Tuesday, November 7, 2023

Why Not a Return to the 'Roaring Twenties'?

 The Mortgage Corner

“The Roaring Twenties was a decade of economic growth and widespread prosperity, driven by recovery from wartime devastation and deferred spending, a boom in construction, and the rapid growth of consumer goods such as automobiles and electricity in North America and Europe and a few other developed countries such as Australia.”

Does this sound familiar to history buffs? It’s Wikipedia’s take on the ‘Roaring 1920s’, the era of widespread prosperity and women’s rights as the US recovered from World War One and the Spanish Flu pandemic, in which some 650,000 Americans died.

I know I may be way out on a limb but there could be a repeat in this decade, which I’ve been calling the ‘Roaring Twenty-Twenties.’

There are similarities today. We are still recovering from the COVID pandemic that killed one million Americans, for starters. And consumers are spending like there’s no tomorrow.

The Trump and Biden administrations have passed spending bills of more than $6 trillion to aid the recovery and modernize the American economy, which will boost growth and household incomes for the rest of this decade.

And while we’re not fighting a world war, spending has picked up because of the Middle East and Ukrainian conflicts, just as it did fighting world wars.

Such unprecedented spending is producing results. Third quarter US economic growth has soared to 4.9 percent after just 2 percent real growth in the first two quarters of 2023.

Predictions of Q4 growth are all over the map, in part because few believe that consumers can keep shopping at the current rate. Maybe not, but does that mean massive layoffs and an abrupt halt to the huge construction boom in infrastructure, the environment and expansion of the social safety net going forward?

No, because the Biden administration has focused on infrastructure, clean energy and semiconductor manufacturing, sectors that produce more high paying jobs, Lael Brainard, director of the National Economic Council, said at a White House press briefing.

“Despite repeated forecasts that recession is just around the corner, the U.S. recovery is solid, and inflation is down. Unemployment has fluctuated in a narrow band below 4 percent for 17 months in a row—the longest stretch in 50 years (my emphasis),” said Brainard.

And since Biden took office in 2021 it has already spurred nearly $500 billion in private-sector commitments, she stated.

Critics, mostly conservatives that want smaller government say, however, that it is the major reason inflation isn’t coming down faster. But Brainard counters that annual core CPI inflation has now fallen and is projected to decline further as rents decelerate.

The closely watched category of core non-housing services CPI that Fed Chair Powell has said is most important has run at annualized rate of 3.3 percent over the last six months, close to the 3.2 percent average from the three decades before the pandemic and excluding the financial crisis.

FREDpceinflation

The more general Personal Consumption Expenditure (PCE) inflation indicator, another favored Fed price index, is running at 3.4 percent annually per above FRED graph .

The latest economic data confirm the good news. Labor productivity in Q3 jumped to 4.9 percent, the highest in three years, according to the Bureau of Labor Statistics, in part because of more investment in new technologies such as AI, which means an increased supply of things. Production output in the third quarter rose 5.9 percent, hours worked rose just 1.1 percent.

This is while unit-labor costs, a key measure of wage growth, fell 0.8 percent in the third quarter, the first decline since the fourth quarter of last year, which is another sign of falling inflation since labor costs make up two-thirds of production costs.

So why all the public pessimism that seems to prevail? Economics is a very opaque window to look through in understanding the American economy. The public looks at the cost of everything, and the Fed has posted interest rates at a record pace to slow inflation.

That’s why most Americans are focused on the past and present rather than the future, but this decade has just begun. The Roaring 20’s was a wild ride then, and it will be a wild ride again to a prosperous future.

Harlan Green © 2023

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

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