The overall strength of the economy isn't measured by one quarter's growth.
In 2019, there were ominous signs that the bull market and expanding economy of the Obama era was drawing to a close. Car sales were starting to slacken off, and sales of RVs - often a bellweather of the economy - were dropping by double-digits. Consumer debt was at an all-time high, as was corporate debt. Many companies, particularly in retail, were going belly-up, not killed off by Amazon or even Wal-Mart, but by the crippling debts they took on as they went "private" and were taken over by "venture capitalists".
Then 2020 happened. The pandemic closed many businesses for weeks at a time, and many, even when now open, are running only at partial capacity. But a funny thing, car and RV sales are through the roof. Interest rates were slashed to zero percent, and people with nothing else to do, went on a buying binge. Since no one could vacation on a cruise ship, or at Disney World, and flying in an airplane seemed like a bad idea, America went camping this summer.
All summer long we saw them - "CoVid Campers" with temp tags on their trailers or brand-new tents still in the box, struggling to figure out how to back up a trailer or insert tab A into slot B on their tent. Perhaps many will be converts to the camping lifestyle. Perhaps many more will be selling trailers and camping gear at a loss next Spring. At one campground within two hours' drive of New York City, we saw a sign on the dumpster, "Don't dump your camping gear in here!" When we asked the ranger, she told us that many of these weekend warriors get discouraged after a rainy Saturday night and toss away hundreds, if not thousands of dollars of wet camping gear and then drive back to Brooklyn. People are crazy.
While the car business has been brisk in the last quarter, we have to remember that it basically stopped entirely in the first quarter. Profits from one quarter are merely offsetting losses from earlier on, if that. Yes, inventories are tight - car factories were shut down for weeks earlier in the year. And yes, the "overflow lots" of the FCA near where we keep our camper are now empty - even the Dodge minivans are gone! Weeds are growing through the cracks in the concrete.
So, recession over. Trump is a genius - and economic recovery is around the bend!
Not so fast, MAGA-hat! Tell that to Boeing and all of the airlines. Tell that to the cruise industry which is scrapping ships at a rapid clip. Tell that to the folks at Disney and Six Flags and any other theme park. Tell that the Sheldon Adelson, who is trying to unload his Las Vegas properties at fire-sale prices.
And as this Forbes article notes, the "rebound" in GDP in this quarter only looks good because it is pulling out of the basement of the previous two quarters.
The Paycheck Protection Program and expanded unemployment benefits have pumped a lot of cash into the economy - the classic "stimulus" model that Republicans hate, but have learned to embrace, at least in an election year. Problem is, stimulus expires and companies which have been paying people not to work are now having to face real layoffs. Expanded unemployment benefits will also expire - as they always do, eventually. In the next few weeks and months, we'll see the hurt expand across the economy as people who have been spared pain so far are forced to reckon with both the virus and the recession that was on its way before the virus hit.
But what about car sales? They are through the roof! Well, not exactly - when you stop sales of all cars for a month, there is bound to be pent-up demand. People whose leases were expiring have to turn in cars, and indeed this was a problem if you lease expired in May or so, and the dealership was closed. Folks whose cars were wrecked, stolen, or just worn out, were in the market for new cars in June, with none to be had. So the "boom" in auto sales today is just the make-up for lost sales in the first quarter, not necessarily some sustainable growth for the future. Cheap gas and low interest rates are encouraging many folks to buy a new SUV or truck. Is this a sustainable trend, or a one-time blip?
Yes, GE made an unexpected profit this quarter - by slashing costs dramatically. Cutting costs is good, but you can't make a profit by cost-cutting, in the long-term. You have to sell products, and GE's most profitable product - aircraft engines - is basically on hold, as the airline industry cancels order after order. Boeing basically has shut down the 737 MAX line, and all the unsold airplanes may take years to unload. Whether they actually start up production again remains to be seen. The only good news for GE is that its staggering liability for its ill-advised "long-term care" insurance polices may be slashed as the elderly die off in droves in nursing homes. Hey, there's a silver lining in everything, right?
The problem for the real economy (and not just the DJIA) is that a plethora of people will be losing their jobs - permanently - in the coming months. Smaller airlines are already feeling the pinch, and if 9/11 is any guide, it may be years before we see passenger traffic rebound to pre-pandemic levels. If people become more and more comfortable staying at home and working online, it may permanently alter our economy in ways we cannot perceive just yet.
Welcome to the Biden recession. Yes, that is what the Republicans will call it, if Biden wins. Just as they re-characterized the crash in 2008 as the fault of Obama (when it occurred during Bush's tenure, and it was he, not Obama, who signed the bailout!) the GOP will conveniently argue that all the bad shit going down is the result of Democratic policy. If Trump is re-elected? They will still blame the Democrats and use the recession or depression as an excuse for "emergency measures".
The way we have been goosing the economy over the last three years - and last three quarters - is not sustainable. During the last three years of the Trump administration, we have slashed taxes on the rich and printed money to beat the band, increasing deficit spending and the national debt - the latter being something Republicans used to be against. That kept the Obama recovery and bull market going for three years. Then the slowdown in 2019 and the virus in 2020. We've now gone from the crack pipe to the meth pipe - paying people not to work and just handing out money to American companies willy-nilly. Interest rates went from ridiculously low 1.5% to zero percent - not negative just yet. And now Trump proposes a payroll tax holiday, which would put more money into people's pockets and fulfill the GOP prophesy that Social Security is going bankrupt - years earlier that previously predicted!
The crack pipe/meth pipe analogy is apt, I think. You can smoke crack and feel fine, for a while at least. And doing meth? You feel like a super-man! But these are short-term effect, and unless you keep going back to the pipe, again and again, the feeling goes away in short order. Pretty soon you are stealing and doing odious things, just to get another hit. And in the long term (which becomes the short-term, very quickly) your physical and mental health takes a toll. Eventually, you crash and burn. There are no elderly long-term meth users in the retirement home.
Trump and Mnuchin have kept the party going long after closing time. As a result, I think we may see double the hangover, come the new year.
Somebody, some day, has to pay back all this money the government has been borrowing. Odds are, it will be you and me.
