Economic Trends
May 2021 | Creighton Institute for Economic Inquiry
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Greetings!
Welcome to our May report covering results from Creighton’s two April economic surveys. Creighton’s monthly survey of supply managers and procurement experts in nine Mid-America states indicates economic growth is in a range indicating the regional economy is experiencing a very strong economic rebound. The overall index from Creighton’s monthly survey of bank CEOs in rural areas of 10 states declined to a still strong reading with expanding farmland prices and agriculture equipment sales.
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Creighton University
Jack MacAllister Chair in Regional Economics
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From the Desk of Professor Ernie Goss
China’s GDP Surpasses U.S.’s:
Who Loses and When?
In 2010, China’s gross domestic product (GDP) was approximately one-fourth that of the U.S. Since then, China’s overall economy has advanced at an annual compound growth rate of 10% compared to the U.S.’s much slower expansion of 4.1%. Should this trend persist, China’s GDP will surpass the U.S.’s in 2027. Other than bragging rights, what are the impacts? Could the U.S. dollar lose its reserve status?
At the 1971 Bretton Woods Agreement, the U.S. dollar was officially crowned the world’s reserve currency. Even without this official designation, due to the size of the U.S. economy, and its debt markets, the U.S. dollar was, and is, the global reserve currency. As a result of this status, other countries accumulate reserves of U.S. dollars equivalents instead of gold. But rather than holding U.S. dollars, these nations purchase and hold interest earning U.S. Treasury bonds. These purchases have the impact of reducing U.S. interest rates. Furthermore, these bond purchases strengthen the U.S. dollar making purchases of foreign products such as Paris vacations and German automobiles cheaper in price for U.S. consumers.
However, in 2015, the IMF awarded the Chinese yuan status as one of four reserve currencies with the dollar supreme. The IMF basket of reserve currencies currently includes the euro, the Japanese yen, the British pound, and U.S. dollar. Should China’s GDP surpass that of the U.S., and they abandon currency manipulation, there will be pressure from global investors to abandon the dollar and crown the yuan as THE global reserve currency.
The yuan replacing the dollar as THE global reserve would push U.S. interest rate much higher, increase borrowing costs for U.S. firms engaged in international trade, and boost U.S. consumer/business borrowing costs.
At this time, China’s interest rates on government debt are approximately two percentage points higher than the U.S.’s. Thus, the dollar losing its status as the global reserve currency could increase U.S. federal debt service by as much as two percentage points and cost U.S. taxpayers as much as $600 billion per year in interest payments, other factors unchanged.
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Number of the Month
9.6%
This week’s inflation release (the CPI) was scary. Annualized inflation has increased from 1.2% in October 2020 to 9.6% in April 2021. This is likely to torpedo significant portions of Biden’s next two deficit spending programs. Helicopter Joe is spraying the countryside with U. S. dollars with negative impacts. Watch out for rising interest rates next.
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Goss Eggs
Recent Dumb
Economic Moves
According to the Penn Wharton Budget model, a nonpartisan organization and Democrat favorite, the Biden capital gains tax increase to a high of 43.4% would reduce federal revenue by $33 billion over 10 years. On the other hand, the Tax Foundation, a Republican darling, estimates that the rate hike would cut federal revenue by $124 billion over the same period of time. Pandering to the big tax and spenders can be expensive!
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Mid-America
April survey highlights:
- Creighton’s regional Business Conditions Index climbed into a range indicating very strong growth for the next three to six months.
- The delivery speed of raw materials and supplies slowed to its lowest pace on record.
- The wholesale inflation gauge soars to a 30-year high.
- Regarding their firm’s greatest 2021 challenge, supply chain bottlenecks, higher prices and finding and hiring qualified workers were the most mentioned.
- More than nine out of 10 supply managers, or 93%, reported supply bottlenecks, or delays for April.
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Rural Mainstreet
Strong Growth Path: Farmland Prices Expanding Rapidly
April survey results at a glance:
- Overall index dipped but remained in strong growth territory from March’s record high.
- The farmland price index advanced its highest level since November 2012.
- The farm equipment-sales index rose to its highest reading since February 2013.
- Housing index soars to record level with bids above listing prices.
- Lack of available workers is restraining job growth.
- Approximately 9.1% of farmland sales over past six months have gone to nonfarmer investors.
- Fully 100% of bank CEOs indicated that export markets were important, or very important, to their local economy.
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The Outlook
Professor Goss' Forecast - May 2021:
- Since the presidential elections, the yield on U.S. long-term Treasury bonds has expanded from 0.83% to 1.64%. I expect that yield to climb by another 0.25% (25 basis points) by the end of Q2, 2021. Mortgage rates, which have expanded by 0.18% (18 basis points), will rise by another 25 basis points by the end of Q2, 2021.
- Annualized and seasonally adjusted Q2 2021 GDP growth will range between 5% to 6% (down from Q1 2021).
National Association of Business Economics - April 2021:
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“Results of the April NABE Business Conditions Survey show that conditions continued to improve during the first quarter of 2021. Two thirds of panelists indicate that the vaccine rollout and the new administration have had a positive impact on their view of the economy,” said NABE President Manuel Balmaseda, CBE, chief economist, CEMEX.
- “This optimism is broad-based by sector. Furthermore, respondents see a stronger outlook for growth in inflation-adjusted gross domestic product, or real GDP, over the year ahead than they expected three months ago. Thirty-five percent of panelists anticipate real GDP to expand by at least 6% from the first quarter of 2021 through the first quarter of 2022. That’s an increase from just 5% of panelists in the January survey who expected growth in calendar year 2021 to equal 6% or more."
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The Good
- April’s Purchasing management indices (PMI) of supply managers for both ISM’s national survey and Creighton’s Mid-America approached record highs indicating very strong manufacturing growth.
- Initial claims for unemployment benefits fell sharply last week, sinking below 500,000 for the first time since the Covid crash.
- The Case-Shiller U.S. Home Price NSA Index reported a 12% annual home price gain in February, up from 11.2% in the previous month.
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The Bad
- Creighton’s wholesale inflation gauge from the April Mid-America manufacturing supply manager survey soared to a record high. The U.S. consumer price index climbed by an inflationary 0.6% in March.
- U.S. employment for April rose by almost 700,000 less than expected and the unemployment rate increased from 6.0% to 6.1%.
- The U.S. budget deficit rocketed to $4.1 trillion in March from a year earlier—a record.
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Job openings in the U.S. soared to a record high 8,1 million despite high unemployment. Biden’s $300 weekly bonus for unemployed workers is part of the problem.
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Keep An Eye On
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U.S. Inflation Report. On June 10, the U.S. Bureau of Labor Statistics releases its consumer price index (CPI) for May. Recent readings are signaling well above the Federal Reserve’s acceptable level.
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U.S. Jobs Report. On June 4, the U.S. Bureau of Labor Statistics releases its job numbers for May. Another weaker than expected report will be very bearish for the U.S. economy.
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NASDAQ index. Due partially to fears of higher inflation and interest rates, the index has fallen by 5.6% over the past two weeks. Greater inflation fears will be bearish for the index.
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