“Is our growth rate too good to be true?”
The Commerce Department reported that the U.S. economy grew at a 6.9% annual rate in the fourth quarter of 2021. This represents the fastest growth in almost 35 years.
Unfortunately, our economy might be on a “sugar high.” Many of the strong numbers reflect a rebound from our pandemic-induced recession.
Andrew Hunter, chief U.S. economist at the research firm Capital Economics, stated, “We do think it’s increasingly the case that the economy is essentially at or rapidly approaching that capacity-constrained, potential level. … The speed limit is lower now than it was before the pandemic.”
For the following reasons, economists believe America will experience a growth rate that will average less than our post World War II rate of 3%:
- Much of the fourth-quarter growth reflected companies restocking inventory.
- The omicron variant reinforced our worries that the COVID-19 virus is not under control.
- Supply-side constraints hamper production and therefore sales.
- Inflation has reduced disposable income, leading to cutbacks in consumption of longlasting durable goods. Purchases of such items as cars, refrigerators and bulldozers fell in December.
- The Federal Reserve has pivoted from improving employment to fighting inflation.
The biggest challenge currently facing the U.S. economy is supply, not demand. Beth Ann Bovino, chief economist at S&P Global, stated, “Businesses are not only struggling to get the goods components to make the product, but they also need the people as well as the components together. Shortages of goods and services are stroking inflation.”
The Federal Reserve recently announced that in mid-March it would start raising interest rates to reduce inflation. With unemployment standing at 3.9%, Fed officials have said that they have met their employment-related goals.
Federal Reserve Chairman Jerome Powell said, “This is going to be a year in which we move steadily away from very highly accommodative monetary policy that we put in place to deal with the economic effects of the pandemic.” Powell went on to say, “We are prepared to use our tools to assure that inflation does not become entrenched.”
He goes on to say, “I do not think it is possible to say exactly how this is going to go. I think there is quite a bit of room to raise interest rates without threatening the labor market.”
Kristina Hooper, chief global market strategist at Invesco, said “This is not the last tightening cycle, and we need to be prepared for it to be faster and for more substantial moves to be made over the course of the year.”
The Fed has abandoned offering forward guidance, the term used for the central bank’s statements that describe its interest rate intentions over the next few years. Forward guidance has been a central feature of Fed policy since 2015.
Many analysts and investors have written off, at least temporarily, what’s known as the “Fed put.” The term “Fed put” is the belief that the Fed will lower interest rates and implement policies to limit the stock market’s decline below a certain threshold. They argue that surging inflation means policy makers will need to tighten monetary policy in the months ahead.
Warren Buffett said “… near zero interest rates have completely changed the financial landscape. It causes stocks to go up, it causes businesses to flourish, it causes an electorate to be happy.” He warns the consequences of easy money policies remain an unanswered question.
The expression “Katy bar the door” is a warning of approaching trouble. Bank of America economists recently said they expect the Federal Reserve to hike rates by 25 basis points seven times in 2022. Increases of this magnitude would mean Katy can no longer be a couch potato because “trouble has arrived.”
Originally published in the Sarasota Herald-Tribune
