The Budget, Key Dates, Recession

Important Dates Ahead

The Fed has said its actions will be data-dependent. We will all be watching closely when the next two (CPI) Consumer Price Index readings come out as well as the next (PCE) Personal Consumption Expenditure Index results. The PCE is a Fed favorite because they feel it is a more accurate representation of inflation. The next Fed rate decision will give us another point of clarity in their work to fight inflation. It’s reasonable to expect another 75 basis point increase at the next meeting, but then again, this cycle has been anything but reasonable. Until the Fed stops raising interest rates, these meetings are critical.

• CPI Release – August 10th and September 13th.
• PCE Release – August 26th and September 30th.
• Fed Rate Decision – September 21st.

Are We In A Recession?

There has been much debate about whether we are in a recession. The National Bureau of Economic Research is the arbiter of recession events. There are three to four criteria for a recession: GDP growth, the yield curve, job openings and the unemployment rate. Today, we have only met one of these definitions: two consecutive quarters of negative GDP.

According to three other measures, we are not in a recession. We do not have a fully inverted yield curve. The employment rate has been falling since the beginning of the year, not rising. The number of job openings is still almost twice the number of available workers. A rising yield curve, a stable employment rate, and the number of job openings are all signs of a strong economy. Many indicators would have to change significantly – rates, deficits, unemployment, and job openings – before an official recession can be declared.

Depth, duration, and diffusion play a role as well. In terms of duration, we are in a recession because we’ve had two consecutive quarters of negative GDP growth. The brief 2020 Covid recession was due to depth or the extreme quick drop in GDP early in the pandemic. In terms of diffusion, the negative impact of Fed tightening is not evenly or thoroughly distributed.

We don’t have to have all indicators flashing the recession signal all at once. If one single event is strong enough, that can induce a recession alone. Such an event occurred in the Spring of 2020. I am sure the NBER will declare a recession in 2023. Like all previous declarations, the recession will be over by the time it is official. Equity markets can move up well before official recessions are proclaimed.

Budget Surplus

We haven’t had a budget surplus in over twenty years. The only source of revenue the government has is taxes. At the end of the fiscal year, if there is a deficit, the Treasury must borrow money. Obama and Trump both had trillion-dollar deficits, hurting the dollar. Congress had to increase the amount of Treasury borrowing every year, leading to a downgrade of US debt and fiscal deadlock. Now, suddenly, it looks like we will have a tiny surplus or a minor deficit in 2022.

How did this happen? Clearly, marginal tax rates were finally high enough. And there was little or no spending on stimulus. The full weight of stimulation fell on the Fed, and they complied in two ways: by keeping rates at zero, enabling borrowing at almost no cost, and buying almost all debt securities. Now the Fed won’t comply anymore and is raising rates. They are also gradually selling all securities. Perhaps the fiscal deadlocks will be over for several years, and Congress can focus primarily on spending. We will get deficits again, but a year or two of a balanced budget takes a lot of pressure off the government.

Creeping Crypto

Solana has now opened a store in Hudson yards. It’s clear that crypto is not going away. The Solana store aims to educate potential users of crypto in much the same way that Apple defied critics by opening its first store in 2001. (To help users open wallets, register .sol domain names, a navigate the system. Nobody could have imagined then how dominant Apple would become, just as today, we cannot imagine crypto as anything more than a minor payment system. Clearly, lots of money is going into developing crypto. Over $2B has been deployed to crypto companies, and $16B has been raised by crypto funds this quarter. What will it look like in 2042? Nobody knows, but it is safe to say that crypto will be an ever-growing and eventually dominant part of our future decades from now.