Experts Share Insight on the Future of the U.S. Economy

When some city leaders hear the term “assets,” their first thoughts may include natural resources or tourist attractions in their communities.

Georgia’s Cities caught up with two investment experts to talk another type of investment and the state of the U.S. economy.

Kristian Hooper

Kristina Hooper CFP®, CAIA, CIMA®, ChFC®

Kristina Hooper is the chief global market strategist at Invesco. In this role, she leads Invesco’s Global Market Strategy Office, which has strategists on-the-ground in North America, Europe and Asia. Hooper and her team formulate macro views of the markets and economy, examine the investment implications of those views, and share their insights with clients and the media around the world.

Marvin Flewellen

Marvin Flewellen CFA®

Marvin Flewellen is head of client management for investments at Invesco. In this role, he is responsible for the overall leadership of client deliverables and engagement for institutional mandates globally within the public markets on the Invesco platform. These responsibilities involve client onboardings, client meetings, client updates, client transitions and client trainings. In addition, Flewellen is responsible for client portfolio management activities across several market segments, such as insurance and sovereigns.

GC: What are the impacts of fiscal stimulus on the U.S. economy?

KH: Fiscal stimulus refers to government policy that attempts to stimulate the economy either through in- creased government spending or a reduction in taxes or regulations. Fiscal stimulus is typically employed when an economy is weak or in recession. I believe it is usually a necessity to shorten recessions and restore growth; however, it does not come without consequences. Governments usually have to borrow to pay for the additional stimulus, adding to the national debt.

GC: Is additional fiscal stimulus needed?

KH: Absolutely. The job gains in the U.S. are partially attributable to fiscal stimulus such as the Paycheck Protection Program (PPP). Programs like this need to be extended. One area of disappointment in the U.S. jobs report was government jobs. Between April and May, there was a loss of more than one million government jobs. Without fiscal support from the federal government, we are likely to see more job losses. Public employment represents about 13 percent of the work- force, so it is a serious concern.

The EU realizes that more fiscal stimulus is needed; hence the proposal for significant fiscal support de- spite improved economic data. China also continues to provide significant stimulus even though economic data is improving. Some U.S. policymakers will look at the economic “green shoots” we have seen and conclude no more fiscal stimulus is needed. To the contrary—recent economic data proves that fiscal stimulus needs to continue.

GC: How might direct fiscal stimulus to local governments benefit the economy in Georgia?

KH: Georgia has a balanced budget requirement. In April, tax collections dropped approximately $1 bil- lion. From mid-March through April, 1.4 million jobless claims were processed. Local governments are also suffering from reduced revenues and, in some cases, increased expenditures.

The HEROES Act, which has passed the House of Representatives but is unlikely to pass the Senate, provides for $916 billion in local and state government relief broken down to $500 billion for states and $376 billion to local governments (the rest going to tribes). This could help state and local governments shore up their budgets and prevent some layoffs and critical spending cuts.

GC: What are your expectations for the near/ mid-term future of the U.S. economy?

KH: My base case is that the economic recovery in its initial stages is slow and uneven. Think of it as a “swoosh”-shaped recovery. This is dependent on a variety of factors: infection rates, fiscal policy, monetary policy, public health policy including the severity—or “stringency”—of lockdowns, progress towards the development of therapies and a vaccine. It is also impacted by consumer and business behavior. My views can shift meaningfully given the large amounts of un- certainty today.

GC: What has been the effect of COVID-19 on fixed income/bond markets?

MF: COVID-19 has had a negative impact to valuations within the fixed income/bond markets, despite the aggressive rate cuts by the Federal Reserve. The economic impacts of shelter-in-place polices globally have been severe and risk premiums have escalated on a record setting pace. In March 2020, over a two- week period, the investment grade corporate credit market experienced its worst five consecutive days in its recorded history and its best five consecutive days. Volatility was exceptionally high. Amid the economic shutdown and rising volatility, consumer-based sectors significantly underperformed comparable based treasuries, such as transportation, hospitality, energy and retail. Rating downgrades were inevitable.

GC: Are most bond markets now operating normally?

MF: Market activity has been operating normally across most sectors, despite the persistent risk of eco- nomic woes globally. While the policy support has fostered a “normal” market environment, the risk to market activity remains a second wave of COVID-19 and to what degree investors and industries begin to wane. The market presently feels somewhat immune to the risk case scenario of a prolonged COVID-19 environment, but sentiment can change quickly given the fluid nature of the virus and its impacts on human and market behaviors.

GC: What are your near-term expectations for municipal bond rates?

MF: Much of the burden of the fiscal and monetary stimulus packages resulting from the government’s response to COVID-19 will likely fall onto taxpayers. This should make the tax exemption provided by municipal bonds more attractive to investors. The economy had experienced an unprecedented period of growth prior to the pandemic, resulting in strong balance sheets and ample cash on hand among many municipal issuers.

GC: How might these changes in municipal bond rates effect local governments that issue debt soon?

MF: The federal government has taken decisive action to support the municipal marketplace and municipal issuers. The Municipal Liquidity Facility (MLF) was established to provide market access for states, large cities and large counties. The establishment of the MLF has provided comfort and stability to the market. This has resulted in municipal interest rates decreasing over the last couple of months, allowing issuers to access the market through normal primary market activity.

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