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America’s economy is too strong for its own good

T.What day after the latest interest rate rise, seven governors of the Federal Reserve met with some businessmen. Concerns about the impact of monetary tightening would have been quickly dispelled. Cara Walton, of consultancy Harbor Results, spoke of a plastics processor that hired 14 new employees, but only three of her showed up on day one (one of whom was at lunch). quit earlier). Cheetie Kumar, her restaurateur girlfriend, said food and labor costs were rising and her peers were struggling to pay rent. Tom Henning of distribution company Cash-Wa said his company passes the costs on to customers. Demand is holding up, he said, thanks to the amount of money “floating in the economy.”

But anxiety may have crept in as the governor watched. Market in the last two weeksThe central bank’s goal is to keep inflation above 8% year-on-year, approaching a 40-year high. The perception that the central bank is still far from its target and that monetary tightening will continue is wreaking havoc. U.S. stocks have fallen for three straight quarters and have fallen sharply recently. Bond prices are falling, reflecting the turmoil in credit markets. A sharp rise in interest rates in the US has helped the dollar rise, fueling inflationary pressures elsewhere, and other central banks are following the Fed’s lead, regardless of economic conditions. On Sept. 30, Fed Vice Chairman Lael Brainard called on his fellow governors to act “with caution.”She also said the Federal Reserve would take it International influence Consider.

This was an acknowledgment of the risks of the current approach and did not signal that the central bank was changing course. The Fed cannot ignore the strength of the domestic economy. Despite the financial upheaval, America’s economy has reached its limits in important ways. In the labor market, he has two jobs available to all unemployed. According to the Atlanta Fed, wages are up about 7% year-on-year, the fastest pace since the early 1980s. Home prices fell month-on-month in August, but new home sales soared, beating expectations.Corporate profits account for highest percentage in decades GDPConsumer confidence is rising despite rising interest rates.

This is a serious challenge for the Fed. The more resilient the economy, the more difficult it will have to be to contain inflation. As such, further jumbo rate hikes are expected, increasing the risk of financial missteps and eventual recession. There is always a time lag between changes in monetary policy and their actual impact on economic activity. Recent interest rate hikes will inevitably hurt the US economy over the next year. To understand why the Fed is still hawkish despite trouble, it’s important to understand why the economy has so far remained isolated.

fuel in tank

The most obvious factor also explains inflation in the United States.During the covid-19 pandemic, the government was more active than other countries in stimulating the economy. The gap between government spending and revenues) averaged 10.5% in 2020 and 2021, more than triple its pre-pandemic levels and higher than all other rich countries.

Officially, this stimulus ended some time ago. The final big short-term fiscal package is President Joe Biden’s rescue plan for America (ARP) last March. But in reality, stimulation still works through the system.massive ARP Cash only hurts the economy. The state has been granted approximately $200 billion in direct emergency funding. As of August, a fifth of his was still unavailable. And they continue to distribute the claimed funds. In the past few weeks alone, Louisville, Kentucky has ARP Funding for affordable housing. Monroe County, New York has diverted some to medical services. Cumberland County, Tennessee jumped on water and wastewater projects.

More importantly, how stimulus continues to swell the balance sheets of both people and businesses. Households have around $2 trillion in excess savings (compared to pre-pandemic baselines). They are eating this buffer now. The savings rate has dropped significantly this year. But even as inflation eroded their income, reserves allowed them to spend at a decent clip. At the beginning of the third quarter, they had about $2.8 trillion in cash on hand, down from the beginning of the year but about a quarter more than before the pandemic. They’re also taking advantage of strong demand to pass on inflated input costs to customers, protect margins, and even some.Corporate profit after tax reached 12% GDP The second quarter is the highest since at least the 1940s. As long as companies are profitable, they will try to hire employees instead of firing them.

Nor has growth been hampered by soaring energy costs after Russia’s invasion of Ukraine, as in Europe. Certainly, America has benefited in some ways. Exports of both crude oil and petroleum products are at all-time highs. In net terms, the US has exported about 1 million barrels of crude oil and petroleum products per day since Russia invaded Ukraine. A surge in oil export revenues has helped narrow the US trade deficit, and growth is likely to remain flat for the rest of the year.

American consumers are less enthusiastic about higher prices at the pump. They may be more optimistic if they compare themselves to their European peers. Natural gas prices are historically As you can see, it is slightly higher in Europe than in the US. These days they are about five times higher. Europe has gradually been cut off from its main gas supplier, Russia. America is full of energy of its own. Due to the limited liquefaction capacity required for export, most of the gas emitted from the ground is consumed domestically. In Europe, the negative shock from higher energy prices is spurring monetary tightening. In America, the Fed is more or less able to see beyond the energy market turmoil.

Sooner or later, continued interest rate hikes will drag down the US economy. After all, that is the Fed’s intention. The most interest rate sensitive sectors have already taken a hit. Interest rates on 30-year fixed mortgages he hit 7%, the highest in more than a decade. A sharp rise in credit card balances suggests that households are starting to run out of savings. Higher interest rates will only make debt more cumbersome. Corporate profits are also likely to languish, which is one of the reasons for the recent stock market crash.

Nevertheless, a slow and steady return to normal after covid acts as a buffer against these dangers. Inventories of available homes for sale remain very low by historical standards as the supply of building materials, as well as other commodities, has been severely constrained over the past few years. A sharp rise in mortgage rates would normally be expected to lead to a sharp slowdown in construction activity. But this time, builders are still under construction, trying to work through a backlog of unfinished homes.

Meanwhile, product consumption surged during the pandemic as people bought new sofas, larger TVs and fancy exercise bikes for their homes. Now they are back on cruises and concerts. This change is important for the job market, as services tend to be more labor-intensive. Even though consumers spend less overall, they are spending more on the kinds of things that require more workers, boosting employment.

Spread across the economy, this is a powerful trend. The American workforce today is basically the same size as it was in 2019, but its composition is very different. Reflecting the rise of online shopping, transportation and warehousing workers have increased by one million. At the other end of the spectrum, over the past three years he has lost more than a million workers from the leisure and hospitality sector. About two out of three restaurants are understaffed, according to the National Restaurant Association, a lobby group. A slowdown in growth is therefore more likely to dampen rising unemployment than it would otherwise be. Companies suffering from worker shortages have little fat to cut.

very good it’s bad

In some ways, this resilience is welcome. This means that a recession, if it does occur, is likely to be mild. However, the Fed is determined to keep inflation in check and looks to wage growth as an indicator of potential price pressure. Therefore, if the labor market continues to tighten, central banks will move toward tighter and longer-term monetary tightening.

The Federal Reserve (Fed) has already raised interest rates by 3% this year, the steepest rise in 40 years. As turmoil sweeps through financial markets, some economists have criticized central banks for going too far and too fast. Some Fed officials also seem to have cooled down. But their hawkish colleagues are gaining the upper hand after a year of an unexpected rise in inflation. is to do That may be a conservative guess. Even after half a year of tight monetary policy and slowing growth, the economy is still suffering from supply shortages and excess demand, especially for workers. In the face of such a mismatch, the only direction for interest rates is to go up.

https://www.economist.com/finance-and-economics/2022/10/02/americas-economy-is-too-strong-for-its-own-good America’s economy is too strong for its own good

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