I'm certainly not an apologist for the Biden administration, but as the charts below show, the economy on balance has done pretty well in the past several years. The monetary source of the Big Inflation of 2021-2022 has been largely extinguished, real economic growth has exceeded expectations, and corporate profits have been fairly spectacular.
Chart #1
Recent revisions to the GDP statistics showed the economy posting better than 2.3% annual growth over the past several years (see Chart #1). Of course, this is still far less than it might have been had the economy tracked the 3.1% annual growth path that began in 1966 and continued through 2007. But, considering that many observers were predicting a recession in 2023, economic growth has been surprisingly strong. My own forecast of growth in recent years called for growth slightly in excess of 2% per year, and I am pleasantly surprised to have been too cautious, albeit much more optimistic than most.
Chart #2
Chart #2 shows the level of the M2 money supply. The huge bulge in M2 tracks the massive government stimulus payments in 2020 and 2021 that were essentially financed by money printing. With a delay of about a year, some $6 trillion of monetary "stimulus" subsequently turned into raging inflation in 2021 and 2022. The Fed was unfortunately slow to react, but by late 2022 they had raised rates by enough to neutralize excess M2 and thus slow inflation.
Chart #3
Chart #3 is key to understanding the interaction between excess money and inflation. A $6 trillion surge in deficit-financed government spending was not initially inflationary, because the demand for money (which is proxied by the ratio of M2 to nominal GDP in in the chart) surged. That was the logical result of handing tons of cash to a public that had little desire and even less ability to spend it during the lock-down phase of the Covid disaster. But life began to return to normal in early 2021, and the public started to spend the money (i.e., money demand fell). The problem, of course, is that extra spending collided with supply-chain shortages and rising prices were the result. Money demand has almost returned to its pre-Covid levels now, the economy has resumed a more normal growth path, and inflation has become a non-issue for at least the past year.
Chart #4
Chart #4 compares the level of corporate profits (after-tax, and ex Fed profits) with nominal GDP.
Chart #5
As Chart #5 shows, profits are at all-time record levels compared to the size of the economy, and they began their current surge (briefly interrupted by Covid) in 2019, following Trump's 2018 reduction in the tax rate on corporate profits from 28% to 21%. Since the end of 2018, corporate profits (after-tax and adjusted for continuing operations and ex-Fed profits) have risen 58%, while nominal GDP rose 39%. Despite the sizable cut in tax rates, corporate tax payments to Treasury rose from a low of $189 billion in the 12 months ending Jan. '19, to $516 billion in the 12 months ending August '24—a whopping increase of 173%! And, not surprisingly, the S&P 500 is up 130% since 2018.
Art Laffer, take a bow!
While it's great to see evidence that what's good for corporations is also good for the economy, there's a cautionary message here. If, as they have repeatedly promised, a Harris-Walz administration allows the Trump tax cuts to reverse as scheduled at the end of next year, this could pose a significant threat to the economy and, by extension, the stock market.
Please excuse the absence of posts this past month. I haven't had much to say, and I needed a break. Plus, we had a delightful trip to Greece.
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