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Could fiscal spending delay a 2024 recession?

In a word: yes. We can use the pandemic and subsequent government support as an example. In 2020 and 2021 when the global economy came to a halt, the U.S. government injected a whopping $4.6 trillion into the economy. This support not only bolstered lower-wage workers, who are more inclined to spend than affluent workers, thereby fueling economic activity but also proved to be more effective than monetary support due to its targeted, direct, and immediate impact. Given that presidents tend to increase spending in the last year of their term there's a strong belief that fiscal measures could sustain the economy through the election period, potentially averting a recession in 2024.

In the table below, we outline each of the current fiscal spending plans that is expected to support economic growth this year.

2024 fiscal supports 

Sources: GDP estimates provided by Strategas and Piper Sandler

 

Are there risks involved with this spending?

Yes, excess government spending fuels two key risks, both of which could lead to higher yields.

  • Inflation: Fiscal stimulus measures mitigated the economic fallout of the pandemic, but they also boosted demand which caused prices to rise. This situation was further compounded by supply-side constraints, such as transportation and labor shortages, which drove up production and shipping costs, also contributing to inflationary pressures. Further spending from the government could exacerbate this situation, pushing prices and nominal yields even higher.

  • U.S. Treasury debt rating downgrade: The U.S.’s fiscal outlook is worsening with rising debt and interest payments as a percent of GDP. As it worsens, the potential U.S. debt could be downgraded rises. We’d expect to see upward pressure on yields if any of the rating agencies downgrades the U.S.’s credit rating.
     

Portfolio strategy

If recession isn’t the top risk of 2024, then it’s a reacceleration of inflation. Renewed inflation concerns would likely be driven by a reacceleration of growth in tandem with substantial fiscal support. In this case, we’d expect equity market breadth to widen to include cyclical sector stocks like industrials and energy. Long duration bonds may see some pain if rates move higher.

It’s also worth noting that every time since 1944, when a presidential incumbent was on the ticket the S&P 500 ended the year higher. The government is also well funded – a chart of the Treasury General Account (TGA) is provided below – and the balance is expected to rise with tax collections in April. We expect the government to spend a majority of the TGA through the end of the year. Past TGA drains have coincided with risk-on sentiment. 

It’s important to remember, avoiding a recession in 2024 does not herald a soft landing. Instead, we see the economy overheating given that core inflation is still high – and that may be a more pronounced risk for the economy and markets in the medium term. We pointed out this possibility in our 2024 outlook – Choose your own adventure  – and also see inflation-linked assets like TIPS and commodities supported by higher prices. This scenario would likely extend “higher for longer” rates so, on the duration front, consider remaining neutral or lower while taking risk in higher yielding corporate bonds.

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