Is the US economy entering a new normal?

Pandemic, now war in ukraineIt changed how the American economy works. As economists spent months waiting for conditions to return to normal, they began to wonder what “normal” would mean.

Some changes are noticeable in everyday life: working from home is more common, burritos and road trips cost more, and buying a car or sofa made abroad is more difficult.

But these are all symptoms of the broader changes sweeping the economy — ones that could be a big deal for consumers, businesses and policymakers alike if they persist. Consumer demand has been hot for months now, workers are in great demand, wages are too climbing At a fast pace, prices are rising at the fastest pace in four decades Where strong purchases collide with troubled supply chains. Interest rates are expected to rise higher than they have ever been in 2010 as the Federal Reserve attempts to rein in inflation.

History is replete with the big moments that changed America’s economic course: the Great Depression of the 1930s, the Great Inflation of the 1970s, and the Great Recession of 2008 are all examples. It’s too early to know for sure, but the changes happening today could be the next.

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

Forecasters expected rapid inflation to fade in 2021, only to thwart those expectations as it accelerates instead. They believed workers would return to the job market with schools reopening after the pandemic shutdown, but many of them remained on the sidelines. And they thought consumer spending would dwindle as government pandemic relief checks fade into the rear-view mirror. Shoppers have stay at it.

Now, the Russian invasion of Ukraine threatens the global geopolitical order, and another shock disrupts trade and economic order.

For Washington policymakers, Wall Street investors, and academic economists, the surprises added to an economic puzzle that could have far-reaching consequences. The economy had spent decades achieving slow and steady growth overshadowed by weak demand, interest rates that had chronically shrugged off and tepid inflation. Some question whether this model can change after repeated shocks.

“Over the past quarter century, we’ve seen a perfect storm of anti-inflationary forces,” Federal Reserve Chairman Jerome Powell said in response to a question during a public appearance this week, noting that the old system had been disrupted by a pandemic, massive spending, a monetary policy response and a war that was generating A state of “unspeakable” economic uncertainty. “As we get the other side of that out, the question is: What will the nature of that economy be?” He said.

Fed I started raising interest rates This month in an effort to cool the economy and ease high inflation, Mr. Powell Explain this week That the central bank plans to continue raising it – perhaps aggressively. He said that after a year of unpleasant price surprises, the Fed will set policy based on what is happening, not on the basis of an expected return to the old reality.

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

The usual epidemic has been chronic weak demand. Today’s economy faces the opposite issue: Demand has been too high, and the question is whether and when it will decline.

Previously, globalization was burdened with increases in wages and prices, because production could move abroad if it grew expensive. Both the inequality gap and the aging population contributed to the accumulation of stocks of savings, and since money is held in safe assets rather than being used more effectively, it seemed to limit growth, economic inflation and interest rates in many advanced economies.

Japan has been stuck in a regime of weak inflation and slow growth for decades, and the trend appears to be spreading to Europe and the United States by 2010. Economists have predicted that these trends will continue as the population ages and inequality persists.

Then came the Corona virus. Governments around the world have spent huge sums to get workers and businesses through lockdowns – US Spent about 5 trillion dollars.

The era of under-demand ended abruptly, at least temporarily. The money, which continues to flow into the US economy from consumer savings accounts and state and local coffers, has helped fuel strong buying, as families have bought items like lawn mowers and refrigerators. global supply chains can not keep up.

This combination led to higher costs. The companies also discovered that they She was able to raise prices Without losing customers, they did. And when workers saw their seamless groceries and bills swell, and the cost of boarding flights and kitchen renovations soaring, they began to Ask employers For more money.

Businesses were re-employed as the economy reopened from the pandemic and to counteract the increase in consumption, so the demand for labor was high. Workers started earning the raises they wanted, or leaving for new jobs and a higher salary. some companies Began to pass the increased labor costs Together with 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 settle down to their epidemiological pattern.

The argument for a return to pre-pandemic standards is straightforward: supply chains will eventually catch up. Shoppers have a lot of money in savings accounts, but those stocks will eventually run out, and higher Fed rates will slow spending.

As demand moderates, the logic runs, forces such as an aging population and rampant inequality will push advanced economies back into what many economists callsecular stagnationa term coined to describe the economic hardship of the 1930s and its economic revival at Harvard Lawrence H. Summers in the 2000s.

Fed officials often believe that a rebound will occur. they Estimates She suggests that low inflation and slow growth will return within a few years, and that interest rates will not have to rise above 3 percent to achieve this moderation. As market pricing suggests Inflation will Over time, albeit at higher levels than investors expected in 2018 and 2019.

But some of today’s trends seem poised to stay, at least for a while. Job opportunities are plentiful, but the working age population icy growing, immigration Slowed down, people are gradually returning to work from the margins of the labor market. A labor shortage accelerates wage gains, which can sustain demand and enable firms to charge higher prices.

Given this, some policymakers and economists said there is a chance the economy may be at an inflection point.

It is possible that “the massive fiscal and monetary intervention in response to Covid-19 has moved the economy to a higher stress and inflation equilibrium, where people are earning more and spending more than before,” Neil Kashkari, president of the Minneapolis Fed, wrote in recent article.

Global powers can exacerbate these trends. Last year’s supply chain issues could inspire companies to produce more locally — reversing years of globalization and eroding the force that has been dampening wages and price growth for decades. Switching to greener energy sources can boost investment, raise interest rates and raise costs, at least temporarily.

“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 of the global economy in a speech on Tuesday. “They are being replaced by more challenging macro dynamics in which supply shocks are as important as demand shocks.”

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

“The epidemic is the fulcrum,” he told reporters. “The bigger story, in fact, is the war. This crystallizes – and reinforces – the process of deglobalization that has begun.”

Mr. Summers said the current period of high inflation and recurring supply shocks represented “a period, not an era”. It is too early to say whether the world has changed radically. In the long term, he puts the odds of the economy returning to its old order at around 50-50.

“I don’t see how anyone can trust that secular stagnation is permanently over,” he said. On the other hand, “It is quite reasonable that we have more demand than we are used to.”

This demand, he said, will be fueled by government military spending, spending on climate initiatives, and spending generated by populist pressures.

In any case, it may take years to figure out what the economy of the future will look like.

What is clear at this point? The pandemic, and now geopolitical turmoil, has gripped the economy and destabilized it like a snowball. The chips will eventually fall – there will be a new balance – but things may be arranged differently when everything is settled.