From: allin
The current state of the US economy is being assessed, with key indicators pointing towards a potential soft landing, though some analysts raise concerns about a deeper contraction [04:37]([04:37].
Soft Landing Prospects
Recent economic data suggests a soft landing may be underway [06:29]([06:29]:
- Stock Market - Stocks continue to surge, hitting records, with the S&P 500 up 26% since the previous year, largely due to the performance of tech giants like Nvidia, Meta, Amazon, and Microsoft [04:41]([04:41], [06:35]([06:35].
- Job Market - Job growth appears to have slowed, and unemployment is rising [04:43]([04:43]. In June, unemployment reached 4.1%, the highest since 2021 and an uptick from the historic low of 3.4% in April 2023 [06:03]([06:03]. This cooling of the job market was a major goal for the Federal Reserve [04:50]([04:50].
- Stimulus Savings - Pandemic-era stimulus savings are largely depleted [04:52]([04:52].
Despite these positive signs, some analysts question whether the market’s current highs, driven by a few large companies, truly reflect broad-based demand, and ponder the possibility of a deeper economic contraction or a “mini-recession” in the coming quarters [07:07]([07:07], [07:20]([07:20].
Inflation Trends
Consumer Price Index (CPI) data shows a significant drop:
- Recent CPI Print - CPI came in at 3.0%, cooler than the 3.1% economists expected [04:57]([04:57].
- Month-on-Month Decrease - CPI fell 10 basis points month-on-month, marking the first decrease since May 2020 [05:11]([05:11].
- Lowest in Three Years - This is the lowest CPI reading in three years [05:28]([05:28].
The contraction in inflation is attributed to a combination of sustained high interest rates and rising unemployment [07:37]([07:37]. However, inflation remains persistently high at 3% [12:40]([12:40].
Global and Domestic Factors Affecting Inflation
Global inflation also plays a significant role, as US companies dependent on international labor and materials have raised prices [10:09]([10:09], [18:16]([18:16]. Grocery prices, for instance, are up over 30% since COVID [18:03]([18:03].
Federal Reserve Policy and Interest Rates
The Federal Reserve (the Fed) has been criticized for reacting too slowly to inflation, continuing quantitative easing (QE) for six months after high inflation prints emerged [12:07]([12:07]. Since then, the Fed has aggressively increased rates to combat inflation [12:33]([12:33].
Interest Rate Outlook
Federal Reserve Chair Jerome Powell indicated that the Fed doesn’t need to see 2% inflation to start rate cuts [05:30]([05:30]. Prediction markets now show an 89% chance of at least one rate cut by September, up from 73% previously [05:40]([05:40], [05:52]([05:52].
The 2% Inflation Target Debate
There is a growing discussion in Washington, D.C., about whether the Fed should reset its inflation target from 2% to 3% [09:12]([09:12]. This 2% target was originally proposed by Roger Douglas, the former Finance Minister of New Zealand, based on what he considered a “healthy” rate [10:50]([10:50].
Some argue that given the massive stimulus injected into the economy during COVID, it could take a decade to normalize, making a return to 2% inflation unlikely in the current era [09:42]([09:42]. If 3% becomes the “new normal,” it implies permanently higher interest rates, as the Fed typically aims for a return above the inflation rate [12:47]([12:47]. For example, a 2% real return on a 3% inflation rate would require a 5% interest rate, compared to 4% if inflation were 2% [13:08]([13:08]. Permanently higher interest rates could act as a drag on the US economy and investment by increasing hurdle rates for risk-taking [13:27]([13:27].
Economic Outlook and Predictions
The P/E ratio on the S&P 500 has seen a significant increase, with a large portion attributed to the top seven tech companies [08:44]([08:44], [08:51]([08:51]. Market makers have already priced in the expected rate cuts [08:58]([08:58]. The spread between the S&P 500 Index and an equal-weighted index (where all 500 companies have equal weight) is currently at its most extreme since March 2000, just before the dot-com bust, suggesting a potential “enormous hype cycle” that may need to contract [18:36]([18:36], [19:01]([19:01].
There is significant uncertainty in the economic outlook, with investors facing challenges in valuation given unclear risk-free rates of return [19:39]([19:39], [20:29]([20:29]. A “reset” of rates or equity risk premium may be needed to stimulate the economy [20:02]([20:02].
Partisan Perception of the Economy
Economic perception in the US is often influenced by partisanship. A “partisan economic perception” phenomenon shows that Democrats and Republicans view the economy very differently depending on which party controls the White House [14:35]([14:35]. This divergence in perception tightens during major crises like the dot-com crash, the Great Financial Crisis, and the pandemic [16:09]([16:09], [16:19]([16:19].
This explains much of the tension in the country, as people cannot agree on the state of the economy due to their partisan lenses [16:25]([16:25], [16:33]([16:33]. The perception of progression is often decoupled from actual economic progression, influenced by political leaders’ popularization of their actions [17:42]([17:42], [17:46]([17:46].