The latest survey of US growth shows little diminishment of economic activity in the near future. A survey of senior business executives in service-oriented companies, such as retailers and banks, rebounded to a three-month high of 58.2 from 54.9 in September, IHS Markit said Friday.
A similar survey of manufacturing activity slipped to 59.2 from 60.7, but it was still quite high. Any reading over 50 signals growth and numbers are above 55 are exceptional.
So now pundits and some economists worry about overheating and a prolonged inflation cycle that might short circuit long term growth prospects. But consumers are sensing the danger and acting rationally without the need for the Federal Reserve to raise interest rates prematurely; at least according to recent sentiment surveys.
“U.S. private sector businesses recorded a sharp and accelerated upturn in output led by the service sector during October, with growth the strongest for three months, albeit still much weaker than seen earlier in the year,” said IHS Markit’s press release.
GDP grew,+16.75 percent year-over-year in the second quarter 2021. It had declined -8 percent in Q2 2020 from its pre-pandemic high such was the impact of the pandemic lockdowns.
We have seen nothing like this GDP recovery since 1980; the recovery from the decade of the Arab Oil Embargo; or the 1950s recovery from World War Two, as shown in the above graph.
What does such growth mean for American consumers and businesses? Firstly, it means rising wages and benefits for employees. There are currently two million more job vacancies than workers looking for work because the demand for goods and service has grown so quickly since last summer and the decline in infection rates.
Secondly, it should mean a continued high level of growth for several years as businesses ramp up capital expenditures for a rebuild of the American economy transformed by the pandemic.
Am I being rash in predicting such growth? I don’t think so, since all US economic sectors are not only playing catch up because of the pandemic, but they see good prospects for years to come.
The worry about ongoing labor shortages and supply bottlenecks is actually helping to cool down the red-hot demand that is causing the current inflation surge, thus tempering price increases that would put a break on sustained growth.
Hence the recent decline in consumer confidence.
“Consumer confidence dropped in September as the spread of the Delta variant continued to dampen optimism,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “Concerns about the state of the economy and short-term growth prospects deepened, while spending intentions for homes, autos, and major appliances all retreated again.”
This is while actual retail sales are up a huge 12 percent in a year, and home prices are rising in double digits annually. It might be a good thing if consumers retreat slightly, as an antidote to the irrational exuberance that is currently infecting the financial and real estate markets.
Fed Chair Janet Yellen just reported that she sees inflation returning to a more normal level next year.
When asked by CNN’s Jake Tapper when inflation would fall back to around the 2 percent, longer-term target area, Yellen said: “Well, I expect that to happen next year … On a 12-month basis, the inflation rate will remain high into next year because of what’s already happened. But I expect improvement … by the middle to end of next year, second half of next year.”
Consumers are in fact acting rationally if they pause and allow the markets to cool down. By preventing prolonged overheating (and possible asset bubbles forming), it will prolong this growth cycle.
Harlan Green © 2021
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