Predicting the future of any economy is a balancing act on a brittle wire. While many of the major economies appear to be faltering, the big question in the corridors of power is whether the US will continue to grow. The opinion of the experts varies and rests on the delicate balance of the monetary policies of the Federal Reserve (Fed).
The behavior of inflation plays a crucial role. Although it has decreased, inflation is still at high levels (3.17% in July). Unlike the European Central Bank, whose only goal is price stability, Fed Chairman Jerome Powell faces the challenge of weighing not only inflation, but also maximum employment and financial stability.
Although they share similarities, it is important to understand the difference between the nature of inflation in the US and in Europe. In Europe, inflation has been largely driven by supply issues, while in the US inflation is largely a demand issue.
Geopolitical tensions (the struggle for supremacy with China and the war in Ukraine, among others) and the reorganization of globalization are having inflationary supply effects, both in Europe and in the US, with an increase in the prices of many materials raw and manufactured goods. But in Europe we have problems with the energy supply, the main cause of European inflation –largely dependent on Russia until very recently–, which the US does not have. Thanks to fracking technologies, the US has become a net exporter of natural gas and is the world's number one producer of oil (although it still needs to import some).
Regarding demand, part of the inflationary tensions comes in both cases from excess savings during the pandemic and the increase in consumption after its end. But in the United States is added, as the main reason for the increase in prices, a very low unemployment rate (3.5%). Factors such as restrictive immigration policies due to covid, as well as the "great resignation" that has followed the pandemic, in which many young people leave their jobs to live life, leave jobs to be filled and push wages and salaries up .
Political decisions add complexity to this analysis. The public spending programs in infrastructure, green transition and semiconductor production approved by Congress, for more than two trillion dollars, will have inflationary effects and represent a historic break because fiscal expansion measures of this magnitude have never been adopted with rates of unemployment so low
On the other hand, the agreement in the US Senate on May 31 on the extension of the federal government's spending ceiling until January 2025 does not hide the urgent need for fiscal consolidation (of a highly indebted federal state), by increasing taxes and, above all, the reduction of expenses (defense, social security and health).
Furthermore, the Fed's balance sheet has increased tenfold in the last decade, with no one quite sure what effect this may have on inflation and long-term growth.
Even with its maze of uncertainties, the US economy remains the most resilient, productive, and innovative in the world. Starting from similar dimensions 15 years ago, today it almost doubles the GDP of the euro area. The per capita income of the poorest state of the 50 that make up the US (40,461 dollars in Mississippi) is equal to that of France and much higher than that of Spain (29,350 dollars).
The Federal Reserve has raised interest rates ten times since March 2022, from 0% to 5.25%. However, the transmission of this very aggressive monetary policy to prices has been slow due to the savings generated during the pandemic and the increase in consumption of services, which are less likely to be financed than goods. It has had effects on the bond yield curve, disturbing small banks such as Silicon Valley Bank, but it has not affected household consumption or corporate spending and investment.
Jerome Powell will speak today Friday in Jackson Hole. He's looking for a soft landing, so he'll probably need to keep rates high until the economy cools. Will it get there without causing a recession? Today, it seems so.
