Is the US economy as resilient as economists say it is? This is the question asked Bridge KhuranaFixed Income Manager Wellington ManagementOne article analyzes how the US economy has evolved since the start of the coronavirus pandemic.
First, Khurana points it out Inflation in the US has slowed significantly in recent months As for the maximum levels. “One of the biggest changes caused by covid economic policies is the high level of inflationReaching levels not seen in the mid-1970s in 2022, however, the result of the restrictive monetary policy needed to control inflation, flattening supply curves amid a rebound in industry and trade. Although the mini CPI rebounded in January, it has been a blow to inflation since then“, he mentions.
Despite the increase, the manager believes inflation is moving closer to the US Federal Reserve's (Fed) 2% objective. “In the six months ended January 2024, the core Personal Consumption Expenditure (PCE) index stood at an annualized rate of 2.5%. This is certainly higher than the semi-annual annualized rate of 1.3% in December 2019. Converging rapidly toward the Fed's long-term 2% inflation target.”He points out.
Khurana also points out that unemployment remains the same as it was before the pandemic. “The US unemployment rate stands at 3.9%, not far from the 3.6% rate at the end of 2019.. Half-year annual growth in total private wages was 1.6%, up from 1.3% in 2019. In other words, Labor market stiffness is not significantly different from pre-Covid“, he mentions.
For this reason, he believes services inflation will remain close to the Fed's target “given relatively stable employment in the US, We should expect inflation of basic servicesThis continued throughout 2023, May also return to levels consistent with the central bank's inflation target“, dice.
One significant change in the United States economy is the public debt, which has increased since the pandemic. “By the end of the third quarter of 2023, US federal, state and local government debt as a percentage of GDP is 117%.“, compared with 101% at the end of 2019. That figure reflects a decline from a peak of 130% in the second quarter of 2020, when government foreign exchange was used to prop up the economy amid pandemic lockdowns,” it noted.
The manager of Wellington Management shows that The increase in US public debt has benefited the US economy, because it has increased consumption. According to him, this fiscal policy has mitigated the impact of a more restrictive monetary policy.
“The tax expense goes directly to companies' income statements. A profit surge fueled by recent fiscal policy has boosted stock prices and increased wealth for many American households. As a result, consumers were able to continue spending on services, allowing the economy to continue to grow above its potential. This dynamic mitigated the effects of rate hikes“, he assures.
Now, he believes public spending cuts may be affected. “As the inflation, unemployment and growth figures show, the economic outlook is not drastically different than it was before the crisis. If public spending falls, we can see that the neutral rate is no different.”He points out.
Khurana ends his presentation by recalling a phrase from the chorus of Jennifer Lopez's famous song 'Jenny from the Black'. “Don't let my diamonds fool you, I'm still the same Jenny from next door.” (“Don't be fooled by the rocks I got. I'm still here, I'm still Jenny from the block“), says the song.
“Like J.Lo's many diamonds, The US economy has new rocks (in the form of tax induced increase in net worth) But it's possible she's still the same Jenny from the neighborhood“, he mentions.
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