Why The Economy Still Needs Help

Published on: 11/30/2021

In this edition of Chart Talk, Tony Ogorek and Jeff Viksjo discuss how the economy, although recovering, still needs support by looking at this 2-part chart.  The first half compares what the economy has done pre-covid and where we are right now.  The second half looks at the GDP figures for the 2nd and 3rd Quarters of this year.

TRANSCRIPT

TONY:

Welcome to another edition of Chart talk.  I’m Tony Ogorek.  I’m here with our Portfolio Manager, Jeff Viksjo.  And today Jeff, we’re taking a look at an interesting chart, which actually gives us two perspectives on things.  The first one takes a look at what the economy is doing pre-covid and where we are right now.  And the second looks at some Gross Domestic Product figures for the 2^nd and 3^rd Quarter of this year.  So, let’s take the first half of it, which takes a look at where the trend is for the economy relative to where we would have been if we didn’t have covid.

JEFF:

Yea, so a lot of investors are asking, ‘we’re seeing some high inflation numbers, why isn’t the Fed stepping in to raise interest rates to try and cool off the economy, to bring those inflation numbers down?’ One reason is because they‘re looking at the chart on the left.  And Tony, this shows the pre-covid trend of GDP versus where we are now. Yes, we are coming back from covid at a very strong clip, but we are not yet back to where we were before covid.  So there’s a lot of work still left to do.  So the Fed doesn’t want to raise rates and cool things off until we’re back to normal.

TONY:

Right.  And Jeff, let’s flip over to that second half of the chart on the right.  And one of the reasons that the Fed is hesitant to be raising rates at this point, is because we look at the power of the consumer in terms of generating Gross Domestic Product, which is a huge number, so you’ll see the 2^nd Quarter of 2021 we had a blowout number for the economy.  And that’s really because the consumers were being given money and they were out there spending it.  But look what happened in the 3^rd Quarter.  Really the GDP compressed significantly.  And what do you think this means in terms of a future Fed policy?

JEFF:
Yeah and we just have to remember these GDP growth numbers are reported on over a year basis.  So the 2^nd Quarter of 2021, where were we a year ago?  We were all locked down in our homes.  This included the March/April time period where we weren’t allowed to go out.  The 3^rd Quarter of this year, you can see the growth year over year goes down, part of that is because we were out and about in the 3^rd Quarter of last year.  We started opening things up again.  So, those growth numbers aren’t going to look as strong as they did going forward.  And that’s something the Fed is looking at as well.

TONY:

Yeah. So, I think the important thing for people to understand is that you look at these stats.  If you look at them in isolation, they can be misleading.  If you look at them relative to where they were a year ago, they tend to make sense.  And it also shows why the economy, although recovering, is not all the way back and why it continues to need support.

Thank you for joining us for this edition of Chart Talk.  We look forward to seeing you at our next talk.

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