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Decades ago, the economist Arthur Okun — chair of the Council of Economic Advisors under Lyndon Johnson — advocated what he called a “high-pressure economy”. He meant one in which expansionary policies could create higher than average gross domestic product growth coupled with low unemployment, resulting in not only a strong economy, but also disproportionate job gains for more vulnerable groups.
This is exactly the kind of policy that the Biden administration has pursued, so far successfully. There were 353,000 new jobs added in January, twice as many as anyone expected, and the gains were seen across nearly all sectors and categories of labour. America has 1.4 jobs available for every unemployed person — far above the historical norm. That makes this the strongest labour market since at least the 1960s. All this, with inflation back at tolerable levels, and markets booming.
The US is enjoying, as Treasury secretary Janet Yellen recently put it, a revival that is “remarkable for both its speed and its fairness”. So, what’s not to like about the high-pressure economy? Nothing — except for the fact that the pressure points may not always skew to the upside. Because of the nosebleed level of the markets, the amount of fiscal stimulus in play, wildly unpredictable geopolitics and the fact that neither the 2020 recession nor the recovery have been historically typical, the high-pressure economy could easily blow off steam in either direction.
There are three pressure points I’m watching closely. The first and most important is the fact that this just isn’t a normal business cycle.
While it’s very difficult to argue that the Biden administration’s new supply-side economic policies aren’t working, or that this recovery is somehow a mirage, it’s also important to remember that the past three years have been hugely atypical because of Covid-19, the war in Ukraine and the Chinese debt crisis, among other things. This makes it much harder to use historical data to predict the future.
As TS Lombard managing director for global macro, Dario Perkins, put it in a recent note, there are still all sorts of macro distortions working their way through the system. These range from big pandemic-related shifts in consumer spending (first in goods, now in services) and supply chains, through pent-up demand from excess savings and fiscal overhang to volume destruction from inflation, confusing signals from China, and so on. The usual economic indicators, such as yield curves and price levels, have been misleading.
Demographic shifts and the artificial intelligence revolution have complicated matters further. Who knew that productivity growth would be one of the strongest in more than a decade, or that older workers retiring would be not deflationary, but inflationary, as asset-rich boomers keep spending through their golden years and younger people get more bargaining power in a hot labour market?
Another pressure point I think about is the difference between the data and the felt experience of the economy. Worries about the economy have eased as continued growth in employment and rising wages have offset a cost of living crisis that saw inflation outpace the incomes of ordinary Americans.
But while consumer confidence has been rising, there is also, I think, a deeper and less well understood sense of long-term economic vulnerability in the American public. They live with virtually no social safety-net in one of the most rapaciously capitalist societies on the planet, where quick hiring and firing with little or no severance pay is still the norm. And while companies are looking forward to the productivity gains of artificial intelligence, workers are increasingly anxious about all the ways in which it will change labour markets — especially for middle-class, white-collar jobs.
Meanwhile, although headline inflation seems to have stabilised, the price of all the accoutrements of middle-class life — such as education, housing and heath care — are still rising faster than the core inflation rate. Healthcare emergencies and debt are a major cause of poverty for people in the US, where more than half of working adults have trouble meeting their health costs.
That would be unthinkable in Europe. America is a place where people can be middle class, even upper middle class, and still feel quite economically vulnerable. We are rich relative to the rest of the world. But we are not secure. And when people fall in the US, it’s a long way down.
The idea of falling brings me to the third and final pressure point, which is the nature of markets today. I was an early Cassandra about the “everything bubble” — where the prices of stocks, housing and other assets all keep rising — and will admit that I’ve lost money as a result.
Corporate profits and upbeat guidance would argue for the milestone asset prices of the moment. Massive concentration in a handful of technology platform companies does not. When the market capitalisation of the Magnificent Seven — Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla — is equal to the combined size of equity markets in Canada, Japan and the UK, one must question valuations.
Or, at the very least, wonder what will happen when the pressure valves are released.