US Economics Focus

US Economics Focus

Will the pandemic boost productivity growth?

Productivity growth surged during the pandemic last year, but that was principally due to the disproportionate job losses in low-productivity sectors like leisure & hospitality, which raised the economy-wide average level. The pandemic also accelerated structural changes such as the switch to working from home and online sales, but neither are significant enough to provide any lasting boost to economy-wide productivity growth over the medium term. We are also sceptical that the pandemic-related surge in IT investment will lead to any dot com-style boom in productivity, since it has not ignited the gains in multifactor productivity seen in the late 1990s and early 2000s. Even though the acute labour shortages developing in some sectors would normally herald an acceleration, the return of low-productivity workers means that we expect productivity growth to slow from 2.6% in both 2020 and 2021, to 0.8% in 2022 and 2023. Over the longer term, however, we still expect productivity growth to average 2.0%.

27 July 2021

US Economics Focus

Labour shortages will last well into 2022

The widespread labour shortages evident in the survey data and job opening & quit rates are only partly due to transitory factors, including enhanced unemployment benefits, childcare constraints, and virus fears. Limited international migration, the wave of retirements and mismatches in the labour market appear to be playing a bigger role and will last well into 2022. That will put sustained upward pressure on wages, which is a key reason why we expect core inflation will average 2.5% over the coming years.

29 June 2021

US Economics Focus

Coming surge in core inflation to be sustained

Fed Chair Jerome Powell is resolute in his belief that the burst of stronger inflation we are about to see will prove temporary, with underlying inflation dropping back to the 2% target next year. We are not convinced. Given the breadth of the upward pressure on not just prices but wages too, we believe this will develop into a sustained wage-price spiral. We expect core inflation to consistently exceed the Fed’s target over the next few years although, with the Fed more focused on achieving its inclusive full employment goal, we still don’t expect the Fed to begin hiking interest rates until 2023.

6 May 2021
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US Economics Focus

Introducing our common inflation expectations index

In a world where the Phillips curve is flat, inflation expectations become the key driver of actual inflation over the medium term. But getting a true handle on inflation expectations is difficult because of the large number of diverse measures that are available. Our new common inflation expectations (CIE) index cuts through the noise by using novel quantitative methods to construct a single unifying monthly measure of medium-term expectations. What we find is that, although expectations are still slightly lower than what is needed for the Fed to hit its 2% inflation target, they have rebounded markedly in recent months and, if that trend continues, it won’t be long before the Fed should start to be concerned about a sustained overshoot in actual inflation.

31 March 2021

US Economics Focus

How much stimulus is too much?

Much of the recent discussion on whether the proposed $1.9trn fiscal stimulus, equivalent to nearly 9% of GDP, could be too big when the output gap is closer to 3%, has glossed over the fact that the remaining shortfall in output is concentrated in the sectors most affected by the containment measures put in place to tackle the pandemic. The problem is deficient supply rather than demand. Once widespread vaccinations allow those restrictions to be lifted, however, this massive fiscal stimulus, which comes at a time when the Fed is resolute in its opposition to tightening monetary policy until it has achieved a “broad and inclusive” labour market recovery, will add to the lengthening list of factors that point to inflation surprising on the upside.

23 February 2021

US Economics Focus

$15 minimum wage would add to inflation pressures

We suspect that President Joe Biden’s plan to more than double the minimum wage within four years would have only a minimal impact on GDP. While there would almost certainly be some job losses as a result, we expect most of the adjustment would come via prices, adding to the upside risks to inflation over the coming years. But the big uncertainty here is how the pandemic would influence the outcomes since minimum wage hikes would affect the sectors hit by virus-related restrictions hardest.

10 February 2021

US Economics Focus

What steps will Biden take to tackle climate change?

President-elect Joe Biden stood for election on a far-reaching environmental plan which, although it will be harder to implement with the Republicans likely to control the Senate, still represents a dramatic U-turn from President Donald Trump’s term in office. Even without congressional support, Biden will be able to tighten vehicle fuel economy standards, set more ambitious targets for reducing carbon emissions from power plants, and encourage individual states to implement their own measures. The net impact on the economy will, at worst, be slightly negative and, if it boosts investment and accelerates innovation, could even turn out to be positive.

9 December 2020

US Economics Focus

Pandemic increases risk of high inflation

The pandemic has increased the odds that the US will eventually experience a period of high inflation, principally because we expect the Fed to be less committed to ensuring price stability in the future. The higher public debt burden, slower global labour force growth, and the possibility that globalisation will be partly reversed, are additional reasons to expect inflation to gradually rise over the longer-term to 3% or 4%. Any deflationary pressure from technology is likely to be muted, while several unique factors linked to the pandemic mean that the risk of a near-term slide into deflation is low.

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