-U.S. spending is softening
-Money isn't circulating in our economy, which is not a good signal
-Large companies are starting to lay off workers
Hi there—here is this week's update!
The Vital U.S. Consumer
Whether you're buying groceries at the supermarket or paying for your favorite streaming service, those dollars add to the nation's consumer spending figure. Consumer spending accounts for approximately two-thirds of our economy, and given the magnitude of its contribution to economic growth, this is a closely watched indicator.
This week, July's data was released, showing the second month-to-month decline in consumer spending since May.
Given that the $600 of weekly unemployment benefits expired at the end of July, this month's consumer spending is expected to take another drastic hit, given that a new stimulus package has not been signed nearly a month out of coverage.
While executive action was signed earlier in the month for $300 in weekly federal aid for many unemployment benefit recipients to help dampen the aid gap, the actual deployment of these funds is not instant. Even though 35 states in the U.S. have received federal approval for the weekly $300 of additional aid, few have actually distributed it to its residents due to administrative challenges.
When you mix reduced aid with persistent unemployment, this points to a very precarious situation for the U.S. economy. Even in a perfect world where the weekly $600 of unemployment aid was still being deployed, it's not necessarily stimulative to the economy. When an unemployed individual receives monetary aid, they aren't thinking about which new smartphone they're going to buy. Instead, they are thinking about if it's going to be able to cover their essential bills to survive another month.
What this ultimately leads to is a slow velocity of money circulation in the economy.
If the velocity money is decreasing, then fewer transactions are taking place between individuals in an economy. This ratio is effectively the number of times one dollar is used to purchase goods or services, which is included in our economy's GDP.
This is the opposite of what you saw in 2005/2006, where homeowners were cashing out their equity via refinancing and going on buying sprees of luxury goods and services. If you look at the velocity of the money supply lately (Q2 of 2020), you can see this low-velocity narrative playing out.
Large Corporate Layoffs
This week layoffs from large companies, such as MGM resorts to Salesforce, were announced.
Most of the spike in unemployment in recent months has primarily been attributed to small businesses. However, in recent weeks we've seen large companies beginning to fire employees. This is particularly alarming for the future of business growth in the U.S.
For example, Salesforce laid off about 2% of its staff this week, and this could be a leading indicator for a potential decline in tech and business services in America.
When you hear about the V-shaped recovery, this refers to the economy and not asset prices.
The markets have priced in a V-shaped recovery in the economy, with the Fed bridging the gap over low points in the V, but this outcome is looking less and less realistic. Just having the Fed as a buyer, or providing liquidity, is not enough to fix deep structural issues in our economy.
We are not permanently bearish, but there isn't much positive news for us to report. Asset valuations just aren't justified. When thinking about stocks, even quality ones, people are euphorically buying due to FOMO. Simply put, buying stocks now is like buying a used car for more than the newer version.
Remember, Round is here as your long-term investment advisor and is meant to help house the majority of your assets.
See you next week,
-Saul & The Round Team
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