The May YTD deficit for fiscal year ending in September, 2022 was $426B, down 79.4% from the $2,064B level of FY 2021. The total FY 2021 deficit was $2,772B, so the same percentage reduction for the whole year estimates a $572B deficit for FY 2022. Visually, the year-to-date pattern most closely matches 2017 which ended with a $666B deficit. In fiscal years 2018 and 2019, the additional deficit for the last 4 months of the year was $245B and $247B, respectively. That gives us a forecast of $672B for FY 2022. DC insider, Wrightson ICAP, recently forecast a deficit of $600-700B.
The conservative forecast of $700B deficit for FY 2022 is 2.8% of the CBO estimate of FY 2022 GDP at $24,694B. The CBO forecast Deficit/GDP ratios of 3.8% and 3.9% for the next 2 years, roughly the same as the pre-pandemic 2018 rate.
Good News: Government Fiscal Stimulus is a 3.5% Annual Drag on the Economy
The reduced federal deficit and state/local deficits compared with history provided a very large drag on first quarter GDP, but the economy recovered in the second quarter and is forecast by the CBO to deliver 3% overall real GDP in FY2023 after a very strong 4.4% in FY2022.
Revenue increases are not sustainable, coming in as much as 2% of GDP higher than trend or expectations. The 2021 economy was very healthy, resulting in spillover tax receipts in 2022 that will not continue.
Our economy has operated effectively for the last 4 decades with a federal budget deficit averaging 2.5% across the business cycle. Starting with 2.8% in 2022 is an unexpectedly good place. Congress and the president will struggle to maintain this level without significant spending or revenue changes in the next budgets.
North Dakota, Wisconsin, Oklahoma, Kansas, South Dakota, Minnesota and Nebraska form a low unemployment core in the Great Plains area. Utah, Idaho and Montana represent the Rocky Mountains. Vermont and New Hampshire lead in New England. Alabama leads the South, while Indiana leads the Midwest.
Jan, 2016: 4.8% through Feb, 2020: 3.5%. 4 years “below full employment”.
Estimates of Natural (Non-accelerating Inflation) Rate of Unemployment (NAIRU) Have Been Biased Upwards and Influenced by One Period of High Inflation and Supply Chain Disruptions
In retrospect, the period before 1976 (oil, trade, inflation shocks) should have used a 4.5% NAIRU for policy decisions. The jump to 6% in the late 70’s and early 80’s is supported by history. The NAIRU was deemed to be 5% or higher as late as 2010, but could have been pegged lower. Based on the lack of inflation during the teens, the rate probably should have been set at 4% or lower.
Macroeconomic Theory
Classical economics asserted that labor markets will naturally find equilibrium wages and quantities of labor employed at the individual labor market (micro) and total economy level. The Keynesian view, embraced by 90% of professional economists, is that there are market imperfections at both the individual market level and total economy level. Most importantly, wages are “sticky downwards”. Currently employed workers resist “losing” wages by accepting pay cuts when demand is lower. Aggregate supply (production) does not automatically create an equal amount of aggregate demand in the short-run, as businesses, individuals, banks and governments often choose to save more during economic downturns or periods of greater risk. Hence, a downturn in the economy caused by any source may result in a prolonged negative spiral, rather than automatically delivering lower prices in product, money and labor markets, which could help to recover these markets.
Microeconomic Theory: Why is There Any Unemployment?
Economists point to frictional and structural factors. Frictional unemployment occurs because labor market information and decisions are not perfect and instantaneous. As with other markets: housing, commercial real estate, offices, bank loans, farm fields, airport gates, container ships, utilities, R&D, IPO’s, private equity, M&A, retail inventories, etc, labor markets are imperfect. It takes time for equilibrium to be found. Given the increased concentration of labor in major metropolitan markets and internet-based recruiting systems, frictional unemployment has decreased in the last 20-30 years.
Structural unemployment occurs because of mismatches between the current skills possessed and skills demanded in a given place or due to legal or regulatory limitations. Binding minimum wages have been a smaller factor in the last 40 years but may have greater impact in the future. Regulatory requirements for professional licensing have increased significantly in the last 50 years (with some “liberalization” seen in recent years), slowing the ability for individuals to move between professions.
The overall labor force participation rate increased for many years as women entered the workforce, but has declined significantly in the last 20 years for men and for women. I’ll provide a detailed analysis of these factors next week. For our purposes, focusing on short-term changes, recent history shows that the labor force participation rate can be 1-2% higher overall. Some workers have not returned from the pandemic challenges. Some early retirees may return to the labor force. Teens and college students may join the labor force at recent wage rates. Marginal groups (elderly, long-term unemployed, handicapped, drug/alcohol recovery, crime history, minorities, limited language skills, inexperienced) may be considered for more positions.
The media tends to emphasize the increased specialization and technical content required for modern jobs. This has resulted in greater structural unemployment, especially among lower-skilled individuals who held and lost manufacturing jobs between 1970-2000. It has also reduced movement between industries which require a core base of knowledge to be effective, with health care being a prime example.
On the other hand, modern corporations that worked through a dozen post-WW II business cycles eventually adapting to the “business cycle”. First, based on Japanese manufacturing, TQM or lean six sigma manufacturing principles, they reduced their operating leverage. Companies devised factories, offices, distribution centers, product lines and national businesses that could be equally profitable from 70-95% of capacity, rather than 85-95% of capacity. Second, they reduced their unavoidable “fixed costs” by importing goods, outsourcing business functions (manufacturing, IT, accounting, legal, marketing, distribution, sales, R&D) and employing temporary labor. Third, businesses systematized their processes so that core production processes could be operated by individuals with limited specialized or tribal knowledge, including managers and support staff. Fourth, businesses increasingly used matrix and project structures to effectively redeploy staff to any areas of need. So, while variable production staff is a smaller share of employment, the remaining “fixed cost” support staff can be more flexibly deployed. Fifth, after 40 years of process re-engineering, data warehouses, activity based costing and balanced scorecard reporting, companies deeply understand variable costs and incremental benefits driven by sales, production, product lines, facilities, territories and projects. “Knee-jerk” reactions to business cycle downturns are less common as firms better understand short-term incremental profits and medium-term costs of hiring and training. Sixth, firms have improved their ability to define “critical success factors” for every position. This has eliminated many irrelevant experience, degree, culture, personality and other factors from hiring screens. Seventh, firms have increasingly rotated staff through line and staff roles, allowing talented individuals to move between these roles and function effectively. Eighth, firms are more strategically oriented, growing profitable product lines and territories and dropping or “selling off” marginal channels. This means that the incremental positive value of most positions persists, even in an economic downturn.
Overall, firms have learned their “applied intermediate microeconomics” and clearly defined the marginal benefits and costs of every position. They understand exactly what incremental profit can be delivered from each position. Hence, the demand for labor services is significantly greater than it was historically, including through the downside of the business cycle. That means that the natural unemployment level is lower than in the past. Firms can profitably put more people to work than ever before.
Economists, Forecasters and Pundits are Reluctant to Predict Unemployment Below 3% Because it Was Rare Historically.
Lobbyists, Journalists, Politicians and Analysts Highlight the Downsides to “Very Low” Unemployment
From a firm’s perspective, a low unemployment labor market causes increased recruiting, hiring and training costs. It results in less well-matched staff to job roles resulting in lower initial productivity. Companies might even, aghast, inadvertently hire some staff with marginally negative profit results. Hence, very low unemployment rates will increase labor costs, reduce profits, reduce demand for labor and possibly bankrupt previously functional firms.
Trade-off Between Unemployment and Inflation: The Phillips Curve
In the 1970’s fight between Keynesians and Monetarists/Classical Economists/Rational Expectations teams, the Keynesians emphasized the historical existence of a short-term trade-off between unemployment and inflation, especially when unemployment was very low due to a high level of aggregate demand. The conservative side noted that the historical data was inconsistent. The “rational expectations” camp emphasized that unexpected increases in inflation would lead to increased wage demands by labor. In the long-run, there is no such thing as a “free lunch”, so effective real wages would return to the level determined by the “marginal productivity of labor”. Based on recent data (pre-pandemic), it appears that the US economy can run at 3.5-4.0% unemployment without triggering significant upward wage pressures. In the post-pandemic world, the “natural” unemployment rate (NAIRU) is unclear. The labor supply has basically recovered to the pre-pandemic level. Wages are up 5% in nominal terms but are down 2% in real terms (see below).
There are Many Unemployment Measures. They Move Together.
Underemployed individuals provide the logical next best full-time employees. The current slack measure is 3.5%, (7.1% – 3.6%) on the low side, but not so low that conversions from this underemployed group to full-time employment cannot be expected.
Jun, 2020 – Jun 2022. Nominal wages up 4.7%/year. CPI up 6.1%. 1.4% real wage decrease.
Dec, 2020 – Dec, 2021. Nominal wages up 4.9%. CPI up 7.3%. 2.4% real wage decrease.
May, 2021 – May, 2022. Nominal wages up 5.2%. CPI up 7.9%. 2.7% real wage decrease.
Nominal wage rates have increased by 5% annually in a period of 7% inflation. Employers have been able to economically justify these increases while adding 7 million people to the labor force.
Beveridge Curve: Job Openings Versus Unemployment Rate.
Historically, there was a well-defined relationship between the national level of job openings as a percent of the labor force and the unemployment rate. Job openings were a low 2-2.5% of the labor force at the beginning of the business cycle, accompanied by higher (6-10%) unemployment, but improved to 4% openings and 4% unemployment. The current labor market has far more job openings, up to 11 million, almost twice as many job openings as unemployed workers, but the unemployment rate has only fallen to 3.6% so far. This is uncharted territory. There are more voluntary quits, so employees are switching jobs at a faster rate. The labor force participation rate has increased with these jobs and higher wages offered. But firms have not found enough acceptable hiring matches to significantly reduce the open positions level. Through time, they are likely to achieve their hiring goals, driving the unemployment rate down below 3%.
The demand for labor already exists. 11 million open positions is 7% of the labor force. We have enough active demand for ZERO % unemployment.
The supply of labor increased by 7 million people since the depths of the pandemic. The rate of monthly additions has slowed from 500-600,000 to 300,000, but that is still 3.6 million jobs added on an annual basis. We only have 6 million total people unemployed!
3. The labor force participation rate is only 62.5%. There is room for millions to return to the labor market. Before the “Great Recession” in 2008 it was at 67%. Many metro areas, large and small, enjoy labor force participation rates above 65%.
4. The underemployed population can provide up to 3% of the total labor market’s full-time jobs.
5. Frictional unemployment is minimal in the internet age. Structural unemployment may be lower than described in the media, as firms have been adapting to the “information age”, high technology and the service economy for 40-50 years.
Finally, many states and metro areas currently have unemployment rates in the “twos”. Nebraska and Utah stand at 1.9%. Minneapolis (1.5%), Birmingham (1.9%) and Indianapolis (2.0%) demonstrate that otherwise unremarkable (!!!) metro areas can function with very low unemployment rates.
Africa 25%. Middle East 25%. Afghanistan $5B, Israel $3B, Jordan $2B, Egypt, Iraq, Ethiopia, Yemen, Colombia, Nigeria, Lebanon $1B each. Top 10 $16B, one-third of total.
Criticisms of Foreign Aid
Limited evidence that specific country investments provide political returns
Limited evidence of anti-terrorism campaign effectiveness (counterexamples)
Weak administrative structure and oversight at all levels
Direct evidence of individual country economic growth due to aid is limited
Some autocratic governments have benefitted from aid
Some aid is diverted to corrupt governments and individuals
Specific high priority countries have provided weak returns (Egypt, Pakistan, Afghanistan, Iraq)
Higher returns could be gained from investing in Western Hemisphere, Eastern Europe.
Health measures, disease rates, lifespans. Global health. Economic development results globally and in individual countries. US trade benefits from developing trade lanes. Global education. Increased number of democracies, commitment to mixed capitalist economies. Lower cost of defense. Terrorism activities thwarted. Improved strength of US alliances. Improved flow through NGOs, multilateral organizations improves effectiveness. Dollar allocation provides US policy leverage.
6-month time limit. A dozen or less bipartisan dignitaries. Retired ambassadors, investors, CEO’s, federal reserve presidents, etc. Make Mitch Daniels the chair.
Assign 2 projects. One to cut government waste. The other anti-inflation policies. No more than a dozen recommendations in each half. Presented to congress for simple yes/no vote, without major amendments allowed.
2. Spend Less Government Money
Fiscal spending is too expansionary for the current situation. Back off. Reduce infrastructure spending for now, spend it in the next recession. Reduce marginal defense programs that only have political reasons. Cut state government spending by 3%, which is budgeted to increased by 9%.
Increase immigration to improve labor supply. Cut tariffs to reduce supplies costs. Lean on local regulators to reduce zoning restraints and one size fits all building codes. Strategically require a higher share of affordable housing and multifamily permits annually in each metropolitan region. Phase-out the mortgage interest tax deduction for second homes.
Loosen regulations for 5 years to encourage increased “all of the above supplies” energy through drilling, coal, oil and nuclear. Suspend federal gas tax for 3 years. Negotiate oil price minimums/maximums between US/Europe/Japan and OPEC.
Reducing inflation is a complicated policy area. The solutions proposed by “experts” are rarely politically appealing. Competing political parties hesitate to provide “wins” to the other. However, 8% inflation after a 2-year pandemic while the US faces Russian war actions is a “national emergency”, worthy of an FDR like approach to “try a few things”. It is an opportunity to overcome individual industry opposition to things that make sense for the country. It is an opportunity to try some left and right solutions.
Setting aside turnout ratios, the growth in actual voters has been strong for a century. 40-48M voted in FDR’s elections. Kennedy and Nixon fought over 69M voters. Clinton and Bush, Sr. attracted 105M voters in 1992. But, Biden vs. Trump shattered records with 158M casting ballots.
Midterm voting rates (as % of eligible voters) soared at 65% in the 19th century. They dropped to 50% at the start of the 20th century and then down to 45% for most of the 30’s to 60’s. They settled down to 40% thereafter. The 2018 election reached 50%, a full 13% points above the all-time low in 2014.
The slightly different measure, percentage of voting age population, shows the same pattern. 49% voting from 1978-94. Just 46% from 1998-2010. Record low of 42% in 2014, followed by an 11%-point climb to 53% in 2018.
Younger voters increased their turnout by 14 points (18-44), while older voters increased by a solid 8%. High school or less educated voters increased turnout by 7 points, while college educated voters added 12 points.
Long-term presidential and midterm voting (% of eligible voters) follows the same pattern. 80% turnout in the 19th century, dropping to 59% by 1912, then averaging 60% in the 30’s to 60’s. Further decline to just 55% for the 70’s-90’s. Minor increase to 60% in the oughts and teens, followed by 67% in 2020.
The more recent percent of voting age population shows 64% from 80-88, a one-time spike to 68% in 1992, decline to 59% from 96-200, slight increase to 61% for 04-16, and then a big jump to 67% in 2020.
Turnout was up in all categories, but especially among Asian, 18-29 year olds and white non-college educated populations.
Voting by all racial groups of 18-24 year-olds was up significantly.
The two measures (% of eligible voters and % of population) track closely. The “election project” numbers show VEP at 63% from 1952-68, declining to 58% for 72-00, increasing a little to 61% for 04-16, before spiking to 66% in 2020.
Income really matters for voter turnout, with rates ranging from one-third to one-half to two-thirds. With increased lower income support for the Republican party, this is less of a partisan issue today.
Since 1969, Democrats have argued that demographic trends will overturn Kevin Phillip’s description of the Emerging Republican Majority. This remains a hotly debated topic.
Election day voting decreased in 2018 and 2020 as mail and early, in-person voting increased. Many commentators claim that this change is a large driver of the increased turnout levels.
Real, inflation-adjusted, interest rates have declined greatly since 1980. At that time, with the risks of variable inflation and surging oil prices, the real mortgage interest rate was 8%. It declined to 5% in the 1990’s and 4% in the 2000’s before falling to 2% in the 2010’s. The financial cost of owning property has rarely been lower.
House Values are Up, Way Up
House prices grew relatively consistently from 1970 through 2000, with a spike in 2005-9 and a return to trend values in 2010-12. In the last 10 years, house prices have increased by 6% annually in nominal terms, or 4% annually in real terms.
Home Ownership Rate is Rebounding, Up 2%
The US homeownership rate averaged 47% from 1900-40. It increased smartly in post WWII times to 60% by 1955 and 64% by 1965. Homeownership averaged 64%+ for the decade of 1969-78. It increased by 1% during 1979-81. In the midst of a difficult depression, homeownership rates dropped back to 64% by 1985, about the same for the last 20 years, setting a “normal” level. Homeownership rates stayed at 64% for the next decade. Ownership rates increased from 64% to 69% in the next decade before declining right back to 63% by 2015. In the last 7 years, despite many headwinds, the home ownership rate has increased by 2%.
Number of Homeowners has Jumped by 7 Million
In 2000, there were 69M owner-occupied homes in the US. This increased by a solid 7M to 76M by 2005. The housing market hit a lull and the number of owner-occupied homes essentially stayed flat for a dozen years, through 2017. The supply of owner-occupied homes then rose by a strong 7M in the next 4 years to 83M!
The housing market is inherently volatile, typically rising by 2 times the trend and then falling to one-half of the trend. Annual housing starts averaged 1.6M from 1960-2008. They declined by a severe 75% to just 0.5M in 2009. Housing starts have subsequently grown 3-fold to 1.6M annual housing starts, but the accumulated lack of new supply is impacting housing markets today.
The period from 1982-2000 showed homeownership rates by the 5 age segments remaining relatively constant; 65+ 78%, 55-64 80%, 45-54 76%, 35-44 67% and <35 40%. The 65+ group increased homeownership from 75% to 80%. During this time, the overall US homeownership rate increased from 65% to 69%, mostly due to the aging of the population, now more heavily weighted towards the groups with 76-80% homeownership versus the 40-67% younger groups.
Homeownership rates grew from 2000 to peak rates in 2004, before declining significantly for all groups except for the 65+ cohort which essentially held it’s own. The adjacent 55-64 class fell 4%. The middle 45-54 group dropped 7%. The typically homeownership growing 35-44 group cratered by 9%. The young <35 group fell by 5%. Hence, the overall rate fell dramatically during this time.
There is a 30 point gap between married couples and other groups, with 84% of married couples owning homes versus about 55% for other family structures.
The US shows dramatically different homeownership rates by racial category. The differences between the 1995 non-Hispanic White rate (70%) and Others/Asians (50%), Hispanics (42%) and Blacks (42%) remain large in 2021 where we see White (74%), Other (57%), Hispanic (48%) and Black (44%). The groups homeownership share gain from 1995 to 2005 were similar, ranging from 6-10%, but the decline from 2005-2015 was only 3-4% for Whites and Hispanics, but 7% for Blacks and Others. The improvement from 2015 to 2021 has been 2% for 3 groups and 4% for the Other/Asian group.
Summary
The Great Recession flattened the housing market. The number of owner-occupied homes in the US remained level at 76 million from 2006 – 2017. The number of housing starts plummeted from 2.0M to 0.5M per year, compared with an historic average of 1.6M. New home construction first exceeded 1.2M units (75% of historic average) again only in 2020, a dozen years later. New home-owning households have increased by 7M units in the last 4 years! The homeownership rate is up 2 points, from 63.5% to 65.5%. Supply is responding to increased demand and higher home prices. Homeownership rates will increase with the economic recovery, but be constrained by higher home prices.
Inflation is back in the news after several quiet decades. The components of the All Urban Wage Earners and Clerical Workers are listed above, comparing Feb 2020 with a 1997 base of 100, and then Jan 2022 with the same base. The most recent weighting of categories is in the rightmost column.
Overall, consumer prices have risen by a modest 2-2.5% annually, just 59% through Feb 2020 and 75% through Jan 2022. Yes, that is a 10% price increase in the last 2 years: 175/159.
The 3 largest components have shown price rises close to the overall average. The biggest sector, Housing (39%), displays slightly higher inflation, at 72% and 85%, closer to 3% annually, with a possibility of higher rises for the next few years. Transportation (22%) reveals lower than 2% annual inflation with a 45% increase across the full period. Food and Beverage (15%) is close to the average with 64% and 82% growth.
Some smaller areas have seen slow price growth. Apparel (3%) has declined in actual prices during this period. Recreation prices (4%) have grown by less than 1% annually.
Education and Information (6%) prices have grown by 1% annually, but this category includes 3 very different subsectors. Information Technology prices have declined throughout the period. No simple 25- year summary is available. Communications prices have dropped by an average of 1% annually. Education prices have grown much faster, more than offsetting the decline in IT and communications prices. The Tuition, Fees and Child Care measure of prices increased by 165% and 171%, more than twice as fast as overall inflation, roughly 4% annually. College tuition (data not in Fred database) increased by 191% and 196%, about 4.5% per year.
The Other Goods and Services (3%) category mostly contains miscellaneous items that don’t fit cleanly in Housing or Food/Beverage. The category displays faster price increases (3.5%) on average due to the very sharp increase in Tobacco prices (taxes) which have grown 4-fold in 25 years (7%/year). Note that alcoholic beverage prices increased by a little more than 2% annually
Finally, Medical Care (7%) has grown by 116% – 125% during these 25 years, about 3.5% annually.
Overall goods prices have grown slowly and service prices more rapidly. Medical care and college prices stand out for their increases, while the price of housing/rentals is flashing warning signs.
The “real” interest rate is the nominal interest rate minus the inflation rate. It reflects the “real” cost of borrowing. Prior to the “Great Recession”, 2% was a typical “real cost” of borrowing money. To entice lenders to lend, borrowers had to pay some “real” amount extra per year, 2%.
The Federal Reserve did what it could to “ease” monetary conditions and lower interest rates to offset the negative impact of the Great Recession in 2008-9.
By the end of 2011, real rates were ZERO or negative. In other words, the Fed went too far. By June, 2013, rates returned to positive territory, but only reached 0.5%, where they remained through the end of 2017, despite president Trump’s complaints that the Fed was constraining the Trump economy. Monetary policies were “easy” for a very long 7-year period.
By May, 2019, real interest rates were back to just 0.5%, having reached a peak of just 1% for 3 months at the end of 2018. With further “easy” money policy, real rates dropped back to ZERO percent by August, 2019. The economy was now 9 years into recovery. Interest rates should have been higher.
The Fed found new ways to “ease” monetary policy as the pandemic struck in 2020. Real interest rates dropped to -1% and stayed there. Monetary policy has been “easy” for more than a decade. Time for inflation. “Too much money chasing too few goods”. “Inflation is always and everywhere a monetary phenomenon”.
Supply Chain Disruption
The recovery has been faster than anyone expected, but most critically, with consumers less eager to buy “in-person” services, they have greatly increased their purchases of goods. The modern US economy relies on imports and modern manufacturers and retailers hold lower inventories to buffer changes.
Standard macroeconomic theory focuses on aggregate demand versus aggregate supply as the key driver of output, unemployment and inflation. When total demand grows faster than remaining excess capacity of total supply, inflation results. The biggest driver of changes in aggregate demand is the level of government spending (demand) minus government taxation (reduces demand).
Historically, various pressures have kept the federal budget deficit between -3% and +3% of GDP, allowing the government to buffer change in private demand through the business cycle. The large drop from -2.5% to -5% in 1979-82 was a factor that contributed to the last major round of US inflation. A similar decline from -2.5% to -4% in 1989-91 increased inflation, but not on such a large scale. It also served to convince President Clinton and congress to reduce the deficit to ZERO by 1997 and run a surplus for a few years.
The 2001 recession caused a 2.5% decrease in this ratio, from a surplus to a deficit. Bush tax cuts, foreign wars and congressional agreement lead to deeper deficits at 3.3% in 2003-4, before some recovery to -1% in 2007, prior to the Great Recession.
Bush, Obama and congress agreed to spend more to fight the Great Recession, pushing the deficit to a worryingly low -9.8% in 2009. There was no agreement on a second major round of spending, so the deficit improved a bit to -6.6% by 2012 and then to a more reasonable -2.5% in 2014-15. Instead of continuing to improve with the economic recovery, it fell a little, to 3.1% in the last year of the Obama economy.
President Trump’s first order of business was to enact “job creating” tax cuts. Unfortunately, the desired boost to economic growth to fund these tax cuts did not occur. The budget deficit increased from 3.1% to 4.6% of GDP, as the economy reached a record long recovery period of a full decade.
To address the pandemic, congress and Trump agreed to spend money to protect the economy and workers, leading to very large budget deficits of 15% and 12% in 2020 and 2021, respectively. Too much aggregate demand for the level of aggregate supply, so we have major inflation.
Summary
Easy money, easy fiscal policy and a 20% increase in demand for goods leads to major inflation. Like a frog getting boiled as a pot slowly warms up, we became complacent based on the apparently “just right” conditions of the late teens (2012-19). The federal budget deficit needs to get back above -5%, real interest rates need to become positive and consumers need to rebalance to consume more services and less goods. I don’t think we’ll see 7% inflation for 2022, but it looks like 4-5% is a good bet. Hold on.
Politics
Biden deserves a good share of responsibility for the government spending budget deficit, as he was seeking to make it even larger. I give him a “pass” on consumer demand for durable goods since it mostly occurred before he started. I also give him a “pass” for the loose Fed monetary policy which has been going on for a decade or so. He was wise to reappoint the Fed chairman, who I believe will raise interest rates as needed to get the real interest rate back to a proper level. In the meantime, Biden will pay politically for higher inflation, which has a “real” impact on the wallets of voters.
Good News 