take credit for a debt deal passage and avoid blame for any delays that cause alarm. It’s not about solutions, but popularity – which is power. We all know the debt ceiling will be passed over the next few weeks, perhaps with trivial face saving “compromises” by both parties. However, the secular trend towards ever greater deficit spending during economic downcycles will continue throughout the global economy until a financial panic becomes too hot to handle with unlimited quantitative money creation. Cynical? Yes, but its beneficial to know how the Government and Central Bank will respond during economic cycles and we feel confident our economy and stock market will continue upward as we navigate decelerating monetary and fiscal stimulus this year to reach the next economic up cycle in 2024/2025.




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