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The economic situation is strange.
The United States added 263,000 jobs last month and grew nearly 3 percent annually in the third quarter of this year. At 3.7 percent, the country's unemployment rate remains near record lows. Meanwhile, inflation, long the specter of the Biden economy, finally appears to be abating. The Consumer Price Indexonly increased 0.1 percentbetween October and November. The annualized inflation rate is now 7.1 percent, down from a peak of 9.1 percent in July. Furthermore, gasoline is the most politically sensitive price in the US.less today than a year ago.
In other words, payrolls have risen and economic growth has accelerated while consumer prices appear to have stabilized. Look up at this data and you can begin to see the contours of a Goldilocks economy, characterized by low inflation and high employment, looming on the horizon.
But that's not what most economists see. forecasterdisputedVonthe street wall diaryin October put the probability of a US recession next year at about 63 percent. Some analysts, like asset manager Vanguard, are calling for a recession in 2023.it's anything but safe.
And not without reason. With the demand for goods and services outpacing our economy's ability to produce them at (relatively) stable prices, the Federal Reserve intends to further stifle spending and investment by raising interest rates. When borrowing costs rise, consumers tend to withdraw and Entrepreneurs cut investments. This leads to lower demand for labor, which puts downward pressure on wages and therefore prices. But historically, the cost of fighting inflation through higher interest rates has been higher unemployment and recession.
The Fed fast price increase in 2022, and while it's about to slow down over the next year, it has no intention of changing course. Rate-sensitive sectors are already reeling as US new home sales plunge in November retail salesfell 0.6 percent, the most pronounced monthly decrease of the entire year. Meanwhile,production falls, companies delay capital plans, CEOs lose confidence and households doburn your savings.
For these reasons, virtually all analysts believe the US economy will slow over the next year. But the ugliness of the economic landscape is in the eye of the beholder. Some forecasters expect a painful global recession, followed by a lackluster but persistently inflationary recovery. Others claim that the United States will achieve price stability without suffering a recession. Here is the reason for their different views.
Why the US economy could be headed for a painful recession and a lackluster recovery.
The case for pessimism begins with some undeniable data points. Thanks to inflation, the real purchasing power of Americans has been falling for more than a year, Vanguard illustrates in a recent report.
Normally, a sharp fall in real wages would lead to a fall in consumer spending and thus a slowdown in growth. But the pandemic boosted Americans' savings: The vast majority of workers kept their jobs during the COVID crisis, but their wages were supplemented by relief checks and their spending was constrained by shutdowns. Between 2010 and 2020, American households saved an average of 7 percent of their income. In April 2020, that rate rose to 33.8 percent. As of the summer of 2021, Americans collectively had $2.3 trillion in their savings accounts.
So instead of responding to falling wages by tightening their belts, consumers have reduced their cash reserves. But that's not a permanent recipe for maintaining demand. In October, the personal savings rate for Americans fell to a staggering 2.3 percent. At some point, US consumers will collectively walk away from their balance sheets, cringe at the cost of credit, and then perhaps take a look at their skinny 401Ks, and start making flashy, discretionary purchases off their shopping lists. . In fact, the retail data for November suggests that we are already at that point. This drag on aggregate demand is exacerbated by stronger contractions in the sectors most sensitive to rising interest rates. US new home sales are down 25 percent this year.
With all that said, no one denies that an economic slowdown is imminent. What is at stake is the severity of that slowdown and the quality of the recovery that follows.
Thus, the core of the pessimists' argument has less to do with discrete data points and more to do with a general theory of how the global economy is working.
First, the populations of developed countries are aging and this weighty demographic pyramid is beginning to falter. A large number of Americans were already on the cusp of old age retirementBeforethe pandemic, but this process has accelerated as workers in their 60s have been pushed to the margins of the labor market. The labor force participation rate has fallen sharply in 2020 and is yet to return to pre-pandemic levels. According to BlackRock, this is mainly due to a wave of retirements, which is causing a decline in the US job supply.NeverReturning to its 2019 size.
The aging of the population is theoretically inflationary. And for one simple reason: more retirees means fewer employees contributing to the supply of goods and services.nofewer consumers demand them. However, when an aging population reduces demand in some sectors, it increases demand in others. Developed economies must find ways to meet the high and growing demand for health services with a small and declining prime-age workforce.
The second pro-inflationary structural change in the economy is the “just in time” end of global supply chains. This change is happening on two fronts. First and foremost, globalization is being reversed thanks to growing geopolitical rivalries. This is most evident in the West's continuing efforts to end its dependence on Russian raw materials after the war in Ukraine. But weAttempts to restrict trade with China— and Beijing's own plans to reduce its economy's dependence on foreign markets — may be more significant in the long run.
In any case, the desire of governments to prioritize the geopolitical compatibility of major supply chains over mere efficiency put upward pressure on inflation. For four decades, China's labor discipline and cost-minimizing global supply chains have driven down the prices of American raw materials. Now geopolitical imperatives will make global production less efficient, making goods more expensive.
At the same time, the pandemic and the war in Ukraine have warned business leaders about the dangers of prioritizing efficiency over resilience. To protect against future shocks, companies will now be more inclined to build some slack in their supply chains and hold larger inventories, measures that will increase the resilience of their operations at the expense of higher production costs.
The final structural tailwind of inflation is the green transition: As more critical minerals are needed for electric vehicle batteries, fewer are available for cell phones. The more construction workers needed to build transmission lines, the fewer will be available to the housing industry.
There is also a risk that some forms of fossil fuel production will decline faster than clean energy can replace them, whether for technical or political reasons. Even in the most optimistic scenario, emerging markets will remain heavily dependent on fossil fuels for the next decade. But maintaining productivity in a sector that is believed to be in decline is not easy, because bothCapital cityYTalentemigrate to another place.
Thus, until the green transition reaches its maturity stage, the global energy system may become more vulnerable to congestion and shocks, while the resource demands of the green expansion may drive up the prices of various commodities and forms of work.
In the short term, all of this increases both the probability and the potential severity of a recession next year. Because anything that restricts the ability of the supply side of the economy to grow in response to demand, whether it's a shortage of prime-age workers, inefficiencies in supply chains, or energy crises, will put more pressure on the Federal Reserve. to enforce prices. stability by reducing demand.
In BlackRock's view, if the Fed is truly determined to bring inflation back to 2 percent, it needs to create nothing short of a deep recession, as the productive capacity of the US economy has fallen far short of its 2019 trend line.
BlackRock doubts the Fed has the courage to do so,argue that “Recessive policy” will kick in and the central bank will be forced to lower interest rates. Crucially, however, persistent inflation in this regard will prevent the Fed from fully shifting gears and fighting a recession with aggressive interest rates.cortesand quantitative easing, as was the case during the 2009 and COVID recession.
That means the US can expect a sharp rise in unemployment in 2023, followed by a lackluster recovery characterized by weak growth and (relatively) high price levels.
However, precisely because the US economy suffers from labor shortages, the unemployment rate is unlikely to rise to the levels seen during the past two recessions. Vanguard's macro team is bearish on the economy as a whole in 2023, forecasting US GDP to grow by 0.25 percent (the consensus estimate is closer to 1 percent). Still, he doesn't expect unemployment to rise much more than 5 percent in the new year.
The arguments of the pessimists, therefore, refer to both the medium term and the immediate perspective. The problem is not so much that next year will be difficult economically, but that the next few years will be disappointing, at least compared to the economy we had in 2019.
Why the Fed could cut prices without triggering a recession.
To some extent, the call for economic optimism reverses the Council's logic of BlackRock's desperation. The latter emphasizes that much of the inflation is due to supply constraints and concludes that the Fed will therefore have a hard time cutting prices without draconian action.
Optimists emphasize the contribution of supply-side restrictions to inflation. But they see reason to believe that the Fed can lower prices.sinplunge the economy into recession.
While bears focus on structural impediments to supply growth, bulls take heart from short-term trends. Goldman Sachsarguethat several markets are finally recovering from pandemic-related shocks to supply availability. As the COVID crisis made all sorts of in-person services either unavailable (due to lockdowns) or desirable (due to infection risks), consumers in the developed world reduced purchases of yoga classes. , theater tickets and holidays, and increased spending on delivery. estate. Naturally, this overwhelmed various supply chains, from shipping to transportation to semiconductors. But now, as Goldman points out, consumers are shifting their spending away from goods toward services. And while this puts downward pressure on prices in the services sector, rebalancing reduces the mismatch between supply and demand and therefore inflation.
In addition to increasing demand for manufactured goods, the pandemic triggered a housing boom. As wealthy consumers spent more work and play time at home, they began to want more square footage. However, like the increase in demand for goods, this was a one-time shock. Now that the pandemic is subsiding, the number of remote workers is decreasing, and the pressure on the rental market is easing. Since mid-2021, the rate of rent increase for new rentals has slowed considerably.
As Alex Williams of Employ AmericaObservationsstarted this slowdown in rental ratesBeforeThe Federal Reserve rate hikes should have had a noticeable impact on the rental market. Therefore, it appears that the sector is deflating on its own, as one would expect if the increase in rents from 2020 to 2021 were the result of a single spike in demand. This hypothesis is consistent with the exceptional outflow of migrants from urban centers during the pandemic: as households sought more space in lower-cost suburban areas, rents there shot up faster than the decline in inner-city rents ( as there was a sizable population of aspiring New Yorkers, San Franciscans, etc. willing to move to these cities as soon as housing there becomes a little more affordable).
In Goldman's view, these disinflationary pressures will allow the Fed to lower prices without collapsing the economy. However, the central bank will continue to raise interest rates, which will weaken the labor market. But that will only raise the US unemployment rate by 0.5 percentage point to just over 4 percent, thanks in part to the peculiar shape that "overheating" in the labor market has taken in the past two years.
In previous periods of inflation, excess demand for labor translated into extremely low unemployment. But during the post-COVID boom, excess demand has manifested itself in an exceptionally large gap between job openings and applicants. In Goldman's calculations, that gap between offers and workers peaked at nearly 6 million. When economic conditions deteriorate, companies typically cut back on hiring before cutting back on existing staff. Thus, these excess job openings serve as a buffer against layoffs: Fed rate hikes must kill off these potential jobs before they deeply reduce real payrolls. The gap between jobs and workers has already narrowed to just over 4 million. But that still gives workers significant protection against falling demand.
Of course, the decline in job openings still hurts workers. And for those already unemployed, that means missing out on job opportunities. But the loss of potential jobs does not reduce the purchasing power of consumers as much as the loss of existing ones.
Real disposable income is currently recovering since the beginning of the year, when rising inflation and falling public spending weighed on household balance sheets. And since Goldman doesn't expect the Fed to trigger a recession, the bank expects real disposable income to rise significantly by the end of 2023.
In short, the disinflationary impact of post-pandemic normalization will make it easier for the Fed to reduce inflation without eroding the labor market, while consumer resilience will keep the economy out of recession in early 2023 and accelerate growth. until the end of the year.
Goldman doesn't exactly miss BlackRock's long-term structural economic liability forecasts. And I am not going to detail any here. But it's worth noting that just a few years ago, many economists believed that the world existed.stuck in a near-permanent state ofweakdemandand structurallowInflation: As an aging population reduces demand for consumer durables, spending has increasingly shifted toward digital goods with low marginal costs of production, and automation and artificial intelligence promise to boost productivity. If the green transition threatens energy shocks in the short term, it should ultimately be dramaticto reduceelectricity and fuel costs.
Ultimately, our economic future is radically uncertain. As COVID has shown, unpredictable shocks can transform our material lives in a matter of weeks. And like recent advances inAYfusionTo illustrate energy, technological advances can rapidly change the nature of our economic problems. The US economy will almost certainly slow down next year. Maybe a lot. Hopefully a little. Also, it's probably best to do what Goldman, BlackRock and Vanguard advise: hedge your bets.
- the economy
- the federal reserve
- Jerome Powell
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