Qwick Takes: Is a slowdown imminent for the U.S. economy?
This week, Talking Biz News Deputy Editor Erica Thompson reached out to Qwoted’s community of experts to inquire about the continued supply chain disruptions and the latest stock movements and consumer spending data, which have led some analysts to forecast a slowdown.
Check out some of the top commentary:
Yes, the U.S. economy will experience a slower pace of growth – due in part to the Delta variant. But even without the Delta variant, a slower pace of growth was inevitable as stimulus wears off, extended unemployment benefits end, and the economy has adapted to the ongoing presence of the virus. The U.S. economy is now larger than it was pre-pandemic so further growth is coming from that larger base, not the depressed levels of economic activity seen in the first half of 2020.
If you drop a basketball off a 7-story building, the first bounce is the biggest. The second, third, and fourth bounces are much less impressive. I want to caution that slower economic growth in and of itself isn’t a cause for alarm. Slower economic growth is often conflated with ‘Uh oh, a recession must be coming.’ Not necessarily. Given the size of the U.S. economy, the extent of reopening that has occurred, and the aging demographics of the U.S. population, sustaining annualized growth rates of over 6% (in real terms) as we’ve seen in the first half of 2021 isn’t realistic. An inevitably slower pace of growth, however, is much more likely to be sustainable.
We view labor shortages and supply-chain disruptions as restraining economic growth into 2022. Labor shortages have been the more important of the two thus far in the third quarter, judging from the purchasing manager data for July showing a more noticeable loss of momentum in labor-intensive services industries than in manufacturing. However, chip and other parts shortages clearly have come into play, most visibly in auto sales. Autos are among the most visible components in consumer goods spending and with an important ripple effect on other parts of manufacturing providing inputs to the industry.
Looking ahead, we expect response to the Delta variant affecting frontline services industries to be the most important event shaping the economy’s trajectory during the balance of the year. However, supply shortages, compounded by worsening port congestion globally, will be a restraint on manufacturing through the early months of 2022. The silver lining is that persistent inventory rebuilding from extraordinarily low levels at present is expected by us to underpin manufacturing through the end of next year. Sustained inventory rebuilding should keep economic growth at an above-average (though moderating) rate, even as underlying demand slows to a more sustainable pace with a steady unwind of pent up demand.
The economic challenge of our time lies in monetary phenomenon. The increase of supply money goes into scarce assets, such as real estate or raw materials. The purchasing power of the money decreases. Central banks embarked upon monetarism in concert. Money then traveled into, in particular, risky assets, driving a commodity boom, but also the stock market rally.
The future is clear to see. Money will be printed, and inflation will follow. It won’t be merely transitory. Once the public recognizes inflation, the government ‘solves’ the problem with price controls and restrictive measures. An alternative path would be to allow individuals decide their fates and cease dilution of the money supply.
Disruptions happen, and they upset the supply chain. Disruptions usually occur without warning, although sometimes they can be predicted due to a particular action, such as tariff adjustments and disputes. Unfortunately, throw in a hurricane, wildfires, social unrest, and an unprecedented national election in the U.S., and one can start adding months on top of months necessary to get to the point of predictable service. That’s why it feels counterintuitive that demand is decreasing, but we keep forecasting longer and longer times to get to predictability.
The inflation issue is what you would expect when you had supply chains that have adjusted to specific economic conditions and now rapidly shift to new ones. Last June, if you wanted to take a plane trip, rent a car, and stay at a five-star hotel, it was reasonably inexpensive due to the pandemic. Now it costs a small fortune. Does that mean that there is inflation, and we’re going to get back to 2008 levels of inflation? We may, but as supply and demand equalize, and they usually do naturally or via legislative/executive manipulation, we will most likely stabilize the inflation rate.
Firstly, there’s a loss of sales as a result of shortages to key products, namely microchips. n other places, the inability of incomplete goods to leave factory floors has been due to constrained delivery networks, such as the EverGiven and a scarcity of freight drivers to help manufacturers meet demand and fulfill orders. Should this continue, we would likely see suppliers increase cost of goods exponentially.
This will result in costs being passed onto the consumer due to the lack of options manufacturers and suppliers currently have at their disposals and could be the start of a “supply-side” induced downturn; prices rising at a greater pace than wages, resulting in a decline in consumption. I expect once additional unemployment protections end spending to decline further and wider consumption being reliant on the ability of producers to be able to meet product orders (so workers can thus get paid).
Base interest rates are already at 0.25%, meaning that if we entered a downturn The Fed would not have much room to move south on interest rates and effectively make borrowing easier. [In] fiscal policy, two gargantuan “infrastructure” bills are being proposed that may inadvertently support the current incentives for people to work less and building an expectation among the populace that would have to be far exceeded in the next recession for there to be meaningful upticks in consumer spending and aggregate demand.
Despite the interest and rise of ‘robots’ as a potential solution to supply chain disruptions (and labor shortages), the reality is that the use of robots in industry is nowhere near replacing human workers altogether. And it won’t be in the foreseeable future. Technology such as automation, AI or robotics are a critical help to support human workers – and that support is desperately needed. Through the pandemic, people were responsible for driving results during an array of crucial supply chain and delivery scenarios. The issue of worker shortage is not going to go away quickly. It’s been here for a while – and the pandemic has certainly added to it – but it is not the root cause. So, it won’t stop if the pandemic stops.
Therefore, the slowdowns that are predicted to affect the US economy may be inevitable, but they can be mitigated with adequate amounts of workers available and/or efficient processes in place. People are business’s most crucial asset, as we’ve learned through these labor shortages and supply chain disruptions – without them, supply chains cannot function. The US supply chain is feeling the pinch and it is more than just a little itch. Many production and logistics workers have been set back by the pandemic. Naturally, labor is short. There are more than 10 million open jobs in America to be specific. This trend exacerbates the point that people are the most important and crucial asset within the supply chain when it comes to picking, packing, and distribution. Therefore the industry needs to pay closer attention to how it empowers, protects, and utilizes people.
How come we forget to factor in the role of the federal government and the Fed while forecasting how the American economy will unfold in the near-to-medium term? At this point in time, the federal government’s stimulus and the Fed’s near-zero policy rates are at the heart of how the economy is shaping up. If there is one thing that solely determines the trajectory of economic growth, it is demand. Demand could have been subdued as the pandemic left millions jobless and dealt a body blow to cross-border and even domestic trade. Although the government and the Fed haven’t expressly included the term Keynesian economics in their policy actions, they have been using the theory at a time when it works best.
There is a reason why global stock markets are scaling new peaks, why corporate profits having been soaring, why house prices are skyrocketing, and businesses are offering attractive wages. Enough liquidity has been pumped in by fiscal and monetary policy measures, which is supporting demand. This liquidity is not going anywhere. Call it political pressure on the president due to the Afghanistan situation or anything, the federal government will keep bank accounts flush with money. A slowdown isn’t imminent, but it may be in the making and strike in the long-term.