By
Derek Hamilton
September 24, 2024
The US economy has held up much better than we and many others expected. We believe one of the main drivers of better-than-expected growth is the tremendous amount of fiscal support provided by policymakers.
The chart below shows the US federal budget balance with the unemployment rate. The budget balance appears as a blue line and is on an inverted scale, so a rising line means the deficit is widening. The US federal budget balance has correlated nicely with the unemployment rate throughout history. Whenever the budget balance deteriorated, the unemployment rate was usually rising. This relationship began to break in 2015 and completely dislocated after the pandemic.
Currently, the gap between the budget balance and unemployment suggests there is too much stimulus in the economy given where we are in the economic cycle. We hope a new administration will address the budget problems, but we have our doubts. One question that needs to be addressed is: what do policymakers do if the economy eventually dips into recession? If they limit stimulus for fear of budget deficits, the economy could experience a sluggish post-recession recovery. Conversely, if they boost the economy through aggressive stimulus, interest rates could move higher at some point in response to a worsening fiscal outlook.
Regardless, continued fiscal stimulus ultimately risks higher inflation and interest rates, but this issue will need to be addressed at some point.
US federal budget balance and unemployment
Note: Shaded areas on chart indicate a period of recession.
Sources: Macquarie, Macrobond, US Department of Treasury, US Bureau of Economic Analysis (BEA), US Bureau of Labor Statistics (BLS).
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