August 1, 2020

Stimulus or Bust

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The Bottom Line:


More government stimulus is not a luxury, it’s a necessity.  Our June 11% unemployment rate currently accompanies a 6.6% gain in personal income economy-wide thanks to government support.  This level of support should decline as economic activity increases, but with high case levels persisting, economic reopening remains constrained.  Should stimulus support waver or diminish too aggressively, personal income numbers will crater and the COVID recession will begin feeling much more recessionary.  Like it or not, continued stimulus is the recession’s vaccine… until a true COVID vaccine arrives.



The Full Story:


Thanks to the rapid and robust response from the US Federal Reserve, the US financial system has remained well lubricated during this COVID crisis.  Comments from Fed Chair Powell this week restated his limitless commitment to liquidity.  Asset markets of all shapes and sizes rallied in response as gushing money supplies raise water levels beneath all asset prices.  But capital ubiquity and availability cannot alone generate economic activity.  Businesses’ viability requires revenues.  While the Fed’s job has been to flood the markets with cash, its been Congress’ job to flood consumers with cash in compensation for forced unemployment.  Therefore, continued COVID revenue restrictions require compensation to keep the economy intact.  But now, Congressional constipation has undermined this agreement, and as employment benefits expire, this recession could reinvigorate.


The Worst of Times Becomes the Best of Times


Most believe that the unemployment rate represents the most meaningful coincident measure of an economy’s effectiveness.  We associate low unemployment levels with high economic success and high unemployment levels with low economic success.  For the most part, I agree.  However, in truth, jobs are just a means to an end, and the end is personal income.  In normal times, high unemployment levels correspond with low personal income levels.  For instance, in 2009 as the US unemployment rate climbed toward 10%, real personal income levels overall dropped 6% year over year.  Makes sense – fewer jobs, fewer wages.  During the hard stop COVID recession, the unemployment rate spiked to 14.7% while real personal incomes dropped over 7%, a crippling blow for our consumption-oriented US economy.  Worst of times! But wait… that personal income number doesn’t account for government transfer payments.  Thanks to the rapid and robust fiscal response from Congress, household subsidies including direct payments and enhanced unemployment benefits actually GREW personal incomes, while the unemployment rate rose as seen in the chart below:


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Incorporating stimulus, April’s 14.7% unemployment rate actually accompanied an 11% increase in personal incomes overall.  In other words, without government support, personal incomes shrank 7%.  With government support, personal incomes rose 11%, the highest rate on record.  Best of times!  This unprecedented effort at income support allowed retail sales to rise and recover record highs even while the household savings rate sits at 20%, also a record high.  A COVID crisis met with this level of economic stimulus is almost no crisis at all.


Uncertain Times


Unfortunately, the political will that met COVID with great retaliatory force has dissipated.  Partisanship and an election cycle have distracted lawmakers.  Nonetheless, a bill appears forthcoming that will extend direct payments to qualified taxpayers and extend unemployment benefits at a reduced rate.  The $600 per week federal stipend, over and above a state’s stipend, encouraged people not to work as two thirds of recipients received a raise to stay home.  The new $200 a week proposal cuts the total average state and federal unemployment stipend in half.  This will certainly incentivize workers to resume work, but they must have workplaces to report to.  Most of the displaced workers hail from the leisure and hospitality industries which remain under rolling regulatory interruptions to combat COVID.  With the timing and efficacy of a vaccine still uncertain, closures across economic areas of congregation will persist.  Studies of the wage parity level for federal unemployment benefits harmonize closer to $400 per week.  Should personal incomes including government stipends start shrinking economy wide, this recession will start feeling much more recessionary.  Correctly calibrating unemployment stipends with economic closure rates may seem daunting, but it’s also the assignment.  This is when we need the best of our lawmakers, not the worst.


Have a great weekend!



David S. Waddell 
CEO, Chief Investment Strategist





Sources: FRED database, Bureau of Labor Statistics
David Waddell
Author: CEO Chief Investment StrategistAfter graduating from the University of the South with a BA in Economics, David began his career with Charles Schwab & Co., Inc. in Phoenix, AZ. Having been recognized for his outstanding business development record, David was promoted to the San Francisco- based Institutional Strategic Accounts Team, which interfaced with the Big 5 accounting firms and Schwab’s largest customers. David left Schwab to continue his education at the graduate level in Boston. While earning his MBA degree with a concentration in finance and investments at the F.W. Olin School at Babson College, he was appointed by the college Trustees to manage a team of seven portfolio managers overseeing the student-managed portion of Babson’s endowment fund. David also founded the Babson Investment Management Association to assist undergraduate and graduate students with training and career path planning in the investment management field. As the firm’s Chief Investment Officer, David chairs the W&A investment committee and combines macro economic forecasting, macro market analysis and macro risk assessments to design portfolio strategies utilizing public market securities worldwide. A civic leader in Memphis, David currently acts as Chairman of Epicenter Memphis, and Co-Chair of the Memphis Chamber Chairman’s Circle while also serving as a board member for LaunchTN and the New Memphis Institute. David previously served as chairman for The Leadership Academy, the RISE Foundation, and the Economic Club of Memphis. He also chaired the capital campaign to build the “Live” stage at the Memphis Botanic Garden. David was a member of the 2004 Leadership Memphis class and has been recognized as one of Memphis’ “Top 40 under 40” by the Memphis Business Journal, and as a finalist for “Executive of the Year” in 2007. In addition to weekly columns in the Memphis Daily News and the Nashville Ledger, David has appeared in the Wall Street Journal, USA Today, Forbes, Business Week, Investment News, Institutional Investor News, The Tennessean and Memphis Business Journal. He has also made appearances on Fox Business News, Yahoo Finance, Bloomberg TV, CNBC, and CBS News and ABC News Channels. Read some of David's articles on his author page in Inside Memphis Business. David has two wonderful children, Easton and Saylor, an obedient Labradoodle named NASDAQ, and a devoted Goldendoodle named Ripley.


David S. Waddell


Chief Investment Strategist

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