Economic Trends
October 2021 | Creighton Institute for Economic Inquiry
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Greetings!
Welcome to our October report covering results from Creighton’s two September 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 that the regional economy is experiencing a positive, but slowing economic growth with significantly elevated inflation. 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
Bitcoin: Is It the New Gold? Is It Money, or a Financial Asset?
Over the past year, the rate of inflation, as measured by the consumer price index (CPI) has soared by 5.3%, its greatest acceleration in the past 13 years. During the same period of time the price of gold actually declined by 7.3%. This is a sharp departure from the past as investors sought gold as a safe haven investment, or shield against inflation.
Over the 52 years prior to the pandemic, a 5.3% increase in inflation, as experienced over the past year, would have increased the price of gold by 6.1%. To what alternative did investors flee?
Bitcoin! Over the last 12 months, investors have pushed the price of bitcoin up by 353.3% to its current price of more than $62,000. But how safe is this alternative to gold, and is bitcoin a hard asset, such as gold, or is it money like the dollar or the Euro? For an asset to serve as money, it must be a medium of exchange and it must be a store of value. See the three-part test below.
Safety?
Since 2016, the average monthly variation in the price of bitcoin was 18.7%, with a one month high of 96.0% and a one month decline of 31.6%. During this same time period, gold experienced average swings of 2.4% monthly with a one-month high of +6.2%, and a one-month slump of -7.1%. Bitcoin fails the safety test, and is not a safe store of value.
Hedge against inflation?
Before and after the onset of Covid-19, bitcoin prices have moved somewhat more in tandem with inflation than gold. Between 2016 and August 2021, each one percentage point increase in inflation produced a 1.33 percentage point upturn in bitcoin prices, and a 1.28 percentage point upturn in gold prices. Bitcoin passes the inflation hedge test.
Is Bitcoin money?
As of October 2021, only El Salvador has granted bitcoin the status of “legal tender.” Only a few U.S. merchants such as Tesla have ever “considered” accepting bitcoin in exchange for a product or service.
Furthermore, according to the IRS, “When you sell virtual currency, you must recognize any capital gain or loss on the sale, subject to any limitations on the deductibility of capital losses.” In other words, the IRS regards bitcoin as an asset like stock, not currency like the U.S. dollar. So when you buy that Tesla X with bitcoin, you likely have a capital gain—short or long. Bitcoin fails the money test.
Conclusion: Clearly, potential bitcoin investors should follow the advice of philosopher/novelist George Santayana who once said, “Skepticism, like chastity, should not be relinquished too readily.”
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Number of the Month
$4.1 trillion
For the first time in U.S. history, the federal government collected more than $4 trillion in taxes for the fiscal year ending Sept. 30, 2021. This amount is almost 15% above the level collected before the 2017 tax cuts.
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Goss Eggs
Recent Dumb
Economic Moves
Higher fuel and heating prices anyone?
Canada and U.S. consumers once again got caught in the crosshairs of U.S. politicians—Michigan Governor Gretchen Whitmer and President Biden.
Just as President Biden killed the Keystone XL pipeline from Canada, Governor Whitmer revoked and terminated an easement in order to shut down Enbridge Energy’s Line 5. Her action, if successful, will disrupt a major supply chain that moves more than 500,000 barrels oil and natural gas liquids a day from Canada to Great Lakes states.
Grade=4.0 Goss Eggs.
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Mid-America
Economic Growth Slows as Confidence Plunges: Higher Prices and Empty Shelves to Greet Holiday Shoppers
September survey highlights:
- Creighton’s regional Business Conditions Index climbed into a range indicating positive, but slowing growth for the next three to six months.
- Business confidence plummeted to its lowest level since the first month of COVID-19, March 2020.
- Almost 73.3%, of supply managers expect holiday and Christmas shoppers to face significantly higher prices and empty shelves this season.
- Approximately one in three supply managers said finding and hiring qualified workers will be the greatest challenge for the next 12 months, up from one in five last month.
- Supply bottlenecks slammed regional imports lower.
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Rural Mainstreet
Bankers Report Record Farmland Price Index: 8 of 10 Expect Negatives from Stepped-Up Basis in Biden Plan
September Survey Results at a Glance:
- Overall index declined for the fourth straight month, but remained in a range indicating slower, but positive, growth for the next several months.
- Farmland price index soared to a record high.
- More than eight of 10 bankers expect the stepped-up basis portion of President Biden’s $3.5 trillion bill to have a negative impact on the Rural Mainstreet economy.
- Almost two-thirds of Bank CEOs expect the Federal Reserve to begin reducing their bond buying stimulus before the end of 2021.
- More than half of bankers reported that the negatives from Covid-19 expanded in September.
- Growth among the 10 states from top to bottom were: Minnesota (tops), Illinois, Colorado, South Dakota, Nebraska, Wyoming, Iowa, North Dakota, Kansas, and Missouri (bottom).
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The Outlook
Professor Goss' Forecast - October 2021:
- Current high U.S. inflation IS transitory, but so is life (depending on your time frame). I expect inflation to move below 3.5% in the first quarter of 2022. While I expect solid wage growth for the rest of 2021, inflation adjusted wage growth will be close to zero due to soaring inflation.
- The Democrat $3.5 trillion reconciliation infrastructure bill (i.e. passed without Republican support) will be scaled back to obtain Senator Manchin’s support.The Republicans and Manchin will save Biden from himself.
- The Fed will begin scaling back (e.g. tapering) its monthly purchases of MBS and U.S. Treasury bonds in the fourth quarter of 2021.
- “Inflation expectations have moved up significantly from those in the May 2021 survey,” added Survey Chair Holly Wade, executive director, NFIB Research Center, “but panelists anticipate inflation will ease in 2022.
- “Over half—58%—of the survey respondents consider the balance of risks to economic growth in 2021 to be to the downside, while 16% expect the balance to be to the upside, a complete reversal from the May survey results,” continued Wade.
- “Panelists point to a variant of the coronavirus against which the vaccines may be ineffective as the main downside risk.”
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GDP NABE panelists have moderated their expectations about the prospects for economic growth in 2021 since the May outlook survey. The median forecast for the third quarter (Q3) of 2021 calls for an increase of 4.0% in inflation adjusted gross domestic product (real GDP), quarter-over-quarter (q/q) annualized.
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The Good
- In the week of October 2, initial claims for unemployment insurance declined by 38,000 to 326,000 from the previous week. The insured unemployment rate fell to its lowest level since March 2020.
- The S&P/CoreLogic/Case-Shiller National Home Price Index rose 17.7%, after correcting for inflation, in the year that ended in July. That’s the highest 12-month increase since these data begin in 1975. Good news for home sellers.
- The cyclically adjusted price earnings ratio of U.S. stocks soared to 37.1, the second highest since 1881. (e.g. stocks are very expensive relative to earnings).
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The Bad
- For the budget year which ended September 30, the Congressional Budget Office forecasts a budget deficit of $3.0 trillion budget deficit which is below last year’s deficit of $3.13 trillion.
- September job additions of 194,000 was almost half of expectations, and 183,000 workers left the labor force for the month.
- The U.S. trade deficit jumped to a record high $73.3 billion in August. Exports rose 0.5% and imports increased even more at 1.4%.
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Keep An Eye On
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U.S. Inflation Report. On November 10, the U.S. Bureau of Labor Statistics (BLS) releases its consumer price index (CPI) for October. Recent readings are signaling inflation well above the Federal Reserve’s acceptable level (transitory or not!)
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U.S. Jobs Report. On November 5, the BLS releases its job numbers for October. Another weaker than expected reading (below 150,000) will push the Federal Reserve to delay their tapering of bond buying of mortgage-backed securities and U.S. Treasury bonds.
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U.S. GDP. On October 28, the U.S. Bureau of Economic Analysis releases 3rd Quarter GDP. Growth below 2%, which I expect, will be bullish for U.S. Treasury bond prices.
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