It’s astonishing how quickly things could shift gears in the world we live today. I recall a hot-button debate undertaking the view regarding hazards of the economic growth being witnessed by the United States.
The experts mulled over the timeline appropriate enough for the Federal Reserve to taper its Asset Purchase Program and hike the interest rates. I vividly recall the headlines in the paper: Inflationary spiral in the United States, Sturdy inflation here to stay, and the US heading for an overheated economy. However, while many contested the Fed’s decision to delay a hawkish push for a liberal rebound of the economy, a few weighed the possibility of a dampening economic turnaround or a return of the pandemic. Primarily because of how unlikely the scenarios seemed (even to myself) that currently define the reality of the world’s largest economy. This reality is baffling. As simple as that.
As both the Trump regime and the Biden administration poured stimulus payments into the economy, a popular conception was that the growth was inevitable. Don’t get me wrong, it sure was! When I look back a few months ago, the American economy was bustling beyond expectations. Markets raced to register records while the national GDP surpassed the pre-pandemic levels. In March alone, approximately 80,000 jobs were created: right around the same time when the trillion-dollar infrastructure bill was posited to Congress. The labor productively pivoted the economy to maintain an above 6% growth rate – up from an average 2.3% growth sustained by the US economy since 2010. Clearly, the economy was booming at an acceleration hardly anyone precedented.
Many economists urged the Fed to consider a contractionary shift in the next FOMC meeting: following through with the hawkish cues given by Fed Chairman Jerome Powell. However, the Fed maintained its vague approach of monitoring inflation while allowing a liberal hand to the economy. Yields on the T-note – US Government’s 10-year security – surged past the pre-pandemic records as inflation peaked way beyond the conservative level of 2%. The sentiments clearly implied that people were interested in spending just like the Fed anticipated and the US government tried to enable. Everything seemed on track.
Then came the summers and the supply bottlenecks contributed more to the price surge as wages nudged higher along with the inflating cost of raw material. The Federal Reserve again played its prerogative over inflation, deeming the supply constraints to resolve overtime while workers to join the economy once the stimulus payments evaporated. Things seemed simple enough; let me put it this way – the Fed seemed deft enough to handle the uncertainty. The economy continued to perform well despite a deficit of 6.8 million workers from the January 2020 levels of the labor force. The Fed again reiterated its mantra of ‘Transitory inflation’ debunking the theories of a meltdown and delaying a drawback from its QE program. Apparently, it appeared that the economists were adept while the conviction in their beliefs made it harder to oppose their perspective to allow a breather before the screws were tightened to stymie the unwanted inflation. Even I presumed that this revival from history’s shortest recession would be etched in golden words. I almost believed that we witnessed a financial marvel through policies complex to be comprehended by a naïve. How wrong were we!
Till the delta variant remained a far-fetched threat for the United States, the main concern was inflation and a stunted march towards full employment. Restaurants opened while back-to-office slogans deluged social media. Employers enticed workers through high wages as unemployment benefits expired. Mask mandates were lifted as the country braced to welcome normality. It felt like the Fed peeked into the future somehow as the roadmap towards prosperity panned out exactly as predicted. The delta variant upended the plan entirely.
Several states have now delayed the plans to reopen schools and offices as the virus resurges. States like Texas and Florida are inundated by the caseload as hospitals are unable to facilitate the whelming infected citizens. The CDC advisory has taken a reluctant step back to recommend masks and testing to even the fully inoculated citizens. The worst part is the breakthrough infections that have instilled a fear that receded months ago as vaccination drives appear to be more futile than ever: despite reassurances by the officials that once claimed confidence in the tensile defense of the vaccines earlier. Naturally, the demand is relapsing as worry coupled with uncertainty now reigns the streets of the United States.
Moreover, the supply channels have regressed further as major logistic stakeholders including Vietnam, Japan, and Indonesia are similarly grappling with the unprecedented surge of the variant. How easily we touted that the supply chain struggles would resolve by the end of 2021 and how redundantly we just assumed that the worst was past.
Hurting the US growth from another front is the dwindling Federal stimulus. As stimulus payments expire, so does the fervor shown in consumer spending over the last few months. Reports estimate that while the deteriorating supply chain networks fuelled the producer prices twice beyond the forecasted levels for July, the consumer prices inflated only by 0.5% from June to July. It clearly signifies that the artificial support is fading which would eventually plunge the consumer demand in the following months, ultimately impeding the racing growth of the economy. Furthermore, even the T-note yields collapsed from March highs of 1.75% to as low as 1.13% earlier this month (Bond prices are inversely promotional to yields). This implies that not only consumers, but American investors are turning cautious of a possible meltdown that was played lightly by the Fed and is only now erupting as investors seek safe bets amidst an uncertain growth prospect of both the US and the global economy.
Rental evictions are on the rise as 1.4 million Americans expect to be evicted in the following months despite a last-minute approval of the Federal Moratorium. Apparently, the states are liberal to interpret the pandemic as they may while the federal government has its hands full. National savings are plummeting fast as negative Real interest rates are eating away the savings while growth is shrouded in a mist of uncertainty. Simply put, despite an inflating economy, the consumers are forced to park their savings in low-paying bonds like the T-notes (a possible reason why bond prices are rising and yields are subsequently falling). Some are resorting to head to stock markets to avoid punny gains in the fixed income market. The surging traffic is a possible reason for a record increase in indices like the S&P 500. In short, the superfluous growth in the equities market, a price increase in the consumer market, and nosediving yields in the bond market, all by no means imply a progressive economy but a regress towards a downfall.
Nonetheless, I still believe that the Fed would be able to pull the US out of the pit that is forming, I still believe that the Democrat regime is ingenious enough to push the stimulus pockets a little deeper, and I still believe that the US markets are sturdy enough to resist another bout of a brief recession. Yet, I don’t blindly believe in a magical spell to correct the fall in a fortnight. I expect a more mature response in contrast to a popular push towards a hawkish policy. I only wonder in hindsight: What would have happened if the Fed heeded the popular opinion and tapered early? Surely it would’ve added oil to the fire of pessimism that currently grips the American economy.
The author is an active current affairs writer primarily analyzing the global affairs and their political, economic and social consequences. He also holds a Bachelor’s degree from Institute of Business Administration (IBA) Karachi, Pakistan.