C’mon down, y’all. If y’all are tired of waiting for your state to really open things up, come to Texas. “It is now time to open Texas 100 per cent,” announced governor Greg Abbott. Theaters, sports venues, bars and restaurants to operate at capacity. No masks required, but if you want to wear one, and don’t rob a bank, that’s up to you. Businesses are free to retain masking requirements, and many will. Governor Abbott just might take time off to welcome you personally, especially if you want to start a business in a state with a constitution that forbids personal income taxes.
Other states are easing, although more gingerly, but might step up the pace when they absorb Friday’s jobs report. The private sector added a surprising 379,000 jobs in February, and the depressing initial January report was revised from 49,000 to 166,000 new jobs. What the Labor Department calls “food services and drinking places” led the charge as the liberating influence of vaccines made itself felt.
President Biden was not happy with relaxations of mask mandates and other easings. He called 100% re-openings in Texas and Mississippi “Neanderthal thinking”. Health officials share the President’s feelings. Some genuinely fear a virus resurgence, others fear losing the power to dictate how others shall live, and an end to their climb from the bowels of the government bureaucracy to prime-time television stardom as has Biden-adviser Anthony Fauci has done. He says face masks might be a necessary part of our wardrobes in 2022. Good luck with that.
These economic re-openings face the President and the Federal Reserve with an economic reality not fully taken into account when they formulated fiscal and monetary policy. Families are now, not at some date in the distant future, starting to spend the inordinately large savings they have accumulated because of lack of access to stores, kids not sent to camp, cruises not taken, restaurants not visited. The personal savings rate, 7.6% in January 2020, hit 20.5% this January, the highest pre-pandemic rate since World War II.
Because household incomes are up 13% over the level in pre-Covid February of last year, consumers were able to spend as well as save. And did. IHS Markit reports “higher levels of business activity across all seven broad categories [of businesses] monitored by the survey … a marked upturn in the health of the U.S. manufacturing sector … [and] the fastest expansion of business activity across the U.S. service sector since July 2014.” Sales of new and existing homes in January were 19.3% and 23.7%, respectively, above year-earlier levels, and real estate agents tell me their only problem is finding homes for sale.
Private sector buoyance is only one of the ingredients of a boom that will be heard across the country and around the world. The other is Biden’s much-more-than relief package, passed by both houses and heading to reconciliation, some $1.9 trillion of borrow-spend on top of $3 trillion already laid out in four separate measures. Much of the new package will not be spent before 2022, not coincidentally the year in which congressional elections will be held, which means voters will be trekking to the polls with “happy days are here again” as background music. Never mind the debt pile they are leaving to their children and grandchildren, to be paid by higher taxes or inflation that saps the purchasing power of the devalued dollars in their pay packets. Those problems will be for later politicians to confront, the best sort of problems in the view of today’s office-holders.
Late last week the Federal Reserve added its weight to what treasury secretary Janet Yellen calls the “go big” approach to relief spending. Chairman Jay Powell said he will keep interest rates low and maintain monthly purchases of Treasury debt and mortgage-backed securities at $80 billion and $40 billion respectively until we achieve “a strong labor market …whose benefits are widely shared.” With almost 10 million fewer jobs than before the Wuhan virus hit, Powell is not ready to uncork the champagne, or consider considering a change in policy.
The Fed chairman will “see through” any signs of upcoming “transitory” price increases while his statutory goal of “stable prices” is suspended. He will have lots of data to “see through”:
- The cost of raw materials embedded in a new vehicle averaged $1,823 last year; in February it jumped 64% to $2,982.
- Harvard economics professor Gregory Mankiw writes that in the year that ended in the first quarter of 2020 private sector wages and salaries grew at “the fastest rate in more than a decade.”
- The 180% jump in lumber prices since last spring has caused the price of a new single-family house to increase by more than $24,000 since mid-April of last year.
- Anyone planning a nice bone-in ribeye roast for the first family gathering since last year’s restrictions on such events will pay 40% more than in early March 2020 according to the U.S. Department of Agriculture. Switch to a chuck shoulder roast and keep the price hike to 20%.
- Manufacturers tell IHS Markit they are being hit by “a severe uptick in cost burdens…,” while service sector firms report that the “rate of cost inflation quickened to the fastest pace since data collection began in October 2009.” All report attempting to pass these cost increases on to customers by raising prices.
The Powell-Yellen-Biden troika remains calm. A Fed survey finds businesses optimistic. Consumers are reaching for their plastic. Treasury presses continue to churn out green bits of paper. All must be for the best in this best of all possible economies. Unless it isn’t.