Is the US economy entering a new normal?

The pandemic, and now the war in Ukraine, have disrupted the workings of the American economy. While economists have spent months waiting for conditions to return to normal, they are beginning to wonder what “normal” means.

Some of the changes are noticeable in everyday life: working from home is more popular, burrito bowls and road trips cost more, and buying a foreign-made car or sofa is more difficult.

But those are all symptoms of broader changes sweeping the economy, changes that could be a big problem for consumers, businesses and lawmakers if delayed. Consumer demand has been high for months, workers are desperately wanted, wages are climbing at a rapid rate, and prices are rising at the fastest rate in four decades as vigorous buying collides with murky supply chains. Interest rates are expected to rise higher than ever in the 2010s as the Federal Reserve tries to rein in inflation.

History is full of great moments that have changed the economic trajectory of the United States: the Great Depression of the 1930s, the Great Inflation of the 1970s, and the Great Recession of 2008 are examples. It’s too early to know for sure, but the changes happening today could be next.

Economists have spent the last two years hoping that many of the pandemic-era trends will prove temporary, but that has not yet been the case.

Forecasters predicted that rapid inflation would fizzle out in 2021, only to have those expectations dashed as it accelerated. They thought workers would return to the job market when schools reopen after pandemic closures, but many remain on the sidelines. And they thought consumer spending would decline as government pandemic relief checks faded in the rearview mirror. buyers have kept at it.

Now, the Russian invasion of Ukraine threatens to disrupt the global geopolitical order, another shock disrupting the trade and economic system.

For Washington lawmakers, Wall Street investors and academic economists, the surprises have added to an economic mystery with potentially far-reaching consequences. The economy had spent decades producing slow and steady growth marred by weak demand, interest rates that were chronically flirting with the bottom and lukewarm inflation. Some wonder if, after repeated shocks, that paradigm could change.

“Over the last quarter century, we’ve had a perfect storm of disinflationary forces,” Fed Chairman Jerome H. Powell said in response to a question during a public appearance this week, noting that the old regime had been interrupted by a pandemic, a huge spending and monetary policy response, and a war that was generating “incalculable” economic uncertainty. “As we come out the other side of that, the question is, what will the nature of that economy be?” he asked.

The Federal Reserve started raising interest rates this month in a bid to cool the economy and moderate high inflation, and Mr. Powell cleared up this week that the central bank planned to keep lifting them, perhaps aggressively. After a year of nasty price surprises, he said the Fed will set policy based on what is happening, not an expected return to the old reality.

“Nobody is sitting around the Fed, or anywhere else that I know of, just waiting for the old regime to come back,” Powell said.

The pre-pandemic normal was one of chronically weak demand. Today’s economy faces the opposite problem: demand has been supercharged, and the question is whether and when it will moderate.

Previously, globalization had weighed down both wage and price increases, because production could be moved abroad if it became more expensive. Huge inequality and an aging population contributed to the accumulation of savings reserves, and since the money was held in safe assets rather than put to more active use, it seemed to depress growth. inflation and interest rates in many advanced economies.

Japan had been trapped in the regime of weak inflation and sluggish growth for decades, and the trend appeared to spread to Europe and the United States in the 2010s. Economists expected those trends to continue as populations age and inequality persists.

Then came the coronavirus. Governments around the world spent huge amounts of money to get workers and businesses through lockdowns: United States spent about $5 billion.

The era of poor demand ended abruptly, at least temporarily. The money, which still flows into the US economy from consumer savings accounts and state and local coffers, helped fuel purchases as families bought items like lawnmowers and refrigerators. Global supply chains couldn’t keep up.

The combination drove up costs. As companies discovered that they were able to raise prices Without losing customers, they did. And as workers saw their Seamless and grocery bills rise, airfares rise and kitchen renovations cost more, they began to ask your employers for more money.

Companies were hiring again as the economy reopened from the pandemic and to cope with the explosion in consumption, so the workforce was in high demand. Workers began to win the raises they wanted, or to leave for new jobs and higher wages. some business the increase in labor costs began to pass to customers in the form of higher prices.

The world of slow growth, moderate wage gains and low prices has evaporated, at least temporarily. The question now is whether things will return to their pre-pandemic pattern.

The argument for going back to pre-pandemic norms is simple: supply chains will eventually catch up. Shoppers have plenty of money in savings accounts, but those reserves will eventually run out and the Fed’s higher interest rates will further reduce spending.

As demand moderates, the logic goes, forces like population aging and rampant inequality will plunge advanced economies into what many economists call “secular stagnation”, a term coined to describe the economic malaise of the 1930s and revived by Harvard economist Lawrence H. Summers in the 2010s.

Fed officials mostly think a reversal will come. Their Dear they suggest that low inflation and sluggish growth will return in a few years, and that interest rates will not have to rise above 3 percent to achieve such moderation. Market prices also suggest inflation slow over time, albeit at higher levels than investors expected in 2018 and 2019.

But some of the current trends seem about to last, at least for a while. Job offers are plentiful, but working age population is growing glacially, immigration has slowed down, and people are only gradually returning to work from the fringes of the labor market. The labor shortage is driving faster wage gains, which could sustain demand and allow companies to charge higher prices.

Given that, some politicians and economists have said there is a possibility that the economy is at a tipping point.

“Massive fiscal and monetary intervention in response to Covid-19 may have brought the economy into a balance of higher pressure and inflation, with people earning more and spending more than before,” said Neel Kashkari, president of Minneapolis. fed, wrote in a recent essay.

Global forces could exacerbate those trends. Last year’s supply chain problems could inspire companies to produce more domestically, reversing years of globalization and undermining a force that had been holding back wage and price growth for decades. The transition to greener energy sources could boost investment, raising interest rates and at least temporarily raising costs.

“The long era of low inflation, pent-up volatility and easy financial conditions is ending,” Mark Carney, former head of the Bank of England, said in a speech on Tuesday, discussing the global economy. “It is being replaced by more challenging macro dynamics where supply shocks are just as important as demand shocks.”

The Russian invasion of Ukraine, which has the potential to rework global trade relations for years to come, could leave a more lasting mark on the economy than the pandemic did, Carney said.

“The pandemic marks a turning point,” Carney told reporters. “The biggest story is actually war. This is crystallizing, reinforcing, a process of deglobalization that had begun”.

Summers said the current period of high inflation and repeated supply shocks marked “a period rather than an era.” It is too early to say whether the world has fundamentally changed. In the longer term, he estimates that the chances of the economy returning to its old regime are around 50-50.

“I don’t see how anyone can be sure that the secular stalemate is lastingly over,” he said. On the other hand, “it is quite plausible that we will have more demand than we used to.”

That demand would be driven by government military spending, spending on climate-related initiatives and spending fueled by populist pressures, he said.

In any case, it could take years to know what the economy of the future will look like.

What is clear at this point? The pandemic, and now geopolitical turmoil, have taken hold of the economy and shaken it like a snowball. The flakes will eventually fall, there will be a new balance, but things can be arranged differently when everything settles.

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