June Monthly Economic Forecast — Moving in to Q3: Recovery, Expansion and Hesitant Optimism

Chris Pelley
Managing Director at Pelley Group
Denver, CO

The Reality of the COVID-19 Economic Recession

Many of the fears surrounding the COVID-19 pandemic were understandably linked to economic anxiety. Early on, many worried that the pandemic would lead the U.S. into an economic recession. While the economy did experience some deterioration, it was brief by most standards largely due to the federal government’s unprecedented response. Pelley pointed out that household net worth has increased by $18 trillion since the end of 2019. 

The Business Formation Anomaly

Despite the fears of an economic recession and widespread business closures due to COVID-19, a remarkable number of new businesses applications were filed during the pandemic. “It might be a message for some of you about where to go find jobs,” Pelley said. “Maybe its not so much with Fortune 500 companies. Maybe its more middle market, or even taking that risk of early-stage companies.”

The Global Vaccination Element

Pelley pointed out that it is important to remember global vaccination rates have an impact on the U.S. economy, even if the U.S. reaches vaccination benchmarks. The U.S. is leading when it comes to vaccination rates, largely due to a successful vaccine rollout and economic stimulus.

The U.S. certainly has had a significant financial response to the COVID-19 pandemic, even when compared to other significant financial crises such as the global financial crisis (GFC) of the mid-to-late 2000s and the tech bubble of the late 1990s. 

“I can’t quite get my head around the stimulus. The total package is approaching $25 trillion. Now you know why I read the article [earlier] about, ‘Its the Entitlements,’” Pelley said, “I think we might be pushing our luck.”

Consumers Lead Economic Recovery

Interestingly enough, household net worth is on the rise in the U.S., despite the economic conditions created during the pandemic. Pelley explained that this is because of a unique opportunity that consumers had to increase their savings — a low opportunity to spend paired with government transfer payments. He also suggested that economic recovery will take off as restrictions lift and consumers can further draw from these reserves. 

Labor in Short Supply

Temporary issues have led to a recent shortage in labor supply. Three primary factors are causing this labor shortage: safety concerns, childcare concerns and unemployment benefits. Pelley also says that there is an element related to employer/employee mismatch that is contributing to the labor shortage. It often takes some time for employers to find a worker with suitable skills and experience and it can also be difficult for workers to find a good match employer-wise. 

A recent working paper from the National Bureau of Economic Research revealed that a 10 percent increase in unemployment benefits caused job application rates to fall by 3.6 percent. Harvard Business Review spoke to several employers looking for workers and found that a 3.6 increase in applicants would not be enough to overcome the shortage, suggesting companies may need to restructure in a broader way to attract new talent.

Inflation Trends and Predictions

Inflation has been a hot economic topic in the past several months. However, Pelley says this is largely related to niche markets and re-opening related inflation. “I mean, used cars have gone up by 30 percent. And, travel and leisure has gone up because people can’t wait to get out of their house,” he said. Many of these companies lost significant value during the pandemic due to a sharp drop in demand, yet many are now rallying according to Pelley. 

Pelley says that the current inflation trend appears transitory. Many structural forces will likely keep inflation at bay including: consumer pushback, debt resistance, increased price transparency, competitive pricing with foreign markets, reduced power of organized labor and more. 

Fortunately, even if trends continue, modest inflation should not agitate the stock market, according to Pelley. 

Commodities Signal Recovery

Key commodity markets have always served as a way for economists to understand a part of the global market. Luckily, commodity trading is signaling a positive outlook. Increasing prices suggest an increase in global demand. According to Pelley, there is evidence of early-stage expansion with a similar pattern and magnitude to the recovery seen post-GFC. 

Increased Government Spending

The Biden administration has proposed trillions of dollars of spending through the form of two recovery packages — the American Jobs Plan and the American Families Plan. These plans will improve infrastructure, create jobs and fund education and other social programs. 

These plans will also likely cause increases in taxes. Pelley also speculates that the U.S. will eventually see a value-added tax. However, corporate tax rate increases may prove to be only slightly unfavorable when it comes to earnings per share (EPS). The base case of a 23 percent corporate tax rate yields an estimated EPS of $209 while the alternative scenario of a 25 percent corporate tax rate yields an estimated EPS of only slightly less — $200. “But, if they get a little too carried away, if they push too hard, the markets will get hit a lot harder obviously,” Pelley said. 

One factor that contributes to increased government spending is favorable interest rates in the current market. “Part of the problem is, interest rates are so low that the government has ample fiscal space for now. But, as interest rates go up as they did in the ‘80s, that could really be a big problem in the next three or four years, couldn’t it?” Pelley said. “Higher taxes shouldn’t threaten the bull market... for now, in the near-term.”

Corporate Buyback Driving Bull Market

Pelley says that this is an important point to take notice of: one key driver of any recent economic recovery is from corporations buying back shares of their own stock. “Don’t confuse brains with a bull market. For the last 10-11 years, central banks have underwritten equities. But, part of that was corporations buying back their own stock.” These buybacks are expected to slow as corporate priorities shift.