Is it possible after years of pandemic and post-pandemic vicissitudes, the US economy is returning to a normal growth pattern, and Americans can breathe easier about the future?
By that I mean consumers are shopping as they did before the pandemic, industries are producing enough to keep inflation in check, and supply-chains fully stocked, even if the Fed won’t begin to drop interest rates until next year.
I believe so, and July’s retail sales are confirming that consumers are healthy and behaving more normally now that the tax season is over.
It surprised some economists that advanced sales for retail and food services jumped 0.7 percent in July, and 3.2 percent over July 2022, as reported by the Census Bureau. But 3 to 6 percent annual sales’ growth has been the norm going back years, seasonally adjusted but not for inflation, per the FRED graph.
Dining out and travel were the biggest beneficiaries of consumers’ largesse. Sales rose a sharp 1.4 percent at bars and restaurants, a sign that they are happy. Internet sales have risen 10.3 percent over the past year, more than double the rate of inflation.
In fact, the so-called ‘new normal’ of post-pandemic activity is looking more and more like the old normal. Unemployment should stay low for the rest of this year, at least. There are still nine million open job vacancies and wages are now rising faster than overall inflation, which should keep economic growth above 2 percent, the average longer-term US growth rate.
Why is inflation slowing so quickly without rising employment? Many economists believed higher unemployment and job losses were needed to slow consumers spending sufficiently to bring down the inflation rate.
Economists such as Paul Krugman believe that might have occurred if inflation expectations had become imbedded—i.e., in the belief that inflation would continue higher for an extended period.
But economies have recovered much more quickly, thanks in large part to the $trillions spent on the pandemic recovery—the ‘new’ New Deal I’ve been talking about.
So, there wasn’t enough time for inflation to become ‘embedded’ (an economic term) in the minds and expectations of Americans. Other countries haven’t invested as much in their recoveries, so are experiencing higher inflation.
A report just out by the NY Fed confirms that inflation expectations are subsiding. The median inflation expectation fell to 3.5 percent in July from 3.8 percent the previous month, and is the lowest reading since April 2021, the report said.
Consumers also expect home-price growth to slow slightly, said the NY Fed. They also see the cost of gas, food, medical care, college, and rent fall in the year ahead. Expectations for food inflation are at the lowest level since September 2020 (5.2 percent).
Why shouldn’t consumers feel better about their future, and act accordingly?
Harlan Green © 2023
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