Investments for the Post-Covid Economic Recovery
The US economy is going to grow impressively in 2021. How long will the recovery last? What are some investments for the post-Covid economic recovery? These questions came to mind after we saw a thoughtful article in The Washington Post about the possibility of the U.S. economy growing at a seven percent rate for the rest of 2021. Bottled up demand and the ability to get people back to normal work are likely to help drive an impressive economic recovery this year. But, what happens in the years to come? Your choices of investments for the post-Covid economic recovery will be based on whether we have a short burst of economic steam or if things like infrastructure investment drive the GDP up for years.
Will the Economy Boom After Covid-19 Is Gone?
According to the Post article, Goldman Sachs is predicting a 7% growth of the U.S. economy this year. This would be the best rate of growth since the middle of the Ronald Reagan presidency. However, the bulk of this year’s recovery will come from rescue and stimulus spending and a return to normal as vaccines drive the virus from our everyday lives. The answer will lie in the following round of legislation and spending. While the Democrats at least are on board with the current rescue package, the following round of legislation may be more contentious.
Will America Invest in Infrastructure?
Once Congress passes the proposed $1.9 Trillion rescue package, in whatever form, the Biden administration is set to introduce more legislation mean to repair U.S. infrastructure and create lots of jobs in the process. The legislation will also be strong on domestic manufacturing, clean energy and care for children and the elderly. Every one of these will have a major focus on creating jobs. Those who are already lining up to oppose such legislation say that it will drive the deficit too high and cause inflation. The inflation will cause higher interest rates which will, in turn, cause another recession. What the Biden administration, the Fed, and the new Secretary of the Treasury are saying is that now is not the time to think small. Our bet is that the second stimulus round, as opposed to the rescue plan, will pass in some form.
How Long Will the U.S. Economic Post-Covid Recovery Last?
A prolonged economic recovery would be likely if Biden’s plans for spending on infrastructure in all of its forms as well as domestic manufacturing work out. How prolonged might have to do more with who holds political power than the economics of what is planned. Democrats believe that they “went small” in the stimulus measures coming out of the Great Recession. Their “half-measures” resulted in a weak recovery and the loss of the House of Representatives and seven seats in the Senate. They would prefer not to repeat their mistake.
The Democrats’ plan is to bring the economy back, create jobs, bring “Trump Democrats” back into the Democratic fold and maintain or increase majorities in Congress at least through Biden’s first time and then beyond. In our opinion, the likelihood of a sustained and impressive economic recovery will depend on the U.S. government getting behind programs that make the economy more efficient and are driven by jobs at home. This will be possible if congress “bites the bullet” and passes not just the current rescue package but a substantial stimulus bill to follow.
In addition, the Biden administration is likely to allow increased immigration similar to what Reagan did. Reagan loosened immigration rules and offered paths to citizenship for illegals. It was the biggest surge of immigration since the 19th century and coincided with a U.S. economic boom.
Will Stimulus Spending Cause Inflation?
Economists like Larry Summers (former Treasury Secretary) warn that too much government spending will dump too much money into the economy and drive up inflation. Then the Fed will be forced to raise interest rates and that will cause a recession. However, according to Jerome Powell, the Fed chairman, they are in no hurry to raise rates if their stated 2% inflation target is passed and that the preferable course today is to spend and bring the economy back.
We have written about this already. Investments based on eventual recoveries of the hospitality and travel sectors should do well in the short term as Covid-19 recedes and especially if the proposed rescue package goes through. Infrastructure-related investments and investments tied to an increase in domestic manufacturing will do better if the proposed stimulus bill passes with all of the infrastructure and green energy bells and whistles attached. For more thoughts about investments for the post-Covid economic recovery follow these links.