José Ramón Iturriaga: Propensity to consume


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The rapid recovery in the propensity to consume and invest is what is behind the speed and strength of the recovery. In previous cycles, crises occurred as a consequence of the derailment of the economy due to the excesses prior to it. The best example is undoubtedly that of 2008. Then the bursting of the real estate bubble that had been brewing for a few years washed away the financial system, which in turn degenerated into the euro crisis, which was the final touch for what it has certainly been the biggest recession in our recent history. An unprecedented overheating of the economy underpinned by European interest rates and Spanish inflation primed the mother of all property bubbles and its blowout had the consequences that we all know. Under these circumstances, the propensity to consume and invest took a long time to recover. Today consumer confidence is not that it took much less time to recover, but that it is at all-time highs.

The “animal spirits” that Keynes defined almost a century ago have recovered in record time because what we are experiencing now is unprecedented. To the exogenous nature of the crisis, we must add the very strong response of monetary and fiscal policy. Furthermore, unlike in previous cycles, the capital markets are at full capacity and the role of emotions is probably playing against it. Not only has this crisis made little impact, but because of how badly we have all been through it, we want to turn the page as soon as possible and make up for lost time.

Thus, the reasonable thing would be that, if nothing goes wrong, the economy will improve in the remainder of the year. Some will continue to scratch their heads wondering why this time is different. And it simply is because it has nothing to do with it. Do not try to find three feet to the cat.

Employment in the United States

Like every first Friday of the month, last Friday we learned the employment figures in the United States. The data does not have a but. During the month of July, almost a million jobs were created and the unemployment rate dropped to 5.4%.

Beyond the extraordinary of the data, the key readings would be two: the recovery of confidence continues its course regardless of the new waves and the market returns its attention to (higher) growth and its impact on monetary policy. They are the two sides of the same coin with which the market has been spinning for a year and a half: how much the epidemic will affect economic activity and what the response of the central banks will be. The irruption of the fifth wave had meant a parenthesis to the recovery pattern of the markets since last November and, now, it seems that it is resuming after verifying that this latest blow from the pandemic is not going to affect the economy like the previous ones.

Perhaps what is most surprising is that the market has not been able to anticipate this circumstance. To a certain extent, the market is in tow of events and only puts a price on things once it comes across them. The latest American employment data has been a reality bath that returns the discussion to when central banks will take their foot off the gas.

The Americans are clearly ahead and will be the first to make a move. They will start by buying less debt in the market to end up raising rates sometime in 2023. This logically has very important consequences in the market. The first thing is to go back to the box we were in a couple of months ago. American bond at 1.70% and the most cyclical sectors recovering the leadership in the stock market. Then it will be seen based on how the inflation data are going and what can be inferred from the behavior of central banks. The best thing is that for this first move we play with the marked cards. However, fewer will probably take advantage of it. Cognitive biases often prevent us from taking advantage of opportunities when they present themselves.

Reality is stubborn

A recurring theme in beach talk these days is the speed of the economic recovery. Those of us who argue that this crisis cannot be analyzed with the same eyes as the previous ones are the least. And it goes without saying that those of us who believe that the economic recovery is quite likely to surprise due to its strength and speed are in the minority. In any case, the data from the last days serve to reinforce our argument.

The next few days when with my feet full of sand I face again with someone who reproaches me for my optimism, I will be able to recite them not only the employment data that are more difficult to interpret and always leave some margin for skeptics to stir, but those of home sales or consumption in recent weeks that leave little room for doubt. June home sales set a new monthly record only beaten four times since 2008, that’s nothing. This data surprises even the most optimistic of the class and, as we have already commented on other occasions, it is a clear indicator of the completely different nature of this economic cycle. In addition, these days we have also known the evolution of credit card spending in the month of July. According to BBVA data in July, 29% more was spent than the same month in 2019. These are very encouraging numbers and the best symptom of how quickly economic confidence is recovering once the pandemic begins to control.

In any case, I do not harbor much hope of being able to convince in the improvised gatherings at the edge of the sea. The counterarguments will be safe of all kinds. From the ad hominem attacks of “you’re an irreducible optimist” to “let’s see what happens when the aid runs out.”

Now, there is an underlying political residue that skews most of the analyzes. In general, it is upsetting that this Government can aim for both the recovery and can survive this crisis. I don’t know what will end up happening, but what these summer conversations show me is that some are more stubborn than the data.

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