The Flations, Re- and In-
We have upgraded our U.S. economic outlook again, to its highest possible rating, an A+. We expect to see a rapid reflation of the U.S. economy over the remainder of this year, with strong momentum heading into 2022. The list of positive impulses is long. It starts with accommodative monetary policy in the form of very low interest rates, asset purchases and liquidity operations. We also now have three rounds of substantial fiscal stimulus in the system. Add in the ramp up in vaccinations, a rapidly improving labor market, huge pent-up demand, improving confidence and ample savings for consumer heaven in the near term. A proposed $2 trillion infrastructure plan, to be spent out over 7 years, would add to the economic expansion. However, the positive boost from infrastructure spending will likely be tempered by increased taxes. We expect these positive forces to drive GDP to new heights this year.
Now for the downside risk factors. Chief amongst these is the potential for new and vaccine resistant strains of coronavirus. Many U.S. states, including Michigan, are seeing cases surge yet again. Beyond just the numbers, there is evidence that new strains of the virus are taking hold in the U.S. However, given progress in vaccinations, along with the removal of age restrictions in many states, including Michigan, the new state surges may have less fuel even if they burn hotter. Also, the political will for yet another round of tighter social mitigation policies appears to be weak. We do not expect to see states significantly tighten business conditions even with resurgent cases.
Supply chain strain is also acting as a brake on the economy. The severe winter weather in Texas and nearby states in February, and the recent lockup of the Suez Canal both added to the pressure on global supply chains. The good news is that the demand is there. The bad news is that some industries, including the very important auto industry, cannot ramp up production to meet demand. That is a better problem to have than weak demand. It is also a temporary problem as tight supply tends to send price signals that eventually increase capacity. More on price signals next.
Higher interest rates are another downside risk. Even though home mortgage rates remain very low by historical standards, they are increasing. Also, in many areas home shoppers are falling over themselves making above-asking-price offers. Rising mortgage rates and double-digit house price gains are leaning against housing affordability, dampening the hopes of potential first time buyers. Rising auto loan rates, higher prices and pared-back dealer incentives are also eroding automobile affordability.
While the U.S. and China are driving global growth, Europe is lagging. Even as the U.K. seeks to roll back its very strict coronavirus polices, other European countries are tightening policies. But there is vocal pushback to tighter coronavirus policies in Europe just as there has been in the U.S. We expect that Europe will join the global post-pandemic economic party by the end of this year, reinforcing the global reflation.
When does the global reflation turn into global inflation? Commodity prices are up across the board. Component prices are up. The stock market is up. House and auto prices are up. Food prices are up. So far, the Federal Reserve has doubled down on its call that the near-term surge in prices is transient, and will not contribute to sustained high inflation. Of course they did. Jawboning inflation expectations down is an important function for the Fed. To date, inflation expectations have loosened and have just begun to drift up. That is not to say that they have become unmoored. The risk is that unmoored inflation expectations may drive a wage-price spiral that could have very negative consequences. High inflation could eventually damage household wealth. It could drive up interest rates and put even more pressure on the rapidly expanding federal debt. It is conceivable that a ramp-up in inflation could eventually be countered by a Volcker-style Fed-induced recession. We expect the Fed to maintain their view for the remainder of this year that near-term inflationary pressure is transient.
For more data, please see the PDF version of this publication by clicking here: April 2021 U.S. Economic Outlook
