Millions of Americans have started receiving stimulus checks as part of the $1.9 trillion American Rescue Plan meant to help the U.S. economy continue its recovery from a recession induced by the COVID-19 pandemic. Although the legislation was only signed into law by President Biden two weeks ago, economist Hugh Johnson says the measure is already impacting the nation’s financial picture.
WAMC's Jim Levulis spoke with Johnson – chairman and chief investment officer of Hugh Johnson Advisors in Albany – this week about the relief plan and other recent financial headlines.
Johnson: You’re starting to see it. And I would include in the American Rescue Plan, not just the $1.9 trillion, which was signed into law by the president on March 11. But I'd also include the $908 billion that was passed in December, the combination of the two, involved a significant level of government spending, basically funding to try to help us out of the economic fallout that's been caused by the pandemic. So we're starting to see the impact of the federal government spending. You see it number one in the personal income numbers, those of us that watch the details, you saw a big increase in income in the month of January as that $908 billion got spent and sent out individuals. You also see it in their spending, and you also see it in their savings. So we are seeing the impact. And you'll see a lot more of it in March. We'll see more money dispersed to individuals, another $1,400 to individuals that qualify. And that'll show up in the March personal income savings and personal spending numbers, it's going to be on again off again. So in January, you got a big increase, and then you'll get an offset in February, in March you’ll get a big increase maybe a little more in April, and then a little bit of an offset in May. But nevertheless, it all points to one thing, and that is the US economy is impacted by the stimulus, and is going to grow and grow significantly in 2021 and 2022. But more in 2021, as a result of the stimulus. But the growth rate of the US economy is likely to be very strong, and it is now showing up in the numbers.
Levulis: And you mentioned those stimulus checks going to many Americans and some people have the decision, you know whether to spend it in the retail economy, some discretionary spending, they have the option to save it, and then some people maybe using it to pay down some bills, pay down some debt. Looking at the overall economy, is there a certain avenue out of those that I just presented that would be a boost to the overall economy and make the overall economy healthier and get it going as policymakers want to see it going?
Johnson: Yeah, the number one thing is spending. 70% of the US economy as we measured, of course gross domestic product, real gross domestic product, is spending by consumers. And so to the extent that consumers spend the money, you will certainly help the economy. I might add very importantly, though, that if they save the money, and as they did save the money back in the May-June period, when we had the first stimulus checks, that money that is saved will eventually start to fund consumption or spending in the upcoming months. So as savings gets worked down, as consumption gets worked down, it's kind of a resource there to keep the economy going in the later months. So I think initially, you're going to see, it would be good to see an increase in spending, significant increase in spending. We are seeing that. We saw that in the January numbers, we will see it in the March and April numbers. And they will probably slide off a little bit or dissipate over time. And then those individuals that are sort of hard-pressed, will have to resort to the savings that they've made with these checks. And they'll start to spend that savings so just cross your fingers and hope that this gives enough of a boost to the economy that we have enough of the reopenings in the economy gets sort of back on track on its own without the need for additional stimulus. That's what you really cross your fingers and hope for.
Levulis: And what's your thinking on that need for the additional stimulus? You mentioned the package that passed at the end of 2020. And then this one came around relatively early on in 2021, in early March. When might the decision need to be made if we need to give the economy another boost this year?
Johnson: That's a really great question. And the reason that's such a great question is, is to some extent, of course, it really depends on the economy sort of getting back at its own feet, and on its own again, and to some extent, a great extent maybe, that depends on the success of the vaccine program. To the extent that we have a continuation of success in the vaccine program and also we have a decline in the number of infections, hospitalizations and deaths, the numbers get better and better, that means more and more of the economy is going to reopen. And that part that is already reopened will start to do more business and start to hire again, because employment is such an important part of this. Then the economy will sort of get back on its own feet again, and it will not be likely that we'll need additional fiscal stimulus. So quite frankly, to a great extent, it depends on the extent to which we can reopen the economy. And that depends to a great extent on the success of the vaccine program. I have my fingers crossed, but I'm fairly optimistic based on the numbers that I've been looking at. And you certainly hope that we're not going to have some sort of a third wave as a result of some of the new forms of the virus, the offsets that we're currently seeing in the US that that that will not give us a setback and a third wave, I don't think that's going to happen. But nevertheless, you have to be obviously conscious of it. And, know, just make sure you what we watch those numbers really carefully.
Levulis: So Hugh I will offer you the question that Fed chair Jerome Powell faced. Is inflation something to worry about as the economy gets going here?
Johnson: Yeah, that's a really good question, too. Because obviously, when we spend this amount of money, it's going to find its way into the balance sheets of households, it'll show up in the balance sheets of households and big cash positions. And the real question is, you know, we've got a big increase in the money supply, the average annual growth rate of the money supply since this pandemic really hit the US economy has been 24%. Before that, the annual growth rate of the money supply was 6.8%. Anybody that watches history would say well, with that kind of growth in the money supply, sooner or later, you're going see upward pressure on inflation. And we'll probably see some upward pressure on inflation in 2021. The numbers are going to be above the Fed’s target to 2%, probably as much as 2.5% in 2021. But keep in mind that Chairman Powell looked at that and said, yeah, we might get those kinds of numbers, but they're going be transitory, they'll come and they'll go, and then in 2022, we'll see better numbers. So these numbers are not going to require the Federal Reserve to become worried and alarmed to start to raise short-term interest rates. That's what Chairman Powell is saying. That's what he's promising. And quite frankly, I think he's right. I think that we'll see maybe 2.5% inflation in 2021. But in 2022, it’s likely to drop back down, maybe not below 2%. But say 2.2% or some number like that. And that'll certainly be comforting to the Federal Reserve. The Federal Reserve will not raise short term interest rates. And that's good news of course, for any business that borrows. It's good news, quite frankly, for the financial markets. Low interest rates usually help the stock market.
Levulis: A lot has been made about what happened with the stocks of GameStop earlier this year as well as the performance of Bitcoin. Some people have been saying it marks a shift in power when it comes to Wall Street and the stock market. What are your thoughts on all that?
Johnson: I have so many thoughts on that, because it's extremely complex. And it's becoming a bigger and bigger part of our lives. And when you see GameStop, when you see the stock being up, I can almost not even say the numbers 5,622% since this bull market began on March 23rd of 2020. That's a staggering amount for a company that not only doesn't earn money, but actually loses money. Their earnings that at the end of 2020, were minus $4.22. So we're seeing a change in what's going on in Wall Street. And it's quite frankly, what's happening is a lot it is a function of social media. Individual investors who have nothing to do are being organized into very substantial investment sort of groups, call them communities. And they're investing collectively, and driving significant swings. Very, very major volatility in the stocks of individual companies like GameStop, and quite frankly, some of them have made money, they've been very successful. And that simply just invites more individuals into those communities or those groups or I would even call them mobs and you get this kind of monkey see, monkey do outcome for the financial markets. I'm very, very worried or concerned about it because it's creating swings and price levels in the stock market which have nothing to do with underlying fundamentals. And I guess I'm old fashioned when I say it's underlying fundamentals that should count. In this case, the underlying fundamentals do not count. So it's a sign of investors getting organized, moving collectively, creating great volatility, creating great volatility that's unrelated to underlying fundamentals. That to me is a sign of speculation. And you see it also, in my judgment, in Bitcoin. Although those that buy bitcoin and own Bitcoin would argue vociferously that it’s not a sign of speculation, it is fundamentally driven, I don't agree. But nevertheless, it is a sign of speculation, at least for GameStop, as well as for a number of other individual stocks, as well as in my judgment, Bitcoin. So it is a sign of speculation, but it doesn't mean that the broad stock market, which really matters to me, has become speculative. In my judgment. Yes, it's gone up. And yes, that is the subject of a little bit of a concern, but it hasn't reached those levels, which I would call speculative, which causes deep concern in the probability or possibility of some significant pullbacks.
Levulis: There's a push on Capitol Hill by some Democratic senators to have federal student loan debt forgiven up to $50,000 in debt encompasses one of the pushes, what might that do for the economy?
Levulis: That's really, really a great question. And the reason that's such a great question is we've seen, the levels of student debt have gone up to levels, quite frankly, that are making it very difficult for many individuals to afford the debt or to be able to make their debt service payments over time. And there are a lot of reasons for that, not the least of which is that we have a very difficult economic and employment environment. And it's getting much more difficult for students that are graduating from college to get a good paying job so that they can make their debt service payments. So I think the idea of either a moratorium or doing something to help those that have these significant debt service payments to make it easier for them, which is what's moving ahead in Washington is a really sound idea. And the really reason I think it's a sound idea is we do need these students to not only go to college, but to graduate from college. I'm very concerned about the slowdown in the growth of productivity in the US. And one of the many ways to reverse that slowdown is to help productivity and one ways to help the productivity is obviously to have more college graduates. The other thing that I think it’s good for is on the whole subject of income inequality is that it gives a lot of individuals particularly from less well-off, less fortunate individuals the chance to go to college. And once they go to college, we know that the numbers tell us that they're likely to sort of move up the income spectrum. And if they start to move, then we'll start to reduce the levels of income inequality. We have to give them employment mobility is what I think the easiest way to say it is. So the combination of increased productivity from college graduates, as well as increased income mobility for college graduates, is in my judgment, very sound economic policy, and good for the future of the US. So I hope we continue to move along the pathway of providing some sort of relief, sensible relief to students that are deeply in debt.
Levulis: And a question when discussing this topic might be, if that debt is forgiven, that's the federal government's money, right? That's the people's money. And now, what happens to that? Is that just added into the federal deficit?
Johnson: Yeah, it gets added into the deficit. But let's keep in mind that some of the plans that are being proposed, and I think some of them are pretty good, is that it might mean that there's less debt service payments by individuals who have, let's say, their income is just not adequate in order to meet those debt service payments, well their debt service payments are going to get reduced. And then at the end of say, well, 25 years, they're going to have to make up the difference at the end of 25 years. And the difference might be taxable at the end of 25 years. So yes, the federal government will be hit, so long as they subsidize those shortfalls in payments for those 25 years. But at the same time, at the end of the 25 years, the individual who has the debt will be required to make up all those shortfalls or the differences. So in the long run, it's really not going to have a very significant impact on the federal deficits or federal debt. There's lots of other things that are going to have a significant impact on deficits and debt. And the amount of fiscal stimulus or federal government spending, the $908 billion in December, the $1.9 trillion in March is going to have a meaningful impact. And that's obviously something that sooner or later, we're going to have to get to. Not now. It's too early. We still are in the middle of the pandemic-induced economic recession, but in time, we'll have to get to it and try to reduce those deficits to levels that are much more sensible for the US economy.
