Fiscal flows (government spending) might be slowing down. Maybe it's a little too early to know for sure and I will need to see more data, however, that's the way it sort of looks at the moment. It looks like government spending peaked in early August.
When I say peaked, I don't mean total spending, which is still rising and on track to come in at around $4.55 trillion for the fiscal year. That would be just shy of the record, the 2009-fiscal-stimulus-year of $4.58 trillion.
While the spending this year has been very strong, the difference is that the economy is only growing at barely 1% annually. In contrast, 2009 finished with a 3.9% growth rate, so you can see the very formidable economic drag that the economy has been facing all this year. It's also being felt by most asset markets, stocks included.
Most of you know I look at spending flows obsessively to forecast what is going to happen with the economy and with the stock market. I've been consistently correct because I know that spending flows drive everything.
In the past, I've used the analogy of a swimming pool where government spending is represented by a hose filling up the pool. There are leaks in that pool, like taxes and saving and imports, so those are things that you have to be aware of if you are going to predict whether the water level will rise or fall. The level of water represents the economy. (You can also substitute the stock market if you like.) Depending on the rate of flow, the pool will either be filling up (flow greater than leakage) or going down. (Leakage greater than flow.)
This year, the water's been flowing into the pool just fast enough to keep the level of the pool rising, but very slowly. If the flow is now turned back, even a little, then we could be in trouble. The water may cease to rise or, worse, it could begin to drain out. The latter would represent a recession.
So, it's very important that the flow remain at least at the rate it's been going or faster. It mustn't slow down, but right now it looks like it's slowing down a little bit. That's why I need more information and that information will be coming in the next couple of days.
Here's another thing to consider. Since the fiscal year is ending this month, Congress will need to come up with a budget before Oct. 1, but that's probably not going to happen. In order to avoid a government shutdown, which neither the Democrats nor the Republicans want in an election year, they're probably going to pass a Continuing Resolution that fixes spending at current levels until at least December, maybe even all the way through to next March. (But December is looking to be the likely deal right now.)
That would be good. On the other hand, any deal that cuts spending, even a little bit, won't be good for the stock market or for the economy, in my opinion.
This comes at a time when the Fed is as close as it has been in nine months to raising rates again. Goldman Sachs even came out and made a prediction that the Fed will raise at the meeting on Sept. 21. How ironic that would be? They waited and waited and waited and then they move at a time when the fiscal picture might be deteriorating? I wouldn't put it past them. Things could get rough if all those ducks line up the way I just described.
It's not time to worry yet. It's still too soon to know for sure, but maybe, just maybe, the weather might be changing.
I will keep you updated.