Is Fiscal Policy Enabling the Soft Landing?

Below is a transcript of this week’s video.

Hi, this is Jason Pride, Chief of Investment Strategy and Research at Glenmede.

Traditional leading indicators, like the one provided by the conference board, have been hinting at higher-than-normal recession odds for some time now, yet the economy has continued to hum along, defying most economists.

A good portion of this resilience appears attributable to stimulative fiscal policy, which is historically unusual in the late stages of an economic cycle, but has been essentially ever-present since the pandemic. Such stimulus today comes just as tight monetary policy is likely to have its peak drag on the U.S. economy, offering a countervailing force that widens the pathway to a soft landing.

Further, it may be reasonable to expect further fiscal stimulus in 2024 as it is the 4^th year in the first term of a President’s administration. Historically, sitting Presidents have a tendency to pull every lever possible to get themselves re-elected and this time does not appear to be any different. As shown in the illustration, economic growth has historically been the strongest in the last year of a first term presidency and the year that follows.

Looking at today’s environment, several policies have already been enacted that could stimulate growth in 2024, such as the Inflation Reduction Act and the CHIPS Act. In addition, other provisions may be in the pipeline, such as the Tax Relief for American Families Act that is currently making its way through Congress. If enacted, this comes with front-loaded stimulus aimed at corporations and families.

The prospect of new stimulus opens up a range of possibilities that could materially reduce the odds of recession in 2024. Glenmede’s Leading Economic Indicator remains negative (though it has been improving). However, layering in the potential impact of new fiscal stimulus from the tax bill and potential release of employee retention tax credits could be enough to push it over the edge back into positive territory. The implied lower recession odds justifies a more constructive stance on equities, i.e. less underweight. However, investors must remain vigilant, as lower recession risk does not mean a downturn is completely off the table.

So to summarize, traditional leading indicators have pointed to a recession for quite some time that has yet to come. One of the reasons the economy has stayed so resilient has been stimulative fiscal policy, which is a late-cycle oddity. Administrations facing re-election have a big incentive to pull economic levers to maximize their election odds, which appears in progress again this year. A mix of previously enacted legislation (i.e., Inflation Reduction Act, CHIPS Act) and a new tax bill could provide this stimulus in 2024. As a result, investors should begin to get more constructive on risk assets, as fiscal policy has the potential to pave a wider pathway to soft landing in the U.S.

Thanks for listening! And please don’t hesitate to reach out with any questions.