The Econmist - USA (2021-11-06)

64 Finance&economics TheEconomistNovember6th 2021

unwindingofstimulus.Yetthereisalso

causetothinkthateachwillnotundercut

therecovery,andthatgrowthmomentum

mayremainstrong.

Easilythemostpositiveeconomicde­

velopmentofthepastyearhasbeenthere­

markabledeclineinunemployment.After

a recessionthelabourmarketusuallytakes

yearstoheal.Thingslookedgrimatthe

heightofthepandemic,whenunemploy­

ment soared to 14.7%, the highest rate

since the Depression.Yet thereturn to

work,albeitnottooffices,hasbeenaston­

ishinglystrong.Theunemploymentrate,

4.8%inSeptember,islowforthispointina

recovery(seechart1 onpreviouspage).

Indeed,thefocusnowisonhowhardit

isforcompaniestohireworkers,especial­

lyforblue­collarjobs.Thatmightsuggest

thattherecoveryisnearinganend,with

theeconomy strainingat itslimits. Yet

someslackremains.About3mpeople,2%

ofthepre­pandemiclabourforce,havestill

toreturntowork.Somemayhaveretired

early,butmanyareonthesidelines,con­

cernedaboutchildcareandcatchingco­

vid­19.As thoseconcerns diminish—the

returntoschoolhasgonewellsofarand

vaccinesareprovingeffectiveagainstse­

vereillness—suchpeopleare,littlebylit­

tle,resumingwork.

Thesurgeininflationpresentsanother

bigworryabouttherecovery(seechart2).

Thepersonal consumptionexpenditures

priceindex,theFed’spreferredgauge,in­

creasedby4.4%inSeptemberfroma year

earlier,themostinmorethanthreede­

cades.Formuchofthepastyearofficialsat

theFedandmanyothereconomists,too,

havearguedthatinflationistransitory,an

outgrowthofgummed­upsupplychains.

Thetightjobmarket,however,compli­

catesthepicture.Wagesroseby1.5%inthe

thirdquartercomparedwiththesecond,

thebiggestgaininatleasttwodecades.

Welcomeasitistoseenursesandwaiters

getpaybumps,thefearisthatrisingwages

willleadtoyetmoreupwardpressureon

pricesandultimatelytoa dreadedwage­

pricespiral,asexperiencedinthe1970s.

Butconditionsareverydifferent.Farfewer

workersarerepresentedbyunionstoday,

andfarfewercontractshavecost­of­living

adjustmentsbakedintothem.Thatshould

weakenthelinkbetweeninflationandpay.

TheFedmayhavebeenundulyoptimistic

in thinking that price pressures would

quicklysubside,butitslogicremainsper­

suasive.Assupplychainsslowlyreturnto

normalandaspeoplere­enterthelabour

force, inflationshould ebbwithout the

needforforcefulinterest­raterises.

Relatedtothatisthefinalbigconcern:

thewithdrawalofstimulus.Withthefiscal

deficithitting15%ofgdpin2020,thehigh­

estlevelsincethesecondworldwar,the

comedownwasboundtobepainful.The

shifttosmallerdeficitswilldeductabout

2.5percentagepointsfromgrowthoverthe

nextyear,easilythebiggestfiscaldragof

the past two decades, according to the

HutchinsCentreonFiscalandMonetary

PolicyinWashington(seechart3).

Themonetarycliffwillnotbeassteep,

butitnowloomsovertheeconomy.The

nextquestionaftertaperingiswhenthe

Fed willraiseinterestrates. OnOctober

29thGoldmanSachs,a bank,saidthatthe

firstraterisecouldcomeassoonasJuly,a

fullyearearlierthanit hadpreviouslyfore­

cast,becauseofitsexpectationthatinfla­

tionwillremainelevated.

Anendtostimuluswouldusuallyau­

gur poorlyfor growth.Yet otherfactors

could insulate the economy. The con­

sumption ofgoods isabout15% higher

thanitstrendlevel,partlybecausepeople

havespentmuchlessmoneythanusualon

holidaysandrestaurantsandmuchmore

onfurniture,exercisebikesandstay­at­

homeessentials. Butwiththepandemic

nowapparentlypeteringout,peopleare

buying experiences again—a fillip for

growth, given that services account for

nearly80%ofoutput.

Even without any more stimulus

cheques, momentum for spending is

strong.JayBrysonofWellsFargo,another

bank,saysthatthestrengthofhousehold

balance­sheets should be the starting

pointinanyanalysisofAmerica’sgrowth

prospects.Personaldebtobligationsasa

shareofdisposableincomeareneartheir

lowestonrecord.Businessinventoriesare

alsonearall­timelows,implyingsubstan­

tialneedforrestocking,ifonlycompanies

can get the goods they need on ti

“KnowingwhatI knowtoday,I would

thatwearestillintheearlystagesoft

recovery,”saysMrBryson.

MrYeagerhasreacheda similarconclu­

sion. As retailers rush to restock their

shelves,Hub’sorderbooksarefilling up

fast.Ithasevenhadtoturnsomeprospec­

tiveclientsaway.“Wethinkthestrength

reallydoescarrythroughtotheendofnext

yearandpotentiallybeyond,”hesays.n

What a drag

United States, contribution of fiscal policy

to quarterly GDP growth*, %

Source: Hutchins Centre on Fiscal and Monetary Policy

*At an annual rate

FORECAST

3

15

10

5

0

-5

2322212019182017

Returning to form

United States

Sources:BEA;HaverAnalytics;TheEconomist

*Basedonaveragequarterlygrowthrateforthefiveyears

priortothepandemic †2012prices ‡Privatenon-residential

fixedinvestment §Personalconsumptionexpenditures

2

12

9

6

3

21192017

Consumption,$trn†

Services

Goods

22

20

18

16

2221192017

GDP, $trn†

4.0

3.5

3.0

2.5

21192017

2015-1average

PCE§ price index, %

increase on a year earlier

Businessinvestment‡

$trn†

Actual Pre-covid trend*

5 4 3 2 1 0

21192017

Interestrates

Bond markets v

central banks

F

or muchof the past two years, central

bankers have found themselves playing

second fiddle to governments. With inter­

est rates in the rich world near or below ze­

ro  even  before  the  pandemic,  surges  in

public spending were needed to see econo­

mies  through  lockdowns.  Now  central

bankers are firmly in the limelight. During

the past month, as inflation has soared, in­

vestors have rapidly brought forward their

expectations for the date at which interest

rates will rise, testing policymakers’ prom­

ises to keep rates low. 

The  expected  date  of  lift­off  in  some

countries  is  now  years  earlier.  In  the  last

days  of  October  Australia’s  two­year  gov­

ernment­bond  yield  jumped  from  around

0.1%  to  nearly  0.8%,  roughly  the  level  at

which  five­year  bonds  had  traded  as  re­

cently as September, prompting the central

bank to throw in the towel on its pledge to

keep three­year yields ultra­low. The bank

formally  ditched  its  policy  of  yield­curve

control on November 2nd, though it said it

would  wait  for  sustained  inflation  to

emerge before raising interest rates.

H ONG KONG

Investors bet that policymakers will

have to break their promises