American inflation is extraordinary because the US economic recovery is ‘exceptional,’ JPMorgan says

New York shopping reopening
People walk through downtown Brooklyn on May 03, 2021 in New York City.

  • The US’ massive stimulus response and a unique labor shortage are fueling stronger price growth.
  • Yet the US is recovering faster than its peers and enjoying an unprecedented demand boom, JPMorgan said.
  • This soaring inflation is a byproduct of the country’s “exceptional” recovery, the bank said.
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Inflation in the US is handily outpacing that of other advanced economies, and it’s probably thanks to the country’s stellar recovery, JPMorgan economists said.

With vaccines rolling out and lockdown measures slowly being lifted, the global economy is on the mend. Advanced economies lead the pack, benefitting from massive stimulus measures and more efficient vaccine distribution. Within that group, the US is among the best performers. The country’s economic output is expected to grow at the fastest rate since the 1950s, and some banks are already revising their estimates for 2022 growth higher on hopes for an even smoother rebound.

Yet concerns of soaring inflation have offset some reopening optimism. A popular gauge of US price growth rocketed 0.6% month-over-month in May and 5% year-over-year, exceeding estimates and marking the largest one-year leap since 2008. Where the Federal Reserve has said it expects the overshoot to be temporary, supply bottlenecks threaten to accelerate inflation further through the year.

JPM Inflation
va JPMorgan

The latest inflation readings are unusually strong, but are likely a byproduct of the US’ outperformance, the JPMorgan team led by Bruce Kasman said in a Friday note. Where the World Bank expects advanced economies to grow 5.4% in 2021, it sees US GDP expanding 6.8% and outpacing peers through the following two years.

The strength of the country’s rebound explains why inflation bounced back so suddenly, the team said.

“Although core inflation is tracking above the pre-pandemic pace elsewhere, the US has been exceptional for a number of reasons,” the JPMorgan economists added.

For one, the country’s service industry was hit particularly hard by the pandemic. Services prices dropped a full 2% at the peak of the downturn, surpassing the damage seen in other advanced economies.

The US also embarked on a far more ambitious stimulus rollout. Congress approved roughly $5 trillion in fiscal support during the health crisis. Much of that aid came in the form of direct payments and bolstered unemployment benefits. Once the country began to reopen, that support drove a demand boom that quickly lifted spending above its pre-pandemic peak. By contrast, spending remained weak in Western Europe, where stimulus wasn’t as large or direct, JPMorgan said.

Trends in the US labor market also contributed to the country’s strong recovery and faster inflation, the team added. Where employers laid off workers en masse at the start of the pandemic, they’re now rushing to rehire and service an unprecedented wave of consumer demand. Job openings soared to a record high in April, but the budding labor shortage also saw quits hit a record and payroll growth slow sharply.

The imbalance between worker supply and employer demand has since driven wages sharply higher as businesses struggle to attract workers. The jumps in labor costs and households’ purchasing power will further lift inflation, the economists said.

That pick-up isn’t to be feared, according to the Federal Reserve. The central bank has said it will let inflation run hot in hopes of driving stronger employment and wage growth through the recovery. President Joe Biden similarly praised the trend in a late-May speech, saying the jump in average pay is a “feature,” not a bug, of the US recovery.

Still, the Fed has hinted it has thought about pulling back on some of its monetary support. The Federal Open Market Committee is expected to maintain its accommodative policy stance but hint at plans to taper its emergency asset purchases when it concludes its June meeting on Wednesday.

Policymakers will likely recognize the spike in inflation rates but maintain that the economy remains far from the Fed’s “substantial further progress goals,” JPMorgan said. The first post-pandemic rate hike will probably arrive in late-2023, the team added, leaving plenty of time for the Fed’s ultra-easy policy to drive the recovery that JPMorgan is calling “exceptional” forward.

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Biden’s break from neoliberalism to invest in the middle class could create ‘the mother of all economic booms’ – an economic commentator explains why

Joe Biden
President Joe Biden delivers remarks about vaccinations, in the State Dining Room of the White House, Tuesday, April 6, 2021, in Washington.

On this week’s episode of “Pitchfork Economics,” Nick Hanauer and David Goldstein talk with Anusar Farooqui, who writes probing analytic essays about economic policy on Substack under the pseudonym Policy Tensor.

Farooqui researches and thinks deeply about some of the most complex systems shaping our world today, and he’s not afraid to take big swings on bold predictions. One such prediction in a recent essay, “The Making of the Mother of All Economic Booms,” caught Hanauer’s attention

In the piece, Hanauer says, Farooqui “argues that the Biden administration is making a really profound break with the last 45 years of neoliberalism, and that that break is going to create probably the biggest economic boom in collective memory, probably since the ’60s.”

If Farooqui is right, the consequences of that boom would be world-changing. Hanauer explained that it would “absolutely create the kind of broad-based growth and benefits that should both transform the economy and also potentially transform politics, which is an even more important achievement.”

The pandemic’s economic impact

Farooqui says that it’s now common knowledge that we’ve seen a slowdown in growth and an increase in income inequality in the decades since the broad global adoption of trickle-down economics as the dominant economic theory.

“What I think has happened, which is the main thesis in that essay,” he explained, “is that elites in the United States today, and technocrats in particular, have come to the conclusion that the only way to stop the political instability which was revealed in 2016 is to restore broad-based growth,” in the form of huge public investments in infrastructure, in support programs, and in policies that will broadly improve the lives of the American people.

“Public investment has been declining, and is really low by historical standards,” Farooqui said. So now, the Biden administration needs to show positive economic progress in a way that can be empirically proven. In other words, the Biden administration wants you to be able to see big improvements to the American middle class with your own eyes after the next infrastructure bills have passed – and before next year’s midterm elections.

Biden’s approach to the economy

The fact that President Biden, who was largely very mainstream throughout his career in the Senate, happens to be the messenger for this economic theory, Farooqui said, is “very pleasantly shocking, I must confess.”

So what has happened to the economy to bring Biden around to this idea of investing deeply in everyday Americans? Farooqui believes that the last 40 years of neoliberal constraints on the economy, in the form of deregulation and tax cuts, have basically hamstrung global economic growth by taking power away from the sectors of the economy that actually produces things.

“All of the great industrial firms are responsible for the mid-century productivity growth” of the 20th century, he said. That productivity was “responsible for the growth of the American working class and the achievement of middle class standards that was the envy of the world.”

But when neoliberalism took root, “the private equity firms went in and really created a market for corporate control.” With their newly unfettered financial might, the equity firms forced industrial companies to “disgorge their services to finance and to essentially move away from an investment in long-term productivity growth and towards the short-term model where you borrow money from the bond market and you do some [stock] buybacks or something.”

“Where bankers used to wait on the industrial firms’ CEOs,” Farooqui explained, “it was now the CEOs who were reporting to the financial analysts – and this relationship of power between Wall Street and industry is crucial to why dynamism vanished from the manufacturing sector.”

Rather than creating products and services that appealed to customers, the sole purpose of every large company became a devotion to increasing shareholder value, creating an “hourglass economy” in which “income growth stalls for the bulk of the population” while wealthy shareholders and CEOs increase their fortunes exponentially.

“So the sheer number of jobs disappear for high school graduates, and this is devastating for working class families,” Farooqui continued. “These depths of despair, beginning at the turn of the century, are a huge story, because those depths of despair are the single best predictor of the swing towards Trump in 2016 – it’s really the pain of working class America.”

Investing in the middle class

The primary argument against these big investments in the American middle class is that it might set off a “macroeconomic instability of some kind,” which has been “baked into people’s minds from the ’70s,” when inflation skyrocketed, Farooqui says.

But when you accept that “inflation is globalized” and not directly tied to the Federal Reserves’ decision to print more money, as Modern Monetary Theory argued, “you get to a place where you can be freed from the old rigidities that prevent a decisive action on the main challenges of the day.”

Does that mean that the tumultuous boom-and-bust economic cycle that we’ve seen over the past 40 years, in which most millennials have lived through three major economic crises, is the result of neoliberalism’s economic stagnation?

Or as Goldstein asked Farooqui, “are you implying we could have had an economic boom all along over the past 45 years? None of the dislocation, none of the inequality, none of the slow growth was necessary or unavoidable, had we not had this swing towards neoliberalism?”

“Absolutely,” Farooqui said. “I’m absolutely certain of that. For example, the Fed could have always run the economy really hot. That could have meant that low-skilled workers’ wages, middle-skilled workers’ wages, people with high school degrees – their wages would have grown at the same rate as college graduates’ salaries, and professional class salaries, which have exploded.”

Many pundits have predicted that we’re on the verge of a once-in-a-lifetime economic boom. But Farooqui’s claims take that idea one step further: He argues that we could potentially see a once-in-a-century realignment that wipes out the old thinking and sets the table for a new understanding of how the global economy works.

While many futurists love to make wild predictions of what the world will be like in a decade or two, the change the Farooqui is foretelling is right around the corner. We won’t have to wait very long to discover if he’s right or not.

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The US economy is set to fully recover to pre-COVID levels this quarter – a feat that took more than 3 years after the last financial crisis

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  • Real gross domestic product for the US economy is set to return to pre-coronavirus levels this quarter, economists say.
  • It’s a feat took more than 3 years after the last financial crisis, Commerzbank analysts said.
  • The IMF has said the scarring from COVID will be far less than after 2008 in advanced economies.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Real gross domestic product for the US economy is likely to retake its pre-coronavirus levels this quarter, economists predict.

The measure of GDP – which provides an inflation-adjusted snapshot of overall economic value – is set for a much faster recovery than after the financial crisis that ran from 2007 to 2009, when the economy took more than three years to regain its pre-crisis size, according to economists at German lender Commerzbank.

“GDP is expected to return to pre-crisis levels as early as the current quarter,” wrote Commerzbank economists Bernd Weidensteiner and Christoph Weidensteiner in a note.

They added that US real GDP took 13 quarters to reach its pre-crisis peak following the financial crisis.

“High-frequency data show that the US economy gained noticeable momentum in March,” they said. “Corona-related restrictions are being relaxed in more and more states, and fiscal policy is pumping trillions of dollars into the economy.”

Goldman Sachs economists have a similar timeline, predicting that real GDP should be well above its pre-coronavirus level by the end of the quarter.

By the firm’s measure, real GDP stood at $19.24 trillion in the final quarter of 2019, and forecasts that it will recover to reach $19.62 trillion in the second quarter of 2021, thanks in large part to strong growth in the first and second quarters.

The US economy shrank 3.5% in 2020, marking its biggest annual contraction since World War II.

But the temporary nature of many of the coronavirus restrictions, the arrival of vaccines, and huge amounts of stimulus mean the economy is set to rapidly rebound in 2021, analysts say.

Commerzbank expects the US economy to grow 6% or more in 2021. Goldman has forecasted growth of 7.2%, more optimistic than the consensus estimate of 5.7%. Both of those estimates would put real US GDP well above its pre-coronavirus level by the end of the year.

On Tuesday, the International Monetary Fund predicted that the world’s richest economies would suffer little lasting damage from the coronavirus pandemic.

The Fund said in a major report that output is expected to be around 1% lower than it would have been by 2024 in advanced economies. That compares to a medium-term loss of output of around 10% after the financial crisis.

The IMF said the unprecedented policy response during the coronavirus crisis had “helped preserve economic relationships, cushioned household income and firms’ cash flow, and prevented amplification of the shock through the financial sector.”

However, it said the loss of output would be much bigger in developing economies, particularly in those with weaker public finances or a reliance on tourism.

Read more: We asked 5 renowned growth-fund managers for their favorite stock picks. These are the 4 that multiple managers think will crush the market going forward.

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Tech stocks lead rebound as investors show renewed optimism around economic recovery

Pimco at NYSE in 2018
Pimco at NYSE in 2018

US stocks rallied at the open on Wednesday after a sharp sell-off the previous day as traders expressed renewed optimism about the economic recovery. The tech-heavy Nasdaq led the charge, with investors piling into rate-sensitive technology stocks as bond yields stabilized.

Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen are set to appear before the Senate at 10 a.m. for the second day of hearings. On Tuesday, Powell said that the US economic recovery had progressed faster than expected but was far from complete and that the Fed would provide support for as long as it takes to fully recover.

Oil prices bounced after their recent slide. A major ship blockage in the Suez Canal could delay supply.

Here’s where US indexes stood after the 9:30 a.m. ET open on Wednesday:

Bitcoin rose by 5%, to above $57,000, after Elon Musk said people could now buy Tesla cars with the world’s most popular cryptocurrency.

West Texas Intermediate crude rose by 3.4%, to $59.70 per barrel. Brent crude, oil’s international benchmark, gained 3%, to $62.67 per barrel.

Gold jumped 0.4%, to $1,731.60 per ounce.

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