Consumer demand, employment, and inflation in the U.S. are showing positive signs, but according to Richmond Federal Reserve President Tom Barkin, caution is still warranted. The pandemic has triggered significant changes in the economy, and the repercussions are yet to fully unfold.
A Delayed Soft Landing
Barkin points out that despite ongoing efforts by central bank officials, the economy has not yet achieved a so-called soft landing in terms of monetary policy. This means successfully bringing inflation back to the Federal Reserve’s targeted rate of 2% without triggering a recession.
Tempering Expectations
While the Fed has observed progress in curbing inflation, Barkin emphasizes that declaring victory and initiating rate cuts may not be the best course of action. Barkin openly expresses his desire for a return to the pre-pandemic economy but provides reasons for exercising caution.
A Paradigm Shift
Barkin acknowledges that the post-pandemic world is different, reflecting on the famous adage that nobody returns unchanged from battle. Although the battles against Covid-19 and inflation cannot compare to actual warfare, their impact on the economy cannot be ignored.
The Lasting Effects of Disruptive Shocks
Highlighting the historical context of economic upheavals, such as those witnessed in the aftermath of the 2008-2009 financial crisis, Barkin cautions about the lasting consequences of disruptive shocks. The pre-crisis level of economic growth was never fully regained, indicating the potential long-term effects.
Areas of Concern
Barkin identifies three key areas that warrant scrutiny regarding lasting changes: the labor market, the housing sector, and deglobalization.
Labor Market Dynamics
The labor market has experienced significant shifts in recent years. Employment remains more than 4% below its pre-pandemic trend, and Barkin highlights a decline in workforce participation as a considerable factor. The aging baby boomer generation is gradually exiting the workforce, contributing to this decline.
Amidst positive indicators, caution remains essential. Barkin emphasizes the need to consider the long-term repercussions and adapt to the transforming dynamics of today’s economy.
The Changing Landscape of the Labor Market and Housing Industry
The labor market has undergone significant changes since the onset of the Covid-19 pandemic. It is currently much tighter, leading to a notable increase in wage growth. According to the Atlanta Fed’s Wage Growth Tracker, wages have risen to 5.0% from the pre-pandemic rate of 3.7%. As a result, there is mounting pressure on wages and potential implications for inflation and the future trajectory of monetary policy.
Similarly, the housing industry has experienced a major transformation. Inventories remain consistently low, reflecting a long-standing issue of under-construction and a shortage of skilled trades workers. These challenges have been compounded by recent increases in construction costs. The current climate of high demand exacerbates the situation further. Spending prolonged periods at home during the pandemic has made individuals more aware of the limitations of their current living arrangements. However, if housing supply continues to fall short of demand, it will continue to drive up prices and rents in the years to come.
The process of deglobalization also presents a considerable risk. The vulnerabilities associated with globally complex supply chains were exposed by the Covid-19 crisis. As a result, countries and firms are reevaluating their trading relationships and supply chains to prioritize resiliency over pure efficiency. This shift in dynamics could potentially lead to upward pressure on goods prices.
Given these changing circumstances, it is prudent to proceed with caution. It is in no one’s interest for inflation to reemerge. With robust demand and a historically strong labor market, there is no rush to tighten monetary policy. Taking the time to gain confidence and carefully assess the situation before initiating any rate adjustments is a wise approach.