Weekly Economic Update August 10, 2020

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I am anxious to see the first new Ford Bronco on the streets.  I have fond but odd memories of the original Bronco.  My uncle in the Air Force had one in the late 60’s.  He had a family with 3 boys which explains why he did not have it long, it was not a family car.  I rode in it a couple of times.  Canvas seats in the back, seat belts that were unused with metal surfaces throughout made it noisy, uncomfortable and likely one of the most unsafe vehicles on the road.  The high center of gravity could easily turn it into the best people mixer ever created.  I cringe now thinking about all the gravel roads my uncle took with a total of 7 of my cousins and I stuffed in the back going down gravel roads at near 60 miles an hour.  Thankfully the only physical outcome for me was ringing ears from all the road noise. 

There is a growing concern over what could happen come tax time in 2021.  During 2019 the average monthly pay out in unemployment benefits nationally was roughly $2 Billion.  Through June 2020 this number moved up to $12.25 Billion.  While the unemployment benefits, have assisted in maintaining the consumer spending levels as well as keeping people in housing and food, there is a dark side to the funding.  Outside of about 5 states, the unemployment benefits are taxable at both the state and federal level.  Many who are unemployed need that money now and are not having any withholding pulled from the amount they are receiving.  The issue will arise next year when the taxes are completed and the tax liability on the benefit amount will be calculated.  In some cases those receiving the extra $600 made more than when they were working.  This might push them into a higher tax bracket by accident. Without anything withheld for the income, the tax bill could be crippling for those impacted.  Unless Congress acts to waive unemployment benefit tax income, those who are having a bad year this year, will be devastated next year. 

Too often we are faced with the fact that good intentions lead to bad outcomes.  In banking this comes in the form of giving a struggling client another loan which is the absolute worst thing you can do for them, more money seldom cures the issue.  The US is faced with the same struggle, near term pain or facing long term pain.  If Congress extends the unemployment benefit without a tax waiver, they just prolong the pain of the recipients and add to it with a higher tax bill in 2021.  However, if they waive the tax and the spending continues how much longer will the government remain solvent? 

The job numbers for July look pretty good.  However the increase in hiring occurred again in those industries that were the most impacted initially, hospitality, retail and leisure.  The recent job gains could evaporate if the numbers of new covid cases rise.  They could also evaporate as companies find they are unable to pivot to the new business model that limits capacity within the business.  Manufacturing employment continues to cautiously expand.  Many manufacturing centers have excess capacity yet and are reluctant to expand too rapidly right now.  That does seem to be changing as the want ad numbers are increasing here in August.  This might be the only optimistic side of things right now.

There are building concerns that the US could be facing a period of upcoming stag-flation.  This is a term from the 1970’s we don’t hear much about.  The money supply is growing, there are shortages building in certain areas that could expand.  The price of gold might be a leading indicator of an inflation rate that might be turning around soon.  At the same time the economy may require a longer period of time than expected to recover.  Hence, stagnation in the economy with inflation surging.  Time will tell.  The issue is complicated by the Fed buying the US debt to keep the interest rates low, skewing the market.  It is getting harder and harder to tell what the interest rates should actually be in the current environment.  The only thing I will say is that they are much lower than they should be.  Now is the right time to borrow on the longest term possible if a firm is considering expansion in the near term.

Have a great week.



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