Here’s a riddle: What is both too hot and too cold? Answer: The economy of the United States in the summer of 2021.
This is the general formula that follows in economic data; changes in financial markets; anecdotes from businesses; and experiences of ordinary people who are simultaneously enjoying higher incomes and facing higher prices and shortages.
In a mid-2021 economy, employers are offering higher wages to attract scarce workers; The airport and car lots are bustling; And the GDP report coming out next week will likely show blockbuster growth. It is also an economy in which inflation is outpacing the wage benefits of many workers; The share of the working population is well below epidemic levels; And bond markets are priced at levels that suggest a high risk of a return to slower growth in the coming years.
Inevitably, the economy is having a hard time rebooting itself, which was likely in the prime days of spring, when many Americans were being vaccinated and stimulus payments were affecting checking accounts.
The Biden administration and the Federal Reserve are betting they can achieve a smooth transition to an economy that enjoys prosperity without hopelessly high inflation. But for this to happen, there has to be a huge mismatch between the economy-wide demand for goods and services and their supply. It is not clear how long this will take.
“I think we should have expected the economy to reopen after this unprecedented shock,” said Karen Dinan, a Harvard economist and a former Federal Reserve and Treasury official. “We’ve seen severe friction, and it’s entirely reasonable to expect those frictions to continue.”
Consumer demand for goods and services is exceptionally high, as Americans spend their stalled savings, government stimulus payments and higher wages. Retail sales were 20 per cent higher in the previous month as compared to June 2019.
But businesses are having a hard time ramping up production to meet the demand that forecasters expected in the spring. This has been particularly evident in the case of cars, where a lack of microchips has hindered production.
But supply constraints are evident in all types of industries. latest survey Manufacturers of the Supply Management Institute cited complaints from manufacturers of furniture, chemical products, machinery and electrical products about the difficulties of meeting demand.
This is creating price inflation that is enough to make it unclear whether wage increases are actually leaving workers better off. Average hourly earnings in the private sector grew at a slower rate than the Consumer Price Index in each of the first six months of the year.
Because of the unique circumstances of the post-pandemic reopening, those numbers most likely underestimate the wage increase that a typical worker has experienced, but it’s clear: workers are receiving higher wages, yes, but they They are also paying more for the things they buy.
Much of this appears to be “temporary” inflationary pressures that are set to ease, and in some cases the opposite. The barriers are set to be resolved – for example, timber prices have fallen sharply in recent weeks, and used car prices may eventually stabilize at a higher level. But there are also slow-moving effects that could dent the dollar’s purchasing power for months to come.
Fares have started increasing rapidly, according to a range of data source. And businesses facing higher prices for supplies and labor may be in the early stages of passing those higher costs on to consumers. The Producer Price Index, which tracks the cost of supplies and services companies buy, rose 1 percent in June, an acceleration from April and May. This is a sign that the forces of inflation are still working their way through the economy.
Paul Ashworth, chief U.S. economist at Capital Economics, used the term to refer to the combination of stagnant growth and inflation, saying, “We call it the inflation hit.” “The actual growth isn’t weak, but it’s not as strong as we thought it was going to be. There was a lot of optimism, and now things are coming back to earth a little bit.”
The labor market is the most obvious example of a market that is simultaneously too hot and too cold.
Traders are complaining of labor shortage and are giving all kinds of inducements to attract workers. Yet the unemployment rate remains a recession-like 5.9 percent. And the share of adults in the labor force – either working or looking for work – has remained essentially flat for months, failing to make clear progress to return to its former levels. It was 63.3 per cent in February 2020 but has jumped around 61.4 per cent and 61.7 per cent for more than a year.
Individuals may be making rational choices for themselves not to work. For example, older workers may retire a few years earlier, or families may decide to receive from one income instead of two. But overall, suppressed levels of labor force participation will limit the productive capacity of the economy.
Hanging on to all this is a lot of uncertainty over whether the delta version of the coronavirus will trigger a new wave of disruption in commerce – both domestically and overseas in places with low vaccine availability. That concern has helped to cause major volatility in global financial markets, whose prices are rising in such a way that the coming years will see a warming of 2020 similar to a sluggish 2010.
In the first three months of the year, long-term bond yields rose and yield curve – which refers to the difference between short-term and long-term interest rates – constant. They are both indicators that investors expect higher growth rates going forward.
it’s reversed recent weeks. The 10-year Treasury yield was at 1.22 per cent on Tuesday, down from a recent high of 1.75 per cent at the end of March.
Where does all that leave the very hot, very cold US economy? A lot of work has been done to enable the economy to reopen, and there is no shortage of demand from Americans who are feeling flush. But unless the economy finds a new equilibrium of prices, wages, production and demand, things are not going to look good.