The Covid winter is over

Here are just a few important and very encouraging charts—part of a larger picture in which the US  economy is definitely emerging from its long Covid winter.

Chart #1

Chart #1 shows a critical and timely measure of US air travel, which includes data as of yesterday. The green line is the 7-day moving average, which is the one to watch since there are definite trends in travel on the various days of the week. Here we see that passenger traffic has increased 78% (!!) since January 27th of this year. It's still down over 40% compared to the levels which prevailed before the onset of lockdowns, but the recovery is proceeding rapidly. Looking ahead, we still have a lot of good news to look forward to as confidence is on the rise and vaccinations proceed apace. And by the way, the US stands out as leader of the vaccination pack among developed nations, with the notable exception of Israel, which has vaccinated over half of its population.

Chart #2

My state has been one of the hardest hit (mostly due to extreme lockdown measures ordered by our politicians). As Chart #2 shows, big lockdowns didn't flatten the curve at all last year, since they were firmly in place last November, when daily new cases began to surge. Vaccines have helped, but they can't really account for the bulk of the decline year to date, since it was underway well before significant numbers were vaccinated. That means natural immunity (acquired from exposure to the illness or natural exposure to similar viruses over the years must be a very important factor contributing to the rapid demise of this pathogen. Either way, the severity of Covid cases and the growth of new daily cases has improved dramatically. In Los Angeles County (10,000,000) population, there were only a handful of Covid-related deaths in the most recent reported week, and daily new cases have dropped almost 90% since late January. Overall, statewide daily new cases have plunged 92% since late January.

Governor Newsom: please open the California economy NOW!

Chart #3

Chart #3 is one of my perennial favorites, since it shows the Fed has been responsible for almost every recession in the past 60+ years (the notable exception being the brief Covid crackdown recession that started a year ago). Recessions (gray bars) have occurred after every major spike in the real Fed funds rate (blue line) and every major flattening or inversion of the yield curve (red line). The purpose of Fed tightening has always been to increase real interest rates (and effective borrowing costs) in order to break the back of rising inflation. (Higher real interest rates work to increase the demand for money thus reducing the amount of excess money in the system at the same time the Fed is withdrawing reserves and shrinking the supply of money.) A significant tightening of monetary policy also causes the yield curve to flatten and to eventually invert (when long-term rates fall below the level of short-term rates). An inverted yield curve almost always means that monetary policy is so tight the economy begins to suffer and the market realizes that the Fed will soon have to reverse course.

As should also be apparent, we are nowhere near either of those conditions at present. Real interest rates are exceptionally low, and the Fed has promised to keep them there for a looonnnggg time. (I have serious doubts they will actually do that however). The yield curve has steepened a bit, which is a sign that the bond market realizes that the economy is improving and the Fed will eventually have to raise short-term rates at some time in the future. But it is not very steep from an historical perspective. 

Other indicators that have traditionally signaled that monetary policy is so tight that it is threatening economic growth prospects—such as 2-yr swap spreads and Credit Default Swap spreads—are firmly at the low end of their historical ranges. That means that liquidity is abundant and the outlook for corporate profits is positive. In short, there are no warning signs of economic trouble ahead to be found in the market. 

I would ordinarily be ecstatic about the prospects for the economy, were it not for a growing number of disturbing developments such as huge increases in government spending, promises of huge increases in a broad range of taxes, growing federal control over the economy, continued lockdowns and mask mandates, and expanded welfare measures (e.g., higher minimum wages and increased healthcare subsidies). Most troubling is the prospect of a significant increase in inflation, since that inevitably erodes standards of living, raises barriers to savings and investment, and works to transfer the burden of a mountain of government debt to the private sector in devious and pernicious ways.

All the things that worry me share a common denominator: they serve to reduce the incentives to work and invest. In short, they are anti-supply side. As a supply-sider, I firmly believe that the only way to truly stimulate an economy is to increase the incentives to work and invest by reducing tax burdens, keeping the value of the currency stable, and minimizing the amount of government intrusion in the economy.