Economic implications: uncertainty, liquidity and hesitancy
Welcome back, friends. As I write this week, the only thing that’s predictable is ongoing uncertainty. This week started with a drop of 700+ points, then rebounded a day later with nearly an equal gain. At this moment, stocks are gaining further. By the time this posts and you read it, it’s anyone’s guess as to where we’ll be
Markets are a proxy of investor sentiment looking out several months and while there are still positive signs, there are also indications of concern. That’s because markets love predictability, stability and certainty and what we have now is anything but those.
Take earnings reports that came out this week. There was a lot of great news from companies like Coca Cola, IBM and Johnson & Johnson and many analysts remain deeply bullish looking ahead to 2022. Still, it’s important to remember that in some senses, today’s earnings reports are really yesterday’s news -- they reflect what has already been, not what’s still in front of us. For that reason and from my perspective, they’re certainly important but they don’t really tell the whole picture, nor do they negate the uncertainty.
Stock market fears: Inflation and Deltas
The spectacular volatility of recent days is clearly a reaction to uncertainty, including the fear of inflation and, of course, the fear that we’re on the precipice of another Covid-19 outbreak. If that comes to fruition, I believe that the potential negative impact could be quite significant and I’m not alone in my concern: As I write this, oil stocks are regaining volatility, as are airline stocks, both of which provide snapshots of investor sentiment (hopes and fears alike).
In the U.S., we’re seeing upticks in infections in localities and states with low overall vaccination rates. The Delta variants are causing new outbreaks in several other countries, too. (As I’ve often said, though, everything is relative and we have to be mindful of that here. For example, if a city had one case a month ago and has experienced a 400% increase since, then the reality is that there are still only four cases.)
Economically speaking, growing outbreaks could mean partial shutdowns in manufacturing, distribution slowdowns and/or supply-chain shortages, again.
Given all the uncertainty, I think we’ll see people turn to safer investments, like bonds -- a sign that sitting on the sidelines for a bit is the preferable way to play.
From The New York Times
Residential real estate is cooling off slightly, too
Housing prices in general, and the housing market overall, really can’t go up anymore at this point, either. New construction starts tipped down a bit in June, more likely as a result of the exorbitant costs to build and buy than of a lack of desire. Mortgage and refinance filings also slid. Interest rates -- and along with them, mortgage rates -- can’t go down any more either and there’s simply little room for the kind of growth we’ve seen to be sustained, with prices so high and inflation rearing its head, eroding buying power.
Growing medical debt
My last point for this week is a story from the New York Times that reported almost 1-in-5 Americans owe for medical debt, making it the largest source of debt held with collections agencies. And most of it is in states that refused to expand Medicaid through the Affordable Care Act:
“Americans owe nearly twice as much medical debt as was previously known, and the amount owed has become increasingly concentrated in states that do not participate in the Affordable Care Act’s Medicaid expansion program.
New research published Tuesday in JAMA finds that collection agencies held $140 billion in unpaid medical bills last year. An earlier study, examining debts in 2016, estimated that Americans held $81 billion in medical debt.”
From The New York Times
Keep this in mind, too: The $140 billion is only that portion of medical debt that’s already in collections, so the reality is that there are likely many billions more in medical debt that are unpaid, but haven't made it to collections agencies, yet.
Clearly, this is bad for medical practices, hospitals, even your friendly rural physician. It also means that the people who are experiencing this debt -- debt they took on in the hope of overcoming a myriad of medical conditions -- are in serious financial stress. This can play out in a wave of bankruptcies, foreclosures, tanking credit scores and more, all of which can make everything from jobs to housing more difficult for them.
Could this unwind the U.S. economic recovery?
Governmental action and the U.S. economy
According to the National Bureau of Economic Research (via Investopedia), a recession is “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
We now know that the “official” length of the Covid recession that began last April lasted about two months, making it the briefest recession on record.
The reason why we bounced out of recession so quickly was that the federal government stepped in and spent trillions of dollars throwing monetary lifelines to businesses, state and muni governments and people of all ages and employment statuses around the U.S:
PPP and EIDL grants and loans propped up countless businesses that would otherwise have been forced to permanently close
Several stimulus-fund payments were made to most Americans, including retirees, which pumped hundreds of billions more into the economy
Unemployment checks with pandemic increases made it easier (or less risky) for millions of people to stay home, rather than go to work
Industries that were hardest-hit -- including hospitality, restaurants, travel and leisure/sports/entertainment -- received additional financial support
Unfortunately, this enormous recovery investment is getting squandered through upticks in Covid transmission and now -- with about $6 trillion more in funds floating around in our economy than just about a year ago -- the federal government can’t add any more liquidity without risking serious economic consequences.
In my opinion, the Biden administration has been doing a strong job of managing both the pandemic-related challenges and the economy so far, but there’s only so much that the administration can do now, short of requiring all Americans who can get vaccinated to do so. And the really scary part? The Delta variant is likely not the last of the variants and as long as we have people who are unwilling to get on board, it’s open season for more Covid mutations.
Looking ahead
As you can see, I have concerns about the economy’s foundational strength and there are things that we need to be aware of now and to watch as they continue to evolve. Overall, though, there are no alarms going off, so I remain hopeful about our recovery.
And although vaccinations in the U.S. have slowed and that point frustrates me, every time someone gets a new dose, we get a step closer to beating this.
As long as that continues, I’ll stay optimistic.
