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Why the Economy is in Pretty Good Shape

We’ve always believed that the primary key to a solid economy is the health of the consumer. Consumption of goods and services make up approximately 70% of our economy. That’s why real disposable income — the amount of available cash in people’s pockets – is very important. We believe there are several factors that could keep real disposable income, and the economy, in very good shape. Here are a few examples:

  1. A real tax cut: There’s a large (and under-appreciated and rarely talked about) tax cut now going to most American families: a huge hike in the existing child tax credit. The March stimulus bill set a maximum credit of $3,600 annually for children younger than age 6 and $3,000 for those between 6 and 17. The regular child tax credit had been $2,000 annually for children under the age of 17. The math on this tax cut is remarkable: in households with joint income under $150,000 the full benefit will be $300 extra per month for children under the age of 6 and $250 for those between the ages of 6 and 17. Many households with three children are now getting $800 monthly checks, a stimulus that is likely to be continued well into this decade.

  2. A big hike is likely in Social Security payments: It’s likely that the annual cost of living rise could be about 5%, based on current inflation trends. For the roughly 65 million people receiving benefits averaging about $1,262 per month, that would be a significant increase; for those receiving the maximum benefit, in many cases over $3,000, that will be a huge increase. The final number will be released in late October and the higher benefits will take effect in 2022.

  3. Low interest rates: With the 10-year Treasury bond yielding less than 1.3% now, another wave of mortgage refinancing appears likely. And the housing boom, which was starting to look tired nationally, could revive, stimulated by ultra-low rates.

  4. Gasoline prices are likely headed back down, as oil prices plunge after the OPEC production agreement. Americans who worry about inflation cite gasoline prices as their biggest concern, but by Fall prices could be much lower than they are now — which would be a de facto tax cut.

  5. Fiscal stimulus: More spending is coming. We think there will be at least one infrastructure bill passed this year, but even if infrastructure spending stalls, there will be new stimulus — and massive deficits — coming in 2022. Nobody seems to care about deficits with interest rates this low.

  6. More hiring: The simplest way to boost real disposable income nationwide is to hire more workers, and that seems very likely as desperate employers in the service sector continue to offer higher wages and sign-up bonuses while Pandemic Unemployment Assistance programs across the country are winding down.

Bottom Line: Real Disposable Income is likely to stay in pretty good shape, thanks to stimulus, stimulus and more stimulus. With the US Stock Market at or near all-time highs, maybe the stock market is reflecting the economy being in pretty good shape.

- Brett


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