We’ve had 3 soft landings -- 1967, 1985, & 1995 -- and many investors believe 2024 will be added to that list. In today’s Narrative, we compare this cycle to 1995 and 1967, drawing some cautionary conclusions. To have a soft landing in 2024, additional fiscal stimulus would be needed (such stimulus definitely kept the economy stronger, longer in 2023). And Congress definitely has new stimulus teed up. If they enact that fiscal support, will the eco backdrop resemble 1995 or 1967?
Can 2024 Reprise The 1995 Soft Landing? Probably Not.
In 1994, Greenspan had raised fed funds 300 bp over the course of a year, producing a 1995 soft landing, not a recession. Over the past 2 years, the Fed has raised funds more than 500bp. 1995 featured the last economic soft landing on record. Will Powell enjoy the same benign outcome this cycle? There are many reasons to expect not.
First, the sheer scale of the recent funds surge dwarfs what Greenspan did.
Second, in 1994 and 1995, banks still had easy lending standards, versus today’s very tight ones. (Banks tightened lending standards in 1996, but the Fed had already eased.)
It’s crucial to note that EVERY soft landing -- 1967, 1985, and 1995 -- featured easy commercial bank lending standards … a condition absent today.
Third, in 1995, real corporate revenues slowed, but were still growing about 4%, supporting employment. Today, real revenues are 0%, and on track to outright decline in 2024.
Indeed, EVERY soft landing -- 1967, 1985, and 1995 -- featured growing real corporate revenues, supporting employment gains. Today, those revenues are stagnating/declining, as is always the case before an economic downturn. And our model points to real revenues declining in 2024.
Fourth, the yield curve today is sharply inverted (and has been for a while), unlike 1995.
Fifth, real GDP & GDI told the same relatively upbeat story in 1995 -- staying positive between 2.5-5.0%. Today, while GDP has reaccelerated, GDI (Gross Domestic Income) has slipped a touch below 0.0%, reflecting the four factors above.
Is a soft landing this year still possible? Yes, but NOT due to the classic drivers of economic growth. Think election-year fiscal stimulus, as noted below.
Fiscal Stimulus Could Produce A Soft Landing … Chips Ahoy.
Last week, the Biden administration forgave more student loans, and started handing out Chips Act grants.
1. “Biden’s Student Loan Boast: The Supreme Court ‘Didn’t Stop Me’. The President ignores the law again as he forgives more student debt. The total is now $138 billion and counting.” WSJ 2/23
2. “The U.S. government is giving chip maker GlobalFoundries $1.5b in grants to build and expand facilities in New York and Vermont, the first major award in a program meant to reinvigorate domestic chip production. The award kicks off what is expected to be a series of cash injections into semiconductor manufacturing projects. Intel, Taiwan Semi, Samsung Electronics and Micron Technology have all submitted applications to the government. The grants, under negotiation for months, are a cornerstone of the $53 billion Chips Act…. With $39b specifically for manufacturing subsidies.” WSJ 2/20
Hmm. The law was passed in 2022, and here in 2024 the grants are just being made … an election year, so good timing. Below is the component of federal outlays where the Chips Act spending will show up.
Grants could total $7.5b this year (if $1.5b were also allotted to the other 4 companies that submitted applications, as noted above). The funds won’t be spent right away, but at the margin, they’ll boost business confidence, and in turn, incremental spending on capex and jobs. Also add …
3. The Wyden-Smith tax cut proposal, which passed overwhelmingly in the House (but faces challenges in the Senate). It’s a $136b tax cut, mainly for businesses, but also a bit of a child tax credit.
4. The continuation of the Employment Retention Credit (ERC) the estimate could see $120b paid out this year (CBO says $70b). Together, the Wyden-Smith plan plus the ERC could sum to about $256b, or 0.9ppts of GDP.
5. Multiple wars are good for defense spending. The Senate has passed a $95b defense bill, and it awaits House action. If enacted, it would add another 0.3ppts to GDP.
Putting all the above together, there could easily be an additional 1.5ppt boost to GDP from fiscal stimulus this year (student loan forgiveness + Chips Act + Wyden-Smith Tax Cuts + ERC), taking our -1.0% real GDP forecast up to +0.5%. For the first 4 months of fiscal 2024, outlays turned down, with receipts moving up, making the budget deficit a bit smaller so far, i.e., NO new fiscal stimulus. Yet.
Fiscal Stimulus Would Raise The Odds Of A “1967” Soft Landing.
Today’s landscape has more eco/political similarities to the 1967 soft landing, than 1995’s (as discussed above). In 1967:
1. Unemployment was still very low, up from 3.6% in 1966 to just 4.0% in 1967. This cycle, it’s risen from 3.4% to 3.7%, i.e., still very low.
2. There was a presidential election cycle…1968 then, 2024 today.
3. The incumbent president (LBJ) was unpopular, and ultimately dropped out of the race. Biden’s poll numbers today are poor.
4. There was an unpopular war -- Vietnam then, Ukraine today.
5. Defense spending was ramping up …
6. … as was entitlement spending, the Great Society.
LBJ’s “guns and butter” fiscal mantra seems like an appropriate slogan for today (i.e., Ukraine, Israel, Taiwan, Chips Act, student loan forgiveness, Child Tax Credit, etc.). Back in 1966-1967, despite all the fiscal stimulus, Bill Martin’s Fed eased. Powell’s reaction function remains to be seen. What happened after Martin cut rates ~200bp?..
1. Nominal GDP accelerated from 6% to 10% in 1968, with real GDP moving up from 2.5% y/y in 1967 to 5.9% in 1968.
2. The unemployment rate dropped from 4.0% to 3.4%.
3. The stock market rallied almost 50% from late 1966 to the end of 1968.
4. Bond yields initially dropped -100bp over 6 months as the Fed began to ease, but then mid-way through the easing cycle, bond yields turned sharply higher.
5. Inflation stopped slowing, and reaccelerated sharply, with core CPI up from 3.5% y/y to 6.0% by 1969.
6. A year after starting to ease, the Fed pivoted sharply, more than doubling rates.
No doubt, the Fed is aware of this history, and the risks it points to. It will be an interesting year on Constitution Avenue.
Former Fed Board Governor Kevin Warsh was interviewed by MNI last week (2/20), and made the following points:
"My own view is inflation is quite likely to be well above target come Christmas Time," Warsh said. He said the Fed's willingness to be dovish and signal rate cuts against a backdrop of inflation that is still too high making its own job harder by loosening financial conditions prematurely."
In sync with that, “Current Fed Minutes Show Unease Over Premature Cuts.” (WSJ 2/21). Again, the conditions for a soft landing are not in place and easing amid material fiscal stimulus risks repeating the Martin Fed’s mistake back in 1967 … which set the stage for the 1970s’ disastrous inflation cycle.
Source: Nancy Lazar Piper/Sandler
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by Refinitiv.
Sincerely,
Fortem Financial
(760) 206-8500
team@fortemfin.com
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