Here’s a riddle: What is both too hot and too cold?
The answer: the American economy in the summer of 2021.
This is the common thread that emerges from the economic data, the changes in financial markets, the anecdotes of the companies and the experiences of ordinary citizens who, at the same time, enjoy higher income and face higher prices already scarcity.
The Federal Reserve Building in Washington DC. / AFP PHOTO / KAREN BLEIER.
In the mid-2021 economy, employers are offering higher wages to attract scarce workers, airports and parking lots are crowded, and next week’s GDP report is likely to show spectacular growth.
It is also an economy in which inflation is outpacing salary increases Of many workers, the proportion of the working population remains well below pre-pandemic levels and bond markets are trading at levels that suggest a high risk of reverting to a crisis. slow growth in the next years.
Essentially, to the economy it’s taking longer to restart than seemed likely in the heady days of spring, when many Americans were vaccinated and stimulus payments hit checking accounts.
The government of Biden and the Federal Reserve they are betting on a smooth transition to a prosperous economy without frustratingly high inflation.
But for that to happen, a huge mismatch will have to be resolved – between the demand for goods and services throughout the economy and their supply.
It is unclear how long that will take.
“I think we should have expected friction to reopen the economy after this unprecedented shock,” said Karen Dynan, a Harvard economist and former Federal Reserve and Treasury official.
“We have seen serious frictions, and it is entirely reasonable to expect those frictions to continue.”
Consumer demand for goods, and increasingly for services, is exceptionally high as Americans spend their pent-up savings, government stimulus payments, and higher wages.
Retail sales were 20% higher last month than in June 2019.
But companies have had a harder time ramping up production to meet that demand than forecasts had expected in the spring.
This has been especially evident in the case of automobiles, where the microchip shortage has limited production.
But the shortage of supply is evident in all kinds of industries.
The latest survey of manufacturers from the Institute of Supply Management cites complaints from manufacturers of furniture, chemicals, machinery and electrical products about difficulties in meeting demand.
This is creating price inflation that is strong enough to make it ambiguous as to whether wage increases are actually making workers better off.
Average hourly earnings in the private sector increased faster than the consumer price index in each of the first six months of the year.
Due to the unique circumstances of the post-pandemic reopeningThose numbers probably underestimate the wage increase a typical worker has experienced, but the bottom line is clear: Workers are earning higher wages, yes, but they are also paying more for the things they buy.
Much of this appears to be inflationary pressures. “transitory“They are going to decrease, and in some cases reverse.
The bottlenecks are about to be resolved; for example, the prices of the wood have fallen sharply in recent weeks, and the prices of used cars they may finally be stabilizing at high levels.
But there are also slower effects that could reduce the purchasing power of the dollar in the coming months.
The rentals They are starting to increase considerably, according to a number of data sources.
And companies facing higher prices for supplies and labor may be in the early stages of passing those higher costs onto consumers.
The producer price index, which records the costs of supplies and services that companies buy, rose 1% in June, which represents an acceleration compared to April and May.
This is a sign that inflationary forces may still be at work in the economy.
“We call it a whiff of stagflation,” said Paul Ashworth, chief US economist at Capital Economics, using the term for a combination of stagnant growth and inflation.
“Real growth is not weak, but it is not as strong as we thought it would be.
There was a lot of optimism, and now things are getting a bit down to earth. “
The working market it is the clearest example of a market that is simultaneously too hot and too cold.
Companies complain about labor shortages and offer all kinds of incentives to attract workers.
However, the unemployment rate is 5.9%, as if it were a recession.
And the share of adults in the workforce – working or looking for work – has remained essentially flat for months, with no clear progress made to return to its pre-pandemic level.
It was 63.3% in February 2020, but has ranged from 61.4% to 61.7% for more than a year.
Individuals can make rational decisions not to work.
Older workers may retire a few years earlier, for example, or families may decide to get by on one income instead of two.
But overall, the low levels of labor force participation they will limit the productive potential of the economy.
Above all this weighs the great uncertainty of whether the delta variant of the coronavirus will create a new wave of trade disruptions, both at home and abroad, in places with less vaccine availability.
That concern has contributed to big swings in global financial markets, which are trading more and more in ways that suggest that the years ahead will be less like the roaring 2020s and more like the slow 2010s.
In the first three months of the year, the yields of the bonds long-term skyrocketing, and the yield curve – which plots the difference between the interest rates in the short and long term – it got steep.
Both are usually indicators that investors expect higher growth rates in the future.
This has been reversed in recent weeks.
The 10-year Treasury yield stood at 1.22% on Tuesday, down from 1.75% at the end of March.
Where does all this leave the American economy, too hot and too cold?
A lot of work has been done to allow the economy to reopen, and there is no lack of demand from Americans who are comfortable.
But until the economy finds a new equilibrium of prices, wages, production and demand, things are not going to be good.
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