Charts That Tell The Story

April 28, 2021 - John Osbon (5 mins to read)

Employment rates, financial support by the US government, debt levels and savings rates are crucial markers of economic health. Sometimes it’s better to skip the front pages of Axios, WSJ, or Financial Times, and go directly to the source to let the numbers speak for themselves. Going directly to the primary sources is a great habit that can help filter out unwelcome bias. Here are ten charts that help paint a picture of the health of markets and the health of the economy.

1. Money Supply

Due to our government’s response to COVID, we have dramatically increased the money supply over the past year. There is no true direct link between inflation and the money supply. However, it’s easy to link increasing stock prices and housing prices with more cash in the system. With Biden’s infrastructure bill meant to create jobs and stimulate growth, we can expect this number to continue to rise.


2. Velocity of Money

We want to see that increase in money go towards economic activity. Velocity of money compares GDP to money supply. When you increase the money supply, you increase the denominator. We would like to see an increase in the velocity of money that would signify that people are spending more, rather than saving or investing their extra money. This has been in a consistent downward slope for decades.


3. Disposable Income

While the GDP to money supply (velocity) continues to trend down, at least disposable income continues to rise. In fact, real disposable income is close to an all-time high and is trending positively. More than half of the people in the US are vaccinated and herd immunity is within sight. In a consumer-driven economy, available disposable income levels are important.


4. Debt Service By Households

Debt service as a percentage of disposable income has hit an all-time low since records were first kept 40 years ago. The majority of household debt is made of mortgage debt. Households that are able to refinance (many have in the past year) will have more spending power than they did prior to the pandemic. 


5. Working age population

As Boomers head towards retirement and millennials are having fewer kids, the working-age population seems to have peaked. Also, China recently reported its first population decline in five decades. As we wrote in Population Growth Is Cooling Off one implication is that there will be increased competition for younger workers, leading to higher wages and reinforced personal balance sheets. Higher wages could be offset by greater productivity. This story is consistent among developed nations. Developing nations, Africa in particular, are still in working population growth mode.


6. Employment ratio

Not only has the working population growth peaked, the percentage of those workers actually working has been in significant decline for the past two decades. One of the five goals of the Federal Reserve is to achieve full employment. Half of the federal government’s tax revenue comes from payroll taxes, so they are incentivized to make employment happen. If you believe Andrew Yang or the leaders in the AI world like Sam Altman, technology is pushing us further away from full employment and consistently increasing the wealth gap. As the Fed pointed out this week, if labor markets were tight wages would be rising.


7. High Yield Spread

The high yield spread tracks how much an investor in high yield debt stands to earn from their interest payments. This spread sits on top of the treasury rate. At this time, the high yield spread is at an all-time low, meaning you get very little return for lending money to risky businesses. Does it make sense to lend money to a “junk” credit quality company today for a 4-5% return? That’s 3.25% for high yield on top of 1.6% rate from the 10 year treasury. Does it seem like the risk of failure or default is off the table? Perhaps with the level of the Fed support, that might be true. Over time, as negative surprises pop up, this is unlikely to be a great risk-reward strategy.


8. The Price of Lumber

High lumber prices affect housing costs, construction costs in particular. Wood, a natural and very important building material, is exceptionally expensive today compared to its history. This shows no signs of slowing down. Actual new construction is restrained due to shortages of mill capacity and experienced workers.


9. Population growth

The global population has exploded to the upside over the past hundred years. The impact of the growing population on GDP since the 1920s until 2020 cannot be overstated. If we continue the next 100 years of global population growth at 1% growth, we will be at 21 billion people, up from 8 billion. If we continue the next 1000 years at even .5% growth per year, we’ll be north of 1.1 trillion people. This exponential population growth curve can’t go on forever. Most developed nations have population growth that is trending towards 0% as we mentioned above. We are beyond our carrying capacity for the planet which places an enormous strain on resources from food production, to all types of supply chains, to building material costs. 

If we are not going to rely on population growth over the coming decades to fuel our economic growth, we will have to increasingly rely on productivity gains from technological advancements.


10. Covid variants in countries like India

By now you have probably read all about the COVID crisis in India. On top of these figures, infections and deaths are significantly underreported in India. New variants have been surging and there is a shortage of hospital beds, respirators and oxygen. India is the world’s second-largest country by population with 1.4 billion people. The same dismal COVID news is coming out of Brazil, with widespread denial of problems. These two major countries will have to see a reversal in these trends before the full global economy can resume. Even though parts of the US are returning to normal very quickly thanks to the vaccine rollout, we are still not out of the pandemic.

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