July/Early August 2021 — Northwood University McNair Center for the Advancement of Free-Enterprise and Entrepreneurship

Introduction

The University of Michigan’s Consumer Sentiment Index dropped 11 points from 81.2 in July to 70.2 in August. The index recorded a negative 13.5 percent month to month change with the index down 5.3 percent when comparing August 2020 to August 2021. The index is at its lowest level in more than a decade and has many worried about future growth in the U.S. economy. The above coupled with growing concern over the U.S. withdrawal from Afghanistan, border concerns in the southwest, increasing problems with the COVID-19 Delta variant and general gridlock in Washington, D.C., all seem to be adversely impacting the economy. An early August poll by Fox News shows President Biden’s approval ratings are now below his disapproval ratings on the economy, crime, and immigration; a dramatic shift from April in the same poll. The poll shows the President at 47 percent approval on the economy, 39 percent approval on crime, and only 35 percent approval on immigration.

Generally speaking, the Federal Reserve Bank of Atlanta’s GDPNow indicator is signaling strong economic growth for Q3, 2021, calling for 6 percent growth. However, this is considerably lower than predictions many economists had made for the third quarter, just a few months ago. Many economists as well as the GDPNow forecast were calling for double-digit GDP growth in Q3…which now appears to have been overly optimistic.

Key July/Early August Data

Positive and Negative Signs

Yet, there is much to be optimistic about, given the overall U.S. economy. The Wilshire 5000, Standard & Poors 500, the DJIA, and the NASDAQ have all been at or flirting with record levels. The Wilshire 5000 is just below 46,000, S&P 500 just above 4,400, the DJIA flirting with 35,200, and the NASDAQ just under 14,600 at the writing of this report. Crude oil is in a strong position at just under $70 per barrel for West Texas Intermediate Crude, while gasoline prices are nearly 45 percent higher than they were at this time last year due to inflation, increased summer demand, and generally higher local and state gasoline taxes. An ounce of gold is currently trading at under $1,800 an ounce, while the Ten-Year Treasury Bond Yield is at 1.3040, giving investors two sound indicators that inflation is under control. However, the above are out of sync when compared to the fact that the Consumer Price Index has been measuring 5.4 percent inflation year over year. We worry that gold and the Ten Year Treasury Bond Yield are lagging behind true conditions and that recent government monetary and fiscal policy are the driving factors behind our current and expected higher future inflation rates. This is evidenced by the fact that transportation services are up 6.4 percent over the same time a year ago, and overall inflation minus food and energy is up 4.3 percent from a year ago, according to the U. S. Bureau of Labor Statistics.

Current Issue

Government Spending – recently the U. S. House and the Senate passed a $1.2 trillion dollar preliminary infrastructure bill calling for $73 billion dollars to be spent on electric vehicle charging stations whose location will be determined by the government rather than the market, $65 billion dollars for internet access to increase internet access in yet to be determined areas, $50 billion dollars for clean water, and “getting rid” of all lead pipes, the scope of this spending has yet to be determined as well, $25 billion dollars for airports, $66 billion dollars for railroads, $39 billion dollars for mass transit; all yet to be determined; with only $110 billion dollars for roads and bridges or what we would traditionally call infrastructure. There is obviously much more pork that we have outlined in the $1.2 trillion dollar infrastructure bill with much negotiating left to do before it is finalized. What is most disappointing is the fact that the U.S. Congressional Budget Office is indicating that this bill if passed as is, will add more than $250 billion dollars to the U.S. deficit over the next ten years, while the Wharton School at the University of Pennsylvania’s research indicates it will add more than $300 billion dollars to the deficit.

In addition, the Democratic party is pushing for what they are currently labeling a $3.5 trillion dollar budget resolution package which has among its yet to be defined content: a) a path to citizenship for all immigrants living in the United States, b) yet to be defined tax hikes on the wealthy and corporations, c) major expansions in government healthcare, d) universal pre-K, e) free community college, and f) funding for climate change initiatives, according to the U.S. Senate budget committee. Numerous experts including our McNair Center, estimate if the bill is passed as currently outlined, the cost will be more like $5.5 trillion dollars over the next 10 years, rather than $3.5 trillion dollars as is currently being promoted, due to the fact that short-term programs like universal Pre-K and free community college tuition will become permanent. This will drive the cost to at least $5.5 trillion dollars and add at least $2 trillion dollars to the U.S. national debt.

With many in this country and abroad, worried about current American economic and military competitiveness, will certainly continue to lose confidence as our national debt will continue to grow and taxing wealthy individuals and corporations will create less confidence in the United States as a place to invest, driving up prices for consumers and giving the wealthy and businesses reasons to shelter their money and move investments overseas. Lastly, the U.S. national debt currently stands at $28.652 trillion dollars, which is now $85,975 per capita and $227,474 per tax payer. The current fiscal year federal budget deficit is almost $3.3 trillion dollars with almost a month and a half left in the curent fiscal year. The U.S. federal debt to GDP ratio is almost 126%, dramatically higher than the 34.64% ratio in 1980.

Conclusion

Many great civilizations have declined or collapsed due to: a) excessive deficit spending by the federal government, b) loss of control in the economic decision-making process by business owners, with increasing decisions being made by government rather than the market while c) the value of money becomes watered-down to the point that it is too late to reverse. According to The Inflation Calculator, the value of the U.S. dollar today buys 6.56 percent of what it bought in 1921. Our national debt is approaching third world status, our government is controlling an ever-greater segment of our economy, and America’s economic and military competitiveness is being questioned like never before. Perhaps a fall from greatness for the American economy will not happen in our lifetime, if not what are we leaving our children and grandchildren?

Contact Us

Comments or questions should be directed to Dr. Timothy G. Nash at: tgnash@northwood.edu. The NU Outlook is a monthly publication of The McNair Center for the Advancement of Free Enterprise and Entrepreneurship at Northwood University. This month’s publication was co-authored by McNair student scholar, Kristin Tokarev. To view Northwood University’s Monthly Economic Outlook Newsletters from previous months, please visit: mcnair.northwood.edu/mcnair-economic-outlook. For more information about Northwood University, our academic programs and enrollment opportunities for students, visit www.northwood.edu.