Weekly Insights
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Join us every Monday for expert market commentary and analysis. Our weekly webcasts cover key market developments, economic indicators, and investment strategies.
Why Were Economists So Wrong?
High inflation rarely has been tamed without precipitating a recession. Few economic prognosticators thought it could be done. Yet the Fed has steered inflation down toward its 2.0% target while allowing the US economy to fly, avoiding a hard landing. Today, we look at the projections of economists who expected a hard landing of the economy and why their trusty models and indicators failed them.
Productivity Is Roaring Back
The pandemic distorted the economy in many ways, including derailing the productivity boom that we’d been expecting would characterize this decade—our Roaring 2020s scenario. That boom now may be back on track; productivity growth was well above the historical average during the past three quarters. If so, the ramifications for economic growth would be profound, as GDP growth is a function of labor force growth plus productivity growth. … We track the impact of productivity growth by monitoring inflation-adjusted wages, unemployment, unit labor costs, and price inflation rates.
Fairy Tales Can Come True
It doesn’t take a recession to bring down inflation to the Fed’s target! “Immaculate disinflation,” widely dismissed as a fairy tale, has come true. In fact, the current economic picture is enchanting, with GDP growth remaining robust, inflation moderating, unemployment remaining low, and consumer spending holding up even as pandemic-era saving depletes. The fairy dust that’s enabled this ideal economy: productivity growth, three quarters strong and counting. … Fed Chair Powell now faces the high-stakes decision of when to lower the federal funds rate. Too soon risks stimulating asset bubbles. Too late risks overly restrictive real interest rates now that inflation is down.
Let’s Party Like It’s 1999!
Now that investors’ recession fears have abated, they’re focusing on company fundamentals again, so good corporate news is having a stronger bullish impact. Additionally, investors are excited about the potential of AI and the prospect of Fed easing. The possible result: an exuberant meltup phase, which might already be under way and might become irrational. … Unless Fed Chair Powell stresses that he’s in no rush to ease, a speculative bubble could inflate, funded by money moving from interest-paying vehicles into stocks and bonds.
Powell’s Inflation Nightmare
The runaway inflation of the 1970s was whipped only after Paul Volcker took over as Fed chief, doing the deed but not without precipitating a recession. Powell’s efforts to engineer “immaculate disinflation,” lowering inflation without a recession, have gone well so far, as we’ve been expecting. But the specter of 1970s inflation’s twin peaks must keep him up at nights now that Middle East hostilities raise the risk of resurgent energy inflation. … Globally, inflation has been dropping, with China’s economic woes effectively working to export deflation to the rest of the world. But war in the Middle East could jeopardize that scenario if it disrupts oil supplies.
The True Story About Long & Variable Lags
The point between Fed tightening and easing is a good time to reconsider the widely accepted long-and-variable-lags theory of monetary policy. Is the economy still vulnerable to recession from the lagged effects of the 2022-2023 tightening round? We don’t think so. The markets have already started to ease, which should offset some lagged tightening effects. Furthermore, lagged tightening effects don’t invariably cause recessions. Our work shows that recessions result when tightening rounds cause credit crunches, not when they merely tamp down demand, and that credit-crunch precipitated recessions descend quickly, not with lags.
A Dozen Reasons To Be Bearish In 2024 (Not!)
How likely is the stock market to have a down year in 2024? Since down years tend to be associated with recessions, and since a recession is unlikely now that inflation has been approaching the Fed’s target, and since the Fed looks more likely to ease than not, it’s hard to see the stock market ending 2024 lower than it began. … Our last Morning Briefing of 2023 provided a dozen reasons to be bullish in 2024. This first one of the new year provides a dozen reasons not to be bearish.
A Dozen Reasons To Remain Bullish In 2024
The bears who still expect a recession base their arguments on historical precedents: At times in the past when economic indicators were flashing the signs they are today, recessions occurred. But we see good reasons not to apply past rules of thumb to the current set of circumstances. Moreover, our Roaring 2020s thesis that widespread adoption of new technologies will set off a productivity boom is unfolding. As a result, we’re bullish on the outlook for the US economy and stock market. Today, we present the bears’ talking points and our rebuttals, including 12 good reasons for optimism as we enter 2024.
Hard Luck For Hard Landers
The economy has proven resilient, defying all the reasons it shouldn’t be, to which diehard hard landers still cling. We expect that it will remain resilient and that inflation will continue to fall to the Fed’s target (a.k.a. “immaculate disinflation”). In this scenario, the Fed won’t be rushing to ease and won’t ease by much. The Fed’s policy stance is perhaps better cast as “normalizing” than tightening that requires undoing. Labor market supply and demand are coming into better balance, as the Fed would like, though November employment data attest to the labor market’s continued strength
Ho! Ho! Ho!
The stock market’s Santa Claus rally has been turbocharged by a rallying bond market, subsiding inflation, lower oil and gasoline prices—in turn fueling consumers’ purchasing power—diminished fear of the Fed, and China’s economic weakness, which lowers the prices Americans pay for goods imported from there. … Jamie Dimon is right to warn that geopolitical dangers are great, but we don’t ascribe to his view that inflation remains troublesome, the Fed might tighten more, and the consumer’s strength likely isn’t sustainable. We think the economic evidence suggest otherwise on each score. … More good news: The sticky services inflation rates that have concerned the Fed are coming unstuck.