Economy Daily

Stock FUTURES are up

Harry Robertson, 12-1, 1, Business Insider, US stock futures rebound from another Omicron sell-off despite Jerome Powell hawkishness, https://markets.businessinsider.com/news/stocks/stock-market-today-us-futures-dow-jones-omicron-jerome-powell-2021-12

US stock futures rallied Wednesday as global stocks rebounded from the latest Omicron-driven sell-off, as investors weighed Federal Reserve Chair Jerome Powell’s hawkish comments on bond-buying and inflation. S&P 500 futures were 1.19% higher, Dow Jones futures were up 0.89%, and futures for the tech-heavy Nasdaq 100 were 1.36% higher, suggesting a higher open for markets at the start of a new month. Uncertainty around the severity and impact of the newly detected Omicron coronavirus variant has caused volatility in stocks after months of calm and regular record highs. “The only winner in December [is] likely to be volatility, as the street sells everything on any negative Omicron headline, and then buys everything back on any hint that the new variant isn’t as serious as we all thought,” Jeffrey Halley, senior market analyst at Oanda, said in a daily note. Stocks began tumbling Tuesday after Moderna CEO Stephane Bancel told the Financial Times that vaccines were likely to be much less effective against the variant. The S&P 500 fell 1.9% Tuesday as hawkish comments from Powell also drove selling. It put the benchmark US stock index 2.9% below its record closing high of 4,704.54, reached on November 18. But comments from the Israeli health minister on Omicron appeared to be contributing to a more positive tone Wednesday. Nitzan Horowitz said “there are initial indications that those who are vaccinated with a vaccine still valid or with a booster will also be protected from this variant,” according to CNN. That followed scientists at the University of Oxford saying Tuesday “there is no evidence so far” that Omicron is resistant to current vaccines. European stocks rebounded along with US futures, after falling sharply Tuesday, with the continent-wide Stoxx 600 up 1.09%. Hong Kong’s Hang Seng rose 0.78% overnight, while Tokyo’s Nikkei 225 gained 0.41%. Bond yields, which move inversely to prices, rose as investors moved away from safe-haven assets in favour of equities. The yield on the key 10-year US Treasury note climbed 5.4 basis points to 1.495%. It remained well below the recent one-month high of 1.666% touched on November 24, however, in a sign that investors want to own safer assets in the face of rising coronavirus risks. Short-term bond yields jumped Tuesday and pushed higher Wednesday after the Fed’s Powell told lawmakers that it’s “probably a good time to retire” the word “transitory” to describe inflation and considered an earlier-than-expected end to tapering asset purchases. Markets interpreted Powell’s comments as hawkish — that is, as a sign that the Fed is set to become more aggressive in tackling inflation by raising interest rates and cutting back on bond buying. The 2-year Treasury note yield rose 6.5 basis points to 1.495% Wednesday, from as low as 0.429% the previous day. It is seen as the security most sensitive to interest rates.

Inflation increasing now

Paul Hanon, 12—1, 21, Wall Street Journal, https://www.wsj.com/articles/global-inflation-set-to-be-higher-for-longer-says-oecd-11638356853?mod=hp_lead_pos2, Global Inflation Set to Be Higher for Longer, Says OECD

The pickup in inflation rates around the world will be longer-lasting and sharper than previously anticipated, with a growing risk that households and businesses grow accustomed to faster price rises, the Organization for Economic Cooperation and Development said in its latest forecasts for the global economy. But the Paris-based research body’s chief economist also warned that should the new Omicron variant of the coronavirus sidestep existing vaccines, the world economy could face a sharper slowdown than previously expected and a round of price declines similar to those seen in the early months of the pandemic. Releasing the last of its four reports on the economic outlook this year, the OECD said it now expects consumer-price inflation in the U.S. to average 4.4% in 2022, up from 3.1% when it last released forecasts in September. It said it now expects inflation in the eurozone to be 2.7%, up from 1.9%. The new forecasts were made before the discovery of the Omicron variant. The OECD also expects inflation to be above the U.S. Federal Reserve’s 2% target at 2.5% in 2023, although it expects eurozone inflation to be just below the European Central Bank’s target at 1.8% in the same year. In an interview with The Wall Street Journal, OECD Chief Economist Laurence Boone said there is a growing risk that households and businesses will come to expect that higher inflation rates will persist. That is the outcome that central bankers fear most, since it opens the way for a vicious cycle of higher wage settlements and price rises intended to cover those higher costs. Federal Reserve Chairman Jerome Powell discussed in a Senate hearing the factors driving continued inflation and the risk the Omicron variant poses for the economy. Photo: Al Drago/Bloomberg News With inflation rates having surprised policy makers over recent months, there is an associated risk that households and businesses will lose confidence in the reassurances being offered by some central banks that higher inflation will prove to be temporary. “That’s a concern,” Ms. Boone said. “People have been saying that higher inflation is transitory for 10 months or so.

Fed perceives that inflation will slow to a healthy level now

Jeff Cox, 11-27, 21, https://www.cnbc.com/2021/11/27/the-current-inflation-run-is-similar-to-other-episodes-in-us-history-but-with-important-differences.html The current inflation run is similar to other episodes in history, but with important differences

Leaders such as Federal Reserve Chairman Jerome Powell, Treasury Secretary Janet Yellen and Biden administration officials view inflation as temporary and almost wholly driven by factors unique to the pandemic. Once those factors subside, they see inflation drifting lower, eventually getting around the 2% level the Fed considers emblematic of a healthy and growing economy

The 1970s prove that strong unions will boost wages and trigger inflation

Jeff Cox, 11-27, 21, https://www.cnbc.com/2021/11/27/the-current-inflation-run-is-similar-to-other-episodes-in-us-history-but-with-important-differences.html The current inflation run is similar to other episodes in history, but with important differences

Mark Zandi, the chief economist at Moody’s Analytics, feels that way even though he says there are close parallels between the current predicament and the runaway inflation of the 1970s. For one, he said the waves in that inflation shock were both demand-driven and the product of supply issues because of the oil embargoes back then. Unions that were able to negotiate cost of living increases in contracts also boosted the wage-price spiral.

Economy strong, new variant won’t slow it

Justin Lahart, 11-26, 21. WSJ. https://www.wsj.com/articles/u-s-economy-could-enjoy-post-holiday-glow-11637928001?mod=hp_lista_pos5, U.S. Economy Could Enjoy Post-Holiday Glow, New Variant or No

By now it is clear that the economy should be closing out the year on a high note, with Americans spending money over the holidays and reengaging in many of the activities that they missed out on during last year’s damped-down festivities, even with the emergence of a new virus variant. Even in normal times, the shift in the economy from December to January is abrupt. Consumer spending drops, highway and airline traffic thins and hundreds of thousands of workers brought on temporarily for the holidays leave their jobs. If it wasn’t for the adjustments that government statistical agencies make for seasonal swings, gross domestic product would register a contraction in the first quarter from the fourth quarter every single year. But the pandemic, and all the economic imbalances it has fomented, make getting a read on what January might look like particularly hard. Covid-19 cases are, unfortunately, rising, and there is a danger that this year’s holiday gatherings and travel will exacerbate the increase. Worse, now there is a fast-spreading new strain of the virus that might be better able to infect people who are vaccinated than previous variants were. That could dent sales—an analysis by economists at JPMorgan Chase finds that spending has softened in states where Covid-19 cases have risen the most in recent weeks, relative to other places. Moreover, while it seems likely that even after the holidays, most Americans will have ample savings relative to before the pandemic, that may not be as true for people lower down the income ladder, leading to some curtailment of spending. That said, predicting where Covid-19 cases might be headed is something of a fraught exercise. Already 37 million people have gotten their boosters, and more children are now getting vaccinated: The virus’s opportunities for transmission could decline, especially if the vaccines prove effective against the new variant. Moreover, with Covid-19 generally not nearly as dangerous for vaccinated people as for the unvaccinated, and with new antiviral drugs from Pfizer and Merck looking as if they could become available soon, many consumers may view Covid-19 as less risky than in the past. Meanwhile, companies ought to experience some easing of the labor and supply chain strains they have been facing. A lot of people coming off holiday jobs will be looking for work again and available to hire. And with holiday goods no longer clogging up transportation networks, getting supplies will be easier. Many businesses might look at it as a good time to secure necessary labor and rebuild depleted inventories. As a result, some of the seasonal swoons in activity that typically occur when the calendar flips might be diminished—translating into gains after they go through the seasonal-adjustment process. This holiday season is looking a lot different from last year’s. This January will look a lot different, too.

CNBC, 11-26, 21, https://www.cnbc.com/2021/11/27/fed-bostic-says-he-remains-open-to-faster-taper-1-or-2-rate-hikes-in-2022.html, Fed’s Bostic says he remains open to faster taper and one or two rate hikes in 2022

If the new omicron coronavirus variant follows the pattern seen with previous variants, it should cause less of an economic slowdown than the delta variant, Bostic said. Atlanta Federal Reserve President Raphael Bostic said on Friday he is hopeful that the momentum of the U.S. economy will carry it through the next wave of the coronavirus pandemic, and said he remains open to accelerating the pace of the central bank’s bond taper. Earlier on Friday, the World Health Organization said it was designating the new omicron variant, first identified in South Africa, as being “of concern.” If the new omicron coronavirus variant follows the pattern seen with previous variants, it should cause less of an economic slowdown than the delta variant, Bostic said. “We have a lot of momentum in the economy right now,” Bostic said during an interview with Fox News, citing strong jobs growth. “And that momentum, I’m hopeful, will be able to carry us through this next wave, however it turns out.” Bostic reiterated that he is open to speeding up the pace at which the central bank slows down its asset purchases so officials can have greater flexibility to respond to surging inflation. It could be “reasonable,” Bostic said, for the Fed to potentially conclude its asset purchases by the end of the first quarter next year, or early in the second quarter, if the economy continues on the same trajectory. At the current pace, Fed officials would be done tapering purchases by the middle of next year. Policymakers will meet again on Dec. 14-15.

One rate hike, which markets have priced in now.  Greater inflation means a double rate hike

CNBC, 11-26, 21, https://www.cnbc.com/2021/11/27/fed-bostic-says-he-remains-open-to-faster-taper-1-or-2-rate-hikes-in-2022.html, Fed’s Bostic says he remains open to faster taper and one or two rate hikes in 2022

According to CME’s FedWatch tool, money market traders were pricing in a 53.7% chance of at least one rate hike by the Federal Open Market Committee’s June meeting as of Friday afternoon, down from an 82.1% chance on Wednesday. Bostic said on Friday that he has not ruled out any possible actions and said it is “certainly possible” for the Fed to raise interest rates at least twice next year if inflation remains elevated. “We’re not going to let inflation get out of control,” Bostic said.

Investors already expecting a three quarter point rate increase

Nick Timaraos, 11-24, 21, WSJ, Fed Officials Debated Inflation Concerns, Taper Pace at November Meeting, https://www.wsj.com/articles/fed-officials-debated-inflation-concerns-taper-pace-at-november-meeting-11637780402?mod=hp_lead_pos3

Investors have dialed up expectations of interest-rate increases by the Fed next year. The probability of a rate increase by May rose above 50% on Wednesday, and expectations of at least three quarter-point rises by the end of 2022 has risen to nearly 65%, according to futures market prices tracked by CME Group. Brisk demand for goods, disrupted supply chains, temporary shortages and a rebound in travel have pushed 12-month inflation to its highest readings in decades. Core inflation, which excludes volatile food and energy prices, rose 4.1% in October from a year earlier, according to the Fed’s preferred gauge.

Economy up, consumer spending rebound

Sarah Chaney Camban, 11-24, 21, WSJ, U.S. Recovery Accelerates on Spending, Labor Market Growth, https://www.wsj.com/articles/consumer-spending-personal-income-inflation-october-2021-11637710533?mod=hp_lead_pos2

The U.S. economy showed broad-based signs of acceleration heading into the end of the year, with consumers ramping up spending, businesses stepping up investment and jobless claims falling to historic lows. Household spending rose 1.3% in October from a month earlier, while personal income increased 0.5% last month, the Commerce Department said Wednesday. Consumers are benefiting from a strong labor market. And they are spending at a faster pace than inflation, which recently hit a three-decade high. Jobless claims, a proxy for layoffs, fell to 199,000 last week, the lowest weekly level in 52 years, the Labor Department separately said. The sharp decline in unemployment claims suggests rising wages and bountiful job openings could continue to buttress consumer spending—the economy’s main engine—despite fading government stimulus and dwindling savings. “Consumer demand remains quite strong,” said Gregory Daco, chief U.S. economist at Oxford Economics. “People are looking to travel. They’re still looking to eat out. They’re still looking to make purchases for the end-of-the-year holidays.” Elevated inflation, stoked by strong demand and limited goods and labor supply, poses a risk to the economy, though. Federal Reserve officials at their meeting earlier this month signaled greater doubts over how long it would take for inflation to abate and how soon they would need to raise interest rates to cool the economy, minutes from the meeting released on Wednesday showed. Consumers increased spending on goods, including big-ticket and smaller purchases, by 2.2% in October. Spending on services, which were hit hard by the pandemic, is showing glimmers of improvement. Outlays on services grew 0.9% last month, an acceleration from the preceding two months. Some sectors that are particularly vulnerable to the pandemic are starting to see a pickup and are in a much better position than a year earlier. For instance, international travel to major U.S. airports rose in November after the U.S. lifted its travel ban on Europeans, Jefferies economists said in a note. Spending among tourists could help boost U.S. retail sales, the economists said. Companies such as manufacturers face higher material and shipping costs, as well as labor and parts shortages that could delay some shipments this holiday season. Still, early signs suggest that global supply-chain problems are abating. In Asia, Covid 19-related factory closures, energy shortages and port-capacity limits have eased in recent weeks. Demand for goods remains hot even though computer-chip shortages have dented factory output for months. New orders for motor vehicles and parts jumped 4.8% from September to October, one of the largest increases among sectors, the Commerce Department said in a report on durable goods released Wednesday. A separate Federal Reserve report from earlier in November said production of vehicles rose 18% last month. New orders for nondefense capital goods excluding aircraft, a closely watched proxy for business investment, were up 0.6% in October compared with the previous month, Commerce Department data show. Business investment has grown solidly this year. In an economy where there is a shortage of workers, companies are investing in machinery and technology that make their existing employees more productive, said Gus Faucher, chief economist at PNC Financial Services Group Inc. “I suspect that will remain strong through 2022,” he said. Strong consumer demand for everything from apparel to electronics to hardware is boosting sales at several of the biggest U.S. retailers, despite rising prices. The retail chains Target Corp. and TJX Cos. said they were able to sidestep supply-chain snarls to post strong sales in the most recent quarter and stock up with goods for Black Friday and the holiday season. Employers across the economy report they are struggling to find workers to keep pace with demand. Retailers, hospitality, leisure and logistics firms are strapped and have been raising pay to avoid staff shortages during the critical holiday shopping and travel season.

Wage increases boost consumer spending

Sarah Chaney Camban, 11-24, 21, WSJ, U.S. Recovery Accelerates on Spending, Labor Market Growth, https://www.wsj.com/articles/consumer-spending-personal-income-inflation-october-2021-11637710533?mod=hp_lead_pos2

Wage increases will be a key source of spending power for consumers as they run through savings accumulated from multiple rounds of government stimulus. Americans were saving at an annualized rate of $1.322 trillion in October, compared with $5.764 trillion in March, when a fresh round of stimulus started reaching bank accounts. “We’re seeing the growth baton being passed from the public sector to the private sector,” said Mr. Daco of Oxford Economics. The personal-saving rate, which is saving as a percentage of after-tax income, was 7.3% in October, in line with pre-pandemic levels. The booming job market has been a boon for Caleb Waack’s career. The 28-year-old starts a new job in data engineering for an online mattress firm next Monday, his third since the pandemic began. Mr. Waack said he seized on extra time from working remotely to study up on programming, helping him transition from automotive engineering to consumer goods and, ultimately, to his chosen field of data science. He said he received an offer for his new job within a week of applying, compared with a five-week turnaround time for the role he took in mid-2020. “The labor market is scorching hot,” said Mr. Waack, who lives in De Pere, Wis. “The salary increase is—it’s significant, definitely higher than inflation. It’s an employees’ market, right?” Covid-19 is still disrupting the economy and poses a risk to the outlook. Virus cases have risen this month, and some public-health experts warn that cases could continue to climb as people gather indoors during the winter.

Economy rebounding, unemployment low, consumer spending up

Paul Wiseman, 11-24, 21, AP, US jobless claims hit 52-year low after seasonal adjustments, https://apnews.com/article/coronavirus-pandemic-business-health-economy-jobless-claims-a774386e727ad7c917a669f5712deb32

WASHINGTON (AP) — The number of Americans applying for unemployment benefits plummeted last week to the lowest level in more than half a century, another sign that the U.S. job market is rebounding rapidly from last year’s coronavirus recession. Jobless claims dropped by 71,000 to 199,000, the lowest since mid-November 1969. But seasonal adjustments around the Thanksgiving holiday contributed significantly to the bigger-than-expected drop. Unadjusted, claims actually ticked up by more than 18,000 to nearly 259,000. The four-week average of claims, which smooths out weekly ups and downs, also dropped — by 21,000 to just over 252,000, the lowest since mid-March 2020 when the pandemic slammed the economy. Since topping 900,000 in early January, the applications have fallen steadily toward and now fallen below their prepandemic level of around 220,000 a week. Claims for jobless aid are a proxy for layoffs. Overall, 2 million Americans were collecting traditional unemployment checks the week that ended Nov. 13, down slightly from the week before. “Overall, expect continued volatility in the headline figures, but the trend remains very slowly lower,” Contingent Macro Advisors wrote in a research note. Until Sept. 6, the federal government had supplemented state unemployment insurance programs by paying an extra payment of $300 a week and extending benefits to gig workers and to those who were out of work for six months or more. Including the federal programs, the number of Americans receiving some form of jobless aid peaked at more than 33 million in June 2020. The job market has staged a remarkable comeback since the spring of 2020 when the coronavirus pandemic forced businesses to close or cut hours and kept many Americans at home as a health precaution. In March and April last year, employers slashed more than 22 million jobs. But government relief checks, super-low interest rates and the rollout of vaccines combined to give consumers the confidence and financial wherewithal to start spending again. Employers, scrambling to meet an unexpected surge in demand, have made 18 million new hires since April 2020 and are expected to add another 575,000 this month. Still, the United States remains 4 million short of the jobs it had in February 2020. Companies now complain that they can’t find workers to fill job openings, a near-record 10.4 million in September. Workers, finding themselves with bargaining clout for the first time in decades, are becoming choosier about jobs; a record 4.4 million quit in September, a sign they have confidence in their ability to find something better.

No inflation control now

AP, 11-23, 24, https://apnews.com/article/coronavirus-pandemic-joe-biden-health-business-richard-nixon-ae06d5cccf066239f9aa7f06491c7698, Biden aims to do what presidents often can’t: Beat inflation,

WASHINGTON (AP) — LBJ tried jawboning. Richard Nixon issued a presidential edict. The Ford administration printed buttons exhorting Americans to “Whip Inflation Now.” Over the years, American presidents have tried, and mostly floundered, in their efforts to quell the economic and political menace of consumer inflation. Now, President Joe Biden is giving it a shot. Confronting a spike in gasoline and other consumer prices that’s bedeviling American households, Biden on Tuesday ordered the release of 50 million barrels of oil from the U.S strategic petroleum reserve. The move, done in coordination with several other major nations, is intended to contain energy costs. Oil markets, having anticipated the move, were unimpressed with the details: Oil prices actually rose on the news. It was just the latest step Biden has taken to show he is doing everything he can to combat inflation as gasoline and food prices, in particular, have imposed a growing burden on American households. On Monday, he announced that he would reappoint Jerome Powell as chair of the Federal Reserve, a move meant in part to reassure financial markets that Washington is serious about containing consumer prices. Last month, he announced a deal to ease supply backlogs at the Port of Los Angeles by extending operations there to 24 hours a day, seven days a week. ADVERTISEMENT Yet none of the president’s actions is considered likely to make a meaningful dent in surging prices anytime soon. “I don’t think the president has many levers to pull to bring down the rate of inflation any time soon,” said Mark Zandi, chief economist at Moody’s Analytics. “The things he is doing are positive, and there’s no downside to them … but they are on the margins. They’re not going to move the dial very much.” Inflation is always a tough foe, made even more complicated by the unusual recovery from the pandemic recession, with shortages of supplies and workers and shipping bottlenecks forcing up prices. The government’s consumer price index skyrocketed 6.2% in the 12 months that ended in October — the sharpest such jump since 1990. Coming after nearly four decades of more or less stable prices, the CPI news represents a “once-in-a-generation uptick in inflation,” said Sarah Binder, a George Washington University political scientist who studies the Fed. “The problem is pretty stark because it’s something that voters notice. It’s hard to escape the impact of a spike in inflation on your daily life, whether it’s buying milk or buying gas.’’ The average price of regular gasoline has shot up to $3.40 a gallon from $2.11 a year ago, according to AAA. Compounding the pain and heightening the pressure on Biden, inflation has been outpacing Americans’ income. Adjusted for price increases, average hourly wages were actually down 1.2% last month compared with a year earlier. “Inflation is painful, and it’s always political,” said Diane Swonk, chief economist at the accounting and consulting firm Grant Thornton. WHAT’S BEHIND THE PRICE SPIKE? It’s partly the consequence of very good news. The world economy — and America’s in particular — rebounded with unexpected speed and strength from last year’s brief but intense recession. It was a result of super-low interest rates, massive government spending and, eventually, the broad rollout of vaccines that allowed more of the economy to reopen. The swiftness of the rebound caught businesses off guard. A year and a half ago, they were bracing for the worst — laying off workers, letting shelves and warehouses go bare, reducing investment and factory output. And energy companies did the same: They cut production of oil and gas as demand for transportation fuels plummeted. Once demand came roaring back, they were unprepared. They found themselves scrambling to call back workers and buy enough to fill customer orders. Ports and freight yards couldn’t handle the traffic. Countries competed over boatloads of overpriced liquid natural gas. Periodic COVID-19 outbreaks shut down Asian ports and factories. Global supply chains broke down. As costs rose, many businesses found that they could pass the burden along to consumers in the form of higher prices. In the meantime, many families had banked their government relief checks and built up their savings. Some critics also blamed Biden’s $1.9 trillion emergency aid package for overheating the economy and contributing to inflation pressures.

Inflation likely to stabilize, more inflation causes rate hikes, killing the economy

Sebastian Mallaby, 11-22, 21, SEBASTIAN MALLABY is Paul A. Volcker Senior Fellow for International Economics at the Council on Foreign Relations. His forthcoming book, The Power Law: Venture Capital and the Making of the New Future, will be published in January 2022, Is Inflaiton here to Stay? https://www.foreignaffairs.com/articles/2021-11-22/inflation-here-stay

Early in the COVID-19 pandemic, in Foreign Affairs, I wrote that advanced economies were entering a new age: the age of magic money. Because inflation seemed dormant, central banks faced no penalty for conjuring money out of thin air. And because this money would drive interest rates lower, governments would likewise face no penalty for borrowing. A period of expansive government beckoned. Countries with firmly anchored prices would be empowered to assist citizens in extraordinary ways, courtesy of magic money. Eighteen months on, this thesis seems both true and troubled. True, because the advanced economies’ response to the pandemic has been genuinely extraordinary. In 2020 and 2021, the U.S. government has propped up the economy by running budget deficits worth a combined 27.0 percent of one year’s GDP, far more than the cumulative 18.5 percent in 2009–10, following the global financial crisis. Thanks to this unprecedented stimulus, a miraculous recovery has ensued. Relative to the eve of the pandemic, U.S. consumers are richer, wages are up, businesses have more cash on hand, and real GDP is higher. Compare that with the painful rebuilding after the financial crash, when it took ten quarters for real output to exceed its mid-2008 high point. Other advanced economies—Japan, the euro area, and the United Kingdom—have experienced something similar. Expansive government programs have boosted household disposable income above the pre-pandemic level. Yet the magic money thesis is simultaneously in trouble, because its premise—dormant inflation—has been battered. In the United States, the Federal Reserve’s preferred measure of core inflation came in at 3.6 percent in the year to September, a 30-year record. Across the 38 economies of the Organization for Economic Cooperation and Development, core inflation stands at 3.2 percent. This past June, I updated my analysis of magic money in Foreign Affairs and noted that inflation was stirring but suggested that this might be temporary; further, I argued that if inflation were to persist, the Fed would act to control it. Both these claims seem weaker now. In the past five months, core inflation has stayed obstinately high, and a rising chorus of commentary insists that the Fed is “behind the curve.” It is time to update my update. Even if the age of magic money really has ended, it has been a remarkable phase in economic history. As Matthew Klein of The Overshoot newsletter observes, the huge pandemic stimulus had three possible consequences. Companies and citizens might have taken the government handouts and nervously saved them, in which case magic money would have failed to spark recovery. At the other extreme, the private sector could have spent the handouts all at once, in which case there would have been hyperinflation. Instead, the economy followed a middle path, and the outcome has been pretty close to the ideal one. On the one hand, output has recovered fast. On the other hand, core inflation at 3.6 percent is a manageable problem. Magic money has worked extraordinarily well. If one parachutes from a great height and lands within yards of the target, that’s victory. Second, although inflation has been more sustained and broader than expected, it may yet turn out to be transitory. In the near term, the world is short of fundamentals such as semiconductors, housing space, and energy, so price pressures may get worse before they get better. The digitization of everything, accelerated by the pandemic, has made the chip shortage especially painful; Goldman Sachs notes that the average new car contains 50 percent more semiconductors than it did just three years ago. But in the medium term, the supply factors pushing prices up seem more temporary than permanent. Production bottlenecks are likely to smooth themselves out as the world puts the pandemic behind it. Workers are likely to rejoin the labor force as more people get vaccinated and oral antiviral therapies to treat COVID-19 become more readily available. Meanwhile, energy prices are more likely to fall than to rise, given their currently high level. Something similar can be said of the demand side of the inflation outlook. For now, too much demand is chasing too few goods, particularly the durable goods that have pushed prices upward. But by this time next year, the government stimulus will be waning. Consumers will have run down some of the financial reserves resulting from government largess and a dearth of spending opportunities during the pandemic. The service sector should be back to normal, absorbing some of the demand that is currently pushing up durable goods prices. Factor in the Fed’s measured withdrawal of stimulus, and the United States may gradually return to price stability. Under this scenario, magic money will have proved extraordinarily effective in 2020–21—and will likely get rolled out again whenever the next crisis arrives. MAGIC KINGDOM Of course, the outlook will darken if people come to expect continuous inflation. Given that the current supply-and-demand disruptions will persist into next year, workers may get into the habit of pushing for higher pay because they expect prices to go up, while businesses may raise prices reflexively because they expect higher wage costs. Already, investors are betting that inflation will average more than three percent over the next five years, though they also believe that the rate will come down in the subsequent five-year period. How people form inflation expectations is not well understood, so it’s hard to gauge this risk. But it is clearly not zero. Another risk comes from the extraordinary state of the financial markets. U.S. fund managers have piled into the stock market on the TINA theory: the idea that with bonds yielding virtually nothing, “there is no alternative” to stocks. As a result, in the past year, stocks have jumped by about a quarter relative to earnings and are way above their long-term average. Housing prices and crypto assets have followed suit. If inflation turns out to be worse than it looks now, the Fed may be forced to surprise the markets with higher rate hikes. That could trigger a financial bust, which would damage the real economy. Magic money has worked extraordinarily well. In short, this drama is not over. If inflation expectations rise further, and if a consequent Fed tightening punctures markets, the age of magic money may indeed have ended. The perils of massive budget stimulus will have been exposed, although these may still pale relative to the perils of doing too little in a crisis. To reduce the risk of this negative scenario, the Fed should signal its concern: it should taper asset purchases faster, stand ready to raise interest rates sooner, and stop talking about unemployment. A calm forewarning of tougher tightening is better than delay followed by clampdown. Yet a brighter future remains the most probable one. If supply stabilizes and demand subsides, measured tightening may turn out to be enough. By the start of 2023, inflation will have stabilized at or just above the two percent target—a bit higher than before, partly because of the jolt to expectations from the current inflation blip and partly because the ongoing transition to green energy will require major investments that will boost the cost of capital. The fact that inflation and interest rates will settle somewhat higher than before will be all to the good. The fear of “secular stagnation”—the worry that the economy can grow only with interest rates close to zero—will have been alleviated. Higher interest rates will discipline borrowers and render the financial system a bit less prone to bubbles. If the U.S. economy can reach that healthy equilibrium, today’s inflation scare will soon be forgotten. The world will move on. The Fed will have won. And the age of magic money will continue

Inflation baked in for the long-term

David Javier, 11-19, 21, https://finance.yahoo.com/news/yes-fatter-paychecks-really-do-stoke-inflation-morning-brief-101151680.html, Yes, fatter paychecks really do stoke inflation: Morning Brief

It should be noted outright that in a society that’s become polarized by class and surging inequality, it’s become incredibly difficult to discuss the role wages play in pushing up inflation. It gets subsumed by facile accusations that those trying to make the argument somehow disdain the working class — which those of us here at the Morning Brief certainly do not. Meanwhile, the finer points often get lost in the soundbite-driven world of social media and opinionated cable TV. With all that being said, it should be noted that our current problem with soaring prices is, at its core, an issue of unusually high COVID-era demand stoked by massive intervention from the Federal Reserve and Uncle Sam. That point was recently articulated by at least two Obama-era officials, Steve Rattner and Larry Summers. For those unaware, consumer spending, and all the conspicuous consumption that goes along with it, comprises a whopping 70% of gross domestic product. The reason why this matters is because wages, which the Morning Brief has pointed out on several occasions, have risen quite significantly during the pandemic after a prolonged period of stagnation. Given the worker shortage and historically high numbers of people quitting their jobs, employers are more likely than not to hike pay even further. On its face, this is a good thing. But in a nutshell, behavioral economics tells us that the more money people have, the more they will spend. And as I pointed out in Thursday’s edition, ample evidence suggests that free-spending workers are loading up on revolving credit. That, of course, stimulates demand in an economy that’s powered mostly by the consumer — thus stoking the inflationary problem best summarized by Rattner as “too much money chasing too few goods.” Most reasonable people rightly applaud the idea of middle and working classes making more money. Yet the rapid pace of (long overdue) wage hikes is stoking both demand and prices alike, and creating shortages just about everywhere. Pointing to the Atlanta Fed’s wage growth tracker that showed two consecutive months of growth over 4%, veteran Wall Street watcher Peter Boockvar noted this week that those readings “are the two highest … since 2008 and in Q1 this year it averaged 3.4% and in Q2 it was 3.1%.” Meanwhile, a National Federation of Independent Businesses survey — the voice of the small business sector, which accounts for at least 40% of economic activity — reported that compensation hit its highest in nearly 40 years, Boockvar pointed out. A net 44% of NFIB respondents said they boosted pay, and 32% plan to do so in the next few months. “The trend is clear with wages and worker leverage,” the analyst added. Taken together, these factors are contributing to what Tom Tzitzouris, head of fixed income research at Strategas, stated candidly recently was a “wage-price spiral” adding to the supply and labor backlogs. “That tells us that people who work for a living — high income or low income — believe they have pricing power. And once they believe that, then inflation has real legs,” the analyst warned. “It doesn’t mean that we are going to see an acceleration in inflation, it just means that this inflation is going to be sticky — potentially 3%+ [in headline consumer prices] for the next decade or at least for the remainder of this business cycle,” Tzitzouris added. “As long as wages are rising towards where inflation is, that tells us that the wage-price spiral is still in effect,” he said.

Interest rate increases coming

Reuters, November 18, 2021, Fed to hike in Q4 next year; inflation to remain above target until 2024: Shrutee Sarkar, reuters.com

BENGALURU, Nov 19 (Reuters) – The Federal Reserve will raise interest rates late next year, earlier than expected just a month ago, in a landmark shift from the emergency measures it took to backstop the U.S. economy during the COVID-19 pandemic, according to a Reuters poll. Most respondents said the Fed should move even sooner to combat inflation, which hit a 30-year high last month and economists say it will stick above the central bank’s target until at least 2024. The shift in economists’ expectations for a first rate hike to next year from early 2023 predicted in an October survey puts them more in line with market expectations, and follows recent news U.S. inflation hit a 30-year high last month. With disrupted global supply chains and a sharply-improved job market, the Fed, like most major central banks, is expected to move sooner rather than later. The Nov. 15-18 poll predicted the Fed would raise rates by 25 basis points to 0.25-0.50% in Q4 2022, followed by two more hikes in Q1 and Q2 2023. The fed funds rate was expected to reach 1.25-1.50% by the end of 2023. But nearly two-thirds of economists, 27 of 42, who responded to an additional question on what they recommended the Fed ought to do said the Fed should raise rates earlier, by the end of September next year. “The double-whammy of a cost and wage push into prices is likely leaving the Fed uncomfortable. The risks of earlier hikes – next summer, if not before – are on the rise,” said Michelle Meyer, U.S. economist at Bank of America Securities. “To the extent that inflation expectations march higher over the longer run and consumers continue to react negatively to higher prices on the view that they will prove persistent, the more likely the Fed will damper the inflationary pressure with tighter monetary policy.” High inflation is a concern for central banks around the world, some of which have already raised rates or are close to doing so. The Fed, for its part, is expected to taper its $120 billion in monthly bond purchases from this month. The consensus view for change in the core personal consumption expenditures (PCE) price index, the Fed’s key inflation gauge, was predicted to stay above 4% this quarter and next, double the 2% target. It’s then forecast to slow in the second half of 2022, along with growth. Those forecasts were upgraded from last month. “The whiff of stagflation is getting stronger as shortages worsen, leading to surging prices and weaker real GDP growth. Shortages of goods and intermediate inputs will eventually ease, although not for at least six to 12 months,” said Paul Ashworth, chief North America economist at Capital Economics. “But the drop in the labour force appears to be more permanent, which suggests the pandemic could have a long-term scarring effect on potential GDP after all.” After expanding 6.7% in the second quarter on an annualized basis, U.S. economic growth was expected to have slowed to 2.0% in the third quarter before expanding 4.8% this quarter. That compared with 3.8% and 5.0% predicted in October for the third and fourth quarters, respectively. On average, the economy was expected to grow 3.9% next year, 2.6% in 2023 and 2.3% in 2024. That compared with previous forecasts of 4.0% for 2022, 2.5% for 2023 and 2.2% in 2024. While the unemployment rate was predicted to range between 3.6% and 4.3% until the end of 2023, over 55% of 39 respondents who answered another question said consumer spending in the U.S. would improve over the coming year.

Inflation high now

Bloomberg, 11-11, 21, Straits Times, Inflation threatens to return to US politics in replay of 1980, https://www.straitstimes.com/world/united-states/inflation-threatens-to-return-to-us-politics-in-replay-of-1980

ASHINGTON (BLOOMBERG) – “Is it easier for you to go and buy things in the stores than it was four years ago?” Ronald Reagan asked days before his sweeping 1980 presidential election victory. That simple question looms as a decisive factor in next year’s congressional ballot. Inflation is now running at its highest in a generation, with a report Wednesday (Nov 10) showing that consumer prices surged at a 6.2 per cent annual pace in October. Nearly all economic forecasters expect it to cool in the coming year, but the key question for President Joe Biden and congressional Democrats is how quickly and how much. While Mr Biden argues that inflation will be pulled down by his forthcoming US$1.75 trillion (S$2.37 trillion) social-spending Bill, along with a US$550 billion infrastructure plan he will soon sign, Republicans are hammering exactly the opposite argument: cash drops by the government are driving up prices. Even some Democrats are echoing GOP fiscal concerns, complicating the outlook for the pending legislative package. At stake in how quickly inflation recedes, and in the debate over the cause and remedy of the escalation in prices, is control of Congress. In next November’s midterm elections, Democrats’ razor-thin majorities of both chambers will be up for grabs. It’s effectively the first national election where inflation will be a prime issue since Reagan’s win over President Jimmy Carter. “We’ve never recorded as many people talking about high home prices or high appliance prices or high TV prices,” said Mr Richard Curtin, who oversees the University of Michigan Consumer Sentiment Survey, a key gauge of household attitudes. “We get a large share of people talking about the reduction of their living standards due to inflation,” made worse because “consumers see no effective economic policies that would restrain inflation,” he said.

Inflation will slow in ‘22

Bloomberg, 11-11, 21, Straits Times, Inflation threatens to return to US politics in replay of 1980, https://www.straitstimes.com/world/united-states/inflation-threatens-to-return-to-us-politics-in-replay-of-1980

Treasury Secretary Janet Yellen said in an interview that aired Tuesday on National Public Radio’s “Marketplace” that she expects inflation next year to be “closer to the 2% that we consider normal.” Outside forecasters largely agree. The median estimate of economists surveyed by Bloomberg is for a 2.8 per cent rate in the third quarter of next year, on the eve of the election, with 2.4 per cent seen for the final three months of 2022. Gasoline futures are trading about 18 cents per gallon lower for next October compared to current levels, signalling prices at the pump should ease. But much depends on the course of the pandemic, and things may get worse before they improve, with no guarantee that supply-chain bottlenecks will have fully cleared. Gasoline futures are trading about 18 cents per gallon lower for next October compared to current levels. PHOTO: EPA-EFE Meantime, rising prices at grocery check-out lines and the gas pump are already unsettling the public, and much of the country is in for more sticker shock when winter heating bills start arriving.

Miniscule impact from reconcilliation

Bloomberg, 11-11, 21, Straits Times, Inflation threatens to return to US politics in replay of 1980, https://www.straitstimes.com/world/united-states/inflation-threatens-to-return-to-us-politics-in-replay-of-1980

But most economists don’t see a near-term impact on inflation from the fiscal packages. It can take years for infrastructure projects to affect transport and other costs, for example. And the ramping up of social safety-net support could in the meantime add fuel to already strong demand. “The spending is front-loaded,” said Dr Jason Furman, a former senior economic adviser in the Obama administration who’s now a professor at Harvard University. Inflation could be boosted by “a few tenths of a percentage point” next year, he said. Longer term, any inflation impact would be “miniscule” and could work in either direction. With American payrolls about 4 million lower today than they were before the pandemic, the biggest impact on inflation over the next year is likely to be how quickly people return to the labour force, Dr Furman said. “Inflation right now is more uncertain than at any point in many decades. We’re in such an unprecedented situation that our biggest lesson from the last year should be humility in our forecasts.” A key Democratic swing voter in the Senate, Joe Manchin of West Virginia, is worried enough about the idea that he’s held up consideration of the social spending Bill the White House and congressional leaders are trying to get enacted. He’s yet to commit to voting for the draft package.

Inflation increasing

Paul Wiseman, 11-11, 21, EXPLAINER: Why US inflation is so high, and when it may ease, https://apnews.com/article/coronavirus-pandemic-business-health-jason-furman-prices-77dc786442ccc3ed8092a7647716d682

WASHINGTON (AP) — Inflation is starting to look like that unexpected — and unwanted — houseguest who just won’t leave.

For months, many economists had sounded a reassuring message that a spike in consumer prices, something that had been missing in action in the U.S. for a generation, wouldn’t stay long. It would prove “transitory,” in the soothing words of Federal Reserve Chair Jerome Powell and White House officials, as the economy shifted from virus-related chaos to something closer to normalcy. Yet as any American who has bought a carton of milk, a gallon of gas or a used car could tell you, inflation has settled in. And economists are now voicing a more discouraging message: Higher prices will likely last well into next year, if not beyond. On Wednesday, the government said its consumer price index soared 6.2% from a year ago — the biggest 12-month jump since 1990. ADVERTISEMENT “It’s a large blow against the transitory narrative,” said Jason Furman, who served as the top economic adviser in the Obama administration. “Inflation is not slowing. It’s maintaining a red-hot pace.’’ And the sticker shock is hitting where families tend to feel it most. At the breakfast table, for instance: Bacon prices are up 20% over the past year, egg prices nearly 12%. Gasoline has surged 50%. Buying a washing machine or a dryer will set you back 15% more than it would have a year ago. Used cars? 26% more. Although pay is up sharply for many workers, it isn’t nearly enough to keep up with prices. Last month, average hourly wages in the United States, after accounting for inflation, actually fell 1.2% compared with October 2020. Economists at Wells Fargo joke grimly that the Labor Department’s CPI — the Consumer Price Index — should stand for “Consumer Pain Index.” Unfortunately for consumers, especially lower-wage households, it’s all coinciding with their higher spending needs right before the holiday season. The price squeeze is escalating pressure on the Fed to shift more quickly away from years of easy-money policies. And it poses a threat to President Joe Biden, congressional Democrats and their ambitious spending plans. ___ WHAT CAUSED THE PRICE SPIKES? Much of it is the flipside of very good news. Slammed by COVID-19, the U.S. economy collapsed in the spring of 2020 as lockdowns took effect, businesses closed or cut hours and consumers stayed home as a health precaution. Employers slashed 22 million jobs. Economic output plunged at a record-shattering 31% annual rate in last year’s April-June quarter. Everyone braced for more misery. Companies cut investment. Restocking was put off. And a brutal recession ensued. ADVERTISEMENT Yet instead of sinking into a prolonged downturn, the economy staged an unexpectedly rousing recovery, fueled by massive government spending and a bevy of emergency moves by the Fed. By spring, the rollout of vaccines had emboldened consumers to return to restaurants, bars and shops. Suddenly, businesses had to scramble to meet demand. They couldn’t hire fast enough to plug job openings — a near record 10.4 million in August — or buy enough supplies to fill customer orders. As business roared back, ports and freight yards couldn’t handle the traffic. Global supply chains became snarled. Costs rose. And companies found that they could pass along those higher costs in the form of higher prices to consumers, many of whom had managed to sock away a ton of savings during the pandemic. “A sizeable chunk of the inflation we’re seeing is the inevitable result of coming out of the pandemic,” said Furman, now an economist at the Harvard Kennedy School. Furman suggested, though, that misguided policy played a role, too. Policymakers were so intent on staving off an economic collapse that they “systematically underestimated inflation,” he said. “They poured kerosene on the fire.” A flood of government spending — including President Joe Biden’s $1.9 trillion coronavirus relief package, with its $1,400 checks to most households in March — overstimulated the economy, Furman said. “Inflation is a lot higher in the United States than it is in Europe,” he noted. “Europe is going through the same supply shocks as the United States is, the same supply chain issues. But they didn’t do nearly as much stimulus.’’ In a statement Wednesday, Biden acknowledged that “inflation hurts Americans’ pocketbooks, and reversing this trend is a top priority for me.” But he said his $1 trillion infrastructure package, including spending on roads, bridges and ports, would help ease supply bottlenecks. ___ HOW LONG WILL IT LAST? Consumer price inflation will likely endure as long as companies struggle to keep up with consumers’ prodigious demand for goods and services. A resurgent job market — employers have added 5.8 million jobs this year — means that Americans can continue to splurge on everything from lawn furniture to new cars. And the supply chain bottlenecks show no sign of clearing. “The demand side of the U.S. economy will continue to be something to behold,” says Rick Rieder, chief investment officer for global fixed income at Blackrock, “and companies will continue to have the luxury of passing through prices.” Megan Greene, chief economist at the Kroll Institute, suggested that inflation and the overall economy will eventually return to something closer to normal. “I think it it will be ‘transitory’,” she said of inflation. “But economists have to be very honest about defining transitory, and I think this could last another year easily.’’ “We need a lot of humility talking about how long this lasts,” Furman said. “I think it’s with us for a while. The inflation rate is going to come down from this year’s blistering pace, but it’s still going to be very, very high compared to the historical norms we have been used to.”

Inflation will stabilize mid next year

Erin Doherty, 11-10, 21, https://www.axios.com/consumer-price-index-october-inflation-60151fa5-0191-4b8b-9c8a-5fc43e1a47ba.html, Inflation at its highest in 30 years

What they’re saying: “We expected inflation would get worse before it got better, but not this much worse. Particularly painful is the increase in food prices as we approach the holidays, and the rise in energy prices as we plan to travel more to family get-togethers,” Robert Frick, corporate economist with Navy Federal Credit Union, wrote in a research note. “However, both those increases are likely to be temporary, and the forecasts that inflation overall will drop early-to-mid-next year still seems credible,” he added.

Economic fundamentals are strongFelix Solomon, 11-9, 21, https://www.axios.com/economy-inflation-stocks-good-pessimism-biden-997e1f94-f600-4475-8cc3-811fd5cf247c.html, The economy is great, but voters don’t believe it

By the numbers: Economic strength is undeniable, both in the country overall and at the household level. The economy is expected to grow 5.7% this year. Almost 6 million jobs were created just between January and October; the unemployment rate is now just 4.6%. The quit rate, the standard barometer of workers’ optimism, hit an all-time record high of 2.9% in August. Average earnings are up 3.5% this year and 4.9% annually, to $31 per hour. Checking accounts are 50% fatter than they were pre-pandemic, while the bottom 50% of the population now has more than $3 trillion in household wealth — up 32% just in the first half of this year, and up 55% from before the pandemic. Stocks hit a new record high every day last week (and yesterday, too), and are up more than 30% year-t0-date.

Growth outlook strong

Hope King, 11-9, 21, A dose of optimism from JPMorgan, https://www.axios.com/economic-optimism-jpmorgan-94364feb-4f23-4d2f-857b-2174f90700c1.html

With 2021 soon in the rearview, the economic tumult of 2020 is looking more and more like a faded “scar,” J.P. Morgan Asset Management’s team told reporters on Monday. Why it matters: “Bold” and coordinated fiscal and monetary policies not only helped soften the pandemic’s blow — they also set up conditions for more corporate and economic growth, they said. The big picture: The passage of the $1.2 trillion infrastructure bill on Friday is a further example of the U.S. government’s willingness to spend in order to drive economic activity, said David Kelly, the firm’s chief global strategist. That, along with strong corporate profits and low-interest rates, points to strong capital spending in the U.S. over the next 10 to 15 years, he said. Yes, but: Global growth will likely moderate compared to the last decade, as expansion in China — the world’s second-largest economy — slows down. The bottom line: “[T]he growth outlook is pretty good, all things considered — and certainly, it does not look like the global economy has been in any way permanently scarred by the pandemic,” Kelly said.