Chart of the week – A new set of outcomes

08.12.21

Chart of the Week – A new set of outcomes

Recently, we highlighted the Federal Reserve’s (Fed) revised set of goals to replace its long-held targets of achieving full employment and 2% inflation, as well as our view on inflation.

The changes at the Fed are important when thinking about the progression of growth and inflation. We believe economic growth has significant support for the remainder of this year and in 2022. We also continue to believe real gross domestic product (GDP) growth will exceed consensus forecasts.

We think the US consumer should continue to drive the economic recovery. We expect job growth to accelerate going forward on the back of strong demand and the expiration of emergency unemployment benefits, which may spur some individuals to return to work. While several states have begun to remove these benefits early, the entire program is set to expire in early September, and President Biden has indicated he will not support an extension. The supply of jobs is extremely high for this stage in the recovery. Data through May shows roughly 9 million job openings, which compares to roughly 3 million early in the prior recovery.

An important factor to consider is the household balance sheet. One way to illustrate this is by looking at the amount of savings accrued above normal rates of saving. From February 2020 through June 2021, consumers have accumulated “excess” savings of nearly $2.5 trillion. Furthermore, household net worth has exploded to the upside, growing by nearly $19 trillion since the end of 2019. On the liability side of the balance sheet, household debt relative to income is the lowest it has been in more than 20 years.

There is some concern in the markets about the economic impact of fading fiscal stimulus, especially as it appears in year-over-year comparisons of economic data. While we are sympathetic to this view, we believe accelerating job growth and the aggregate underlying financial health of consumers should help to offset the fiscal headwinds.

Inflation has clearly surprised to the upside in recent months, driven by a strong recovery and supply chain issues. However, the breadth of inflation has been somewhat muted, as indicated by the Cleveland Fed’s median consumer price index (CPI). While near-term inflation momentum may be close to peaking, we believe a strong US economy and, ultimately a tighter labor market, will lead to sustainably higher inflation.

US Median CPI, year-over-year percentage change

Chart Source: Macrobond. The line represents the current US median CPI, percentage (%) of change year-over-year (y/y). Dates shown are January 1, 2007 to June 1, 2021. Median US CPI is based on data released in the Bureau of Labor Statistics’ monthly CPI report, as calculated by the Federal Reserve Bank of Cleveland. Median CPI is the one-month inflation rate of the component whose expenditure weight is in the 50th percentile of price changes.


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