Though most of the focus has been on the 2020 presidential election and the surge in Covid cases, Leuthhold Group's Chief Investment Strategist Jim Paulsen is telling investors and US businesses to be prepared for a potential 'growth bomb' to hit the economy over the next 12 months.
Here's what he had to say in a recent interview with FS Insider (see 'Growth Bomb' to Hit Over Next 12 Months, Says Jim Paulsen for audio).
Solid Signs of a Rebound
The rebound in economic activity is more durable than many think, Paulsen stated, and is likely to continue through 2021.
The largest factor many people seem to be underestimating is the amount of fiscal and monetary spending already in place. Typically, Paulsen noted, this takes a year to begin having an impact on economic growth.
“There's a well-established relationship between, for example, money supply growth with about a 1-year lag to real GDP growth or earnings growth... We're just now getting to that window, and we’ll probably have to wait until the first quarter of next year, where a lot of the past policies will really start to show up and help the economy in a much greater way.”
The impact of Covid-19 going into next year may also be muted with the prospect for a vaccine (as news was just released with the potential for a highly effective vaccine by Pfizer) and even better treatment options changing the fear factor for 2021. If these materialize, it should boost confidence. Covid is still a risk, but we appear to be learning how to live with it and treat it better.
Already, confidence appears to be returning in the private sector, Paulsen stated. The behaviors he’s seeing in the private sector don't match the national narrative that the economy is hanging by a thread and a surge in Covid-19 is going to wreak havoc.
The GDP print for the third quarter at 32 percent was great, but it’s more important to look at what it was made up of, Paulsen stated, which was very strong business investment spending on capital goods and also by big-ticket, durable item spending by households, housing activity and by auto sales.
“In other words, this is not the type of spending you do — either businesses or consumers — if they're really worried that the economy is just about to crater... This is spending that's done only if you're confident about the future. You don't buy a house or a big ticket item if you think you're going to lose your job.”
Savings Let Loose?
More important than the GDP print, is the data we're getting for the month of October. We had another fantastic unemployment claims and continuing claims number that's fallen all month long, suggesting a possible million-job gain in employment for October.
We're starting off the fourth quarter in very strong fashion, Paulsen stated. Another important consideration is that we have a 14% savings rate in the household sector, which is among the largest in post-war history.
Combine that factor in an economy with virtually no inventories, which were liquidated by a record amount in the second quarter, and we have a powerful combination for growth.
The impact of low inventories in the housing industry is already showing what this combination is capable of producing, Paulsen noted. If this same dynamic takes hold in a broader fashion, we may see explosive growth.
“Imagine that same phenomenon going on across the entire economy... All you have to do is add a little confidence, and that 14% savings rates relative to no inventories is like a bomb—a growth bomb—going off for the economy. If savings rates go to 10%, it’s going to create a need to hire a lot of people, produce a lot more output, and try to resupply shelves across the economy. I think growth is going to be very good, not only in the current quarter, but next year as well.”
To listen to our full-length interview with Jim Paulsen at the Leuthold Group, click here. If you're not already a subscriber to our FS Insider podcast where we regularly interview book authors, strategists and industry experts from across the globe on all things economics, finance and markets...
Written by Ethan D. Mizer