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Is America’s Economy Entering a New Normal? – The New York Times

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Policymakers are wrestling with the reality that the pandemic may mark a turning point in the nation’s economic plot.

The pandemic, and now the war in Ukraine, have altered how America’s economy functions. While economists have spent months waiting for conditions to return to normal, they are beginning to wonder what “normal” will mean.

Some of the changes are noticeable in everyday life: Work from home is more popular, burrito bowls and road trips cost more, and buying a car or a couch made overseas is harder.

But those are all symptoms of broader changes sweeping the economy — ones that could be a big deal for consumers, businesses and policymakers alike if they linger. Consumer demand has been hot for months now, workers are desperately wanted, wages are climbing at a rapid clip, and prices are rising at the fastest pace in four decades as vigorous buying clashes with roiled supply chains. Interest rates are expected to rise higher than they ever did in the 2010s as the Federal Reserve tries to rein in inflation.

History is full of big moments that have changed America’s economic trajectory: The Great Depression of the 1930s, the Great Inflation of the 1970s, and the Great Recession of 2008 are examples. It’s too early to know for sure, but the changes happening today could prove to be the next one.

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

Forecasters predicted that rapid inflation would fade in 2021, only to have those expectations foiled as it accelerated instead. They thought workers would jump back into the labor market as schools reopened from pandemic shutdowns, but many remain on its sidelines. And they thought consumer spending would taper off as government pandemic relief checks faded into the rearview mirror. Shoppers have kept at it.

Now, Russia’s invasion of Ukraine threatens to roil the global geopolitical order, yet another shock disrupting trade and the economic system.

For Washington policymakers, Wall Street investors and academic economists, the surprises have added up to an economic mystery with potentially far-reaching consequences. The economy had spent decades churning out slow and steady growth clouded by weak demand, interest rates that were chronically flirting with rock bottom, and tepid inflation. Some are wondering if, after repeated shocks, that paradigm could change.

“For the last quarter century, we’ve had a perfect storm of disinflationary forces,” Jerome H. Powell, the Fed chair, said in response to a question during a public appearance this week, noting that the old regime had been disrupted by a pandemic, a large spending and monetary policy response, and a war that was generating “untold” economic uncertainty. “As we come out the other side of that, the question is, what will be the nature of that economy?” he asked.

The Fed began to raise interest rates this month in a bid to cool the economy down and temper high inflation, and Mr. Powell made clear this week that the central bank planned to keep lifting them — perhaps aggressively. After a year of unpleasant price surprises, he said the Fed will set policy based on what is happening, not on an expected return to the old reality.

“No one is sitting around the Fed, or anywhere else that I know of, just waiting for the old regime to come back,” Mr. Powell said.

The prepandemic normal was one of chronically weak demand. The economy today faces the opposite issue: Demand has been supercharged, and the question is whether and when it will moderate.

Before, globalization had weighed down both pay and price increases, because production could be moved overseas if it grew expensive. Gaping inequality and an aging population both contributed to a buildup of saving stockpiles, and as money was held in safe assets rather than being put to more active use, it seemed to depress growth, inflation and interest rates across many advanced economies.

Japan had been stuck in the weak inflation, slow-growth regime for decades, and the trend seemed to be spreading to Europe and the United States by the 2010s. Economists expected those trends to continue as populations aged and inequality persisted.

Then came the coronavirus. Governments around the world spent huge amounts of money to get workers and businesses through lockdowns — the United States spent about $5 trillion.

The era of deficient demand abruptly ended, at least temporarily. The money, which is still chugging out into the U.S. economy from consumer savings accounts and state and local coffers, helped to fuel strong buying, as families snapped up goods like lawn mowers and refrigerators. Global supply chains could not keep up.

The combination pushed costs higher. As businesses discovered that they were able to raise prices without losing customers, they did so. And as workers saw their grocery and Seamless bills swelling, airfares climbing and kitchen renovations costing more, they began to ask their employers for more money.

Companies were rehiring as the economy reopened from the pandemic and to meet the burst in consumption, so labor was in high demand. Workers began to win the raises they wanted, or to leave for new jobs and higher pay. Some businesses began to pass rising labor costs along to customers in the form of higher prices.

The world of slow growth, moderate wages gains and low prices evaporated — at least temporarily. The question now is whether things will settle back down to their prepandemic pattern.

The argument for a return to prepandemic norms is straightforward: Supply chains will eventually catch up. Shoppers have a lot of money in savings accounts, but those stockpiles will eventually run out, and higher Fed interest rates will further slow spending.

As demand moderates, the logic goes, forces like population aging and rampant inequality will plunge advanced economies back into what many economists call “secular stagnation,” a term coined to describe the economic malaise of the 1930s and revived by the Harvard economist Lawrence H. Summers in the 2010s.

Fed officials mostly think that reversion will happen. Their estimates suggest low inflation and slow growth will be back within a few years, and that interest rates will not have to rise above 3 percent to achieve that moderation. Market pricing also suggests inflation will slow with time, albeit to higher levels than investors expected in 2018 and 2019.

But some of today’s trends look poised to linger, at least for a while. Job openings are plentiful, but the working age population is growing glacially, immigration has slowed, and people are only gradually returning to work from the labor market’s sidelines. Labor shortages are fueling faster wage gains, which could sustain demand and enable companies to charge higher prices.

Given that, some policymakers and economists have said there is a chance that the economy is 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-pressure, higher-inflation equilibrium, with people earning more and spending more than before,” Neel Kashkari, president of the Minneapolis Fed, wrote in a recent essay.

DeSean McClinton-Holland for The New York Times

Global forces could exacerbate those trends. The past year’s supply chain issues could inspire companies to produce more domestically — reversing years of globalization and chipping away at a force that had been holding down wage and price growth for decades. The transition to greener energy sources could bolster investment, pushing up interest rates and at least temporarily lifting costs.

“The long era of low inflation, suppressed volatility, and easy financial conditions is ending,” Mark Carney, the former head of the Bank of England, said in a speech on Tuesday, speaking of the global economy. “It is being replaced by more challenging macro dynamics in which supply shocks are as important as demand shocks.”

Russia’s invasion of Ukraine, which has the potential to rework global trade relationships for years to come, could leave a more lasting mark on the economy than the pandemic did, Mr. Carney said.

“The pandemic marks a pivot,” Mr. Carney told reporters. “The bigger story is actually the war. That is crystallizing — reinforcing — a process of de-globalization that had begun.”

Mr. Summers said that the current period of high inflation and repeated shocks to supply marked “a period rather than an era.” It is too soon to say if the world has fundamentally changed. Over the longer term, he puts the chances that the economy will settle back into its old regime at about 50-50.

“I don’t see how anyone can be confident that secular stagnation is durably over,” he said. On the other hand, “it is quite plausible that we would have more demand than we used to.”

That demand would be fueled by government military spending, spending on climate-related initiatives and spending driven by populist pressures, he said.

In any case, it could take years to know what the economy of the future will look like.

What is clear at this point? The pandemic, and now geopolitical upheaval, have taken the economy and shaken it up like a snow globe. The flakes will eventually fall — there will be a new equilibrium — but things may be arranged differently when everything settles.

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Fed officials signal rates may head to ‘restrictive’ levels to stabilize economy – PBS NewsHour

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WASHINGTON (AP) — Federal Reserve officials agreed when they met earlier this month that they might have to raise interest rates to levels that would weaken the economy as part of their drive to curb inflation, which has reached a four-decade high.

READ MORE: U.S. prices see smallest rise in eight months, spurring hopes that inflation may be peaking

At the same time, many of the policymakers also agreed that after a rapid series of rate increases in the coming months, they could “assess the effects” of their rate hikes and, depending on the economy’s health, adjust their policies.

After their meeting this month, the policymakers raised their benchmark short-term rate by a half-point — double the usual hike. According to minutes from the May 3-4 meeting released Wednesday, most of the officials agreed that half-point hikes also “would likely be appropriate” at their next two meetings, in June and July. Chair Jerome Powell himself had indicated after this month’s meeting that half-point increases would be “on the table” at the next two meetings.

All the officials believed that the Fed should “expeditiously” raise its key rate to a level at which it neither stimulates or restrains growth, which officials have said is about 2.4 percent. Some policymakers have said they will likely reach that point by the end of this year.

The minutes suggest, though, that there may be a sharp debate among policymakers about how quickly to tighten credit after the June and July meetings. The economy has showed more signs of slowing, and stock markets have dropped sharply, since the Fed meeting.

Government reports have shown, for example, that sales of new and existing homes have slowed sharply since the Fed meetings, and there are signs that factory output is growing more slowly. Gennadiy Goldberg, senior rates strategist at TD Securities, suggested that the minutes released Wednesday might reflect a more “hawkish” Fed — that is, more focused on rate hikes to restrain inflation — than may actually be the case now.

Some officials, particularly Raphael Bostic, president of the Federal Reserve Bank of Atlanta, have indicated since this month’s meeting that the Fed could reconsider its pace of rate hikes in September.

At the meeting, Fed officials agreed to raise their benchmark rate to a range of 0.75 percent to 1 percent, their first increase of that size since 2000. The officials also announced that they would start to shrink their huge $9 trillion balance sheet, which has more than doubled since the pandemic.

The balance sheet swelled as the Fed steadily bought about $4.5 trillion in Treasury and mortgage bonds after the pandemic recession struck to try to hold down longer-term rates. On June 1, the Fed plans to let those securities start to mature, without replacing them. That should also heighten the cost of long-term borrowing.

Powell has said the Fed is determined to raise rates high enough to restrain inflation, leading many economists to expect the sharpest pace of rate hikes in three decades this year. Powell says the central bank is aiming for a “soft landing,” in which higher interest rates cool borrowing and spending enough to slow the economy and inflation. But most economists are skeptical that the Fed can achieve such a narrow outcome without causing an economic downturn.

WATCH: Inequality persists as the U.S. economy recovers from the pandemic

Stock prices have plunged on fears that the Fed’s rate hikes will send the economy into recession. The S&P 500 has fallen for seven straight weeks, the longest such stretch since the aftermath of the dot-com bubble in 2001. The stock index nearly fell into bear-market territory last week — defined as a 20 percent drop from its peak — but rallied Wednesday.

The minutes also showed that some policymakers decided it was appropriate to consider selling some of its holdings of mortgage-backed securities, rather than simply letting them mature. Sales would make it easier for the Fed to transition to a portfolio composed mainly of Treasurys, the minutes said. The Fed did not mention any timing of such sales but said they would be “announced well in advance.”

The Fed has said that by September it would allow up to $30 billion of mortgage-backed securities to mature each month, along with $60 billion in Treasurys. Many analysts doubt that the cap will be reached for mortgage-backed bonds, because mortgage rates having jumped more than 2 percentage points since the start of the year. That means that fewer homeowners will refinance their mortgages because their current loan rates are lower than what is now available in the mortgage market.

Fewer refinancings would force the Fed to sell mortgage-backed securities to maintain its plans to reduce its balance sheet.

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P.E.I. business group sets goals to boost economy — but first it needs workers – CBC.ca

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High-speed internet for all communities on P.E.I., increased wages and support for entrepreneurs — particularly women, Indigenous people and newcomers — were part of a new ​​five-year plan announced Wednesday to boost P.E.I.’s economy.

The Partnership for Growth formed in 2019, and over the last few years received input from more than 200 businesses.

The group has created a plan for economic growth that sets specific goals it wants to see met by 2026, such as increasing the Island’s GDP, improving wages and making P.E.I. a bigger player on the global market. 

“It’s now more important than ever to take the long term view, we’re coming out of COVID-19 our focus has been very short term, now we need to look at what are our priorities to make sure that we got back on track,” said Rory Francis, interim chair for Partnership for Growth.

But first, there are short-term issues that need to be addressed, including a shortage of workers in many industries.

Premier Dennis King said it’s important to work with businesses to help attract and maintain those workers.

‘Good blueprint’

“We also have to be a leader in making sure we have the housing for those that we’re going to need to do here, the skills training, there’s just so many components to this where government can be a leader but also a follower, a supporter as well,” he said.

“Government does best when we take our leadership from others and to have a group that has come together like this across so many sectors of the economy I think this gives us a good blueprint for that.” 

The province will continue to focus on immigration and creating business incentives to improve wages, King said.

The partnership has formed a committee that will help businesses figure out how to achieve their goals.

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German economy dodges recession as war, pandemic weigh – Financial Post

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BERLIN — The German economy grew slightly in the first quarter from the previous one, data showed, with higher investments offset by the twin impacts of war in Ukraine and COVID-19 that experts predicted would weigh more heavily in the three months to June.

Europe’s largest economy grew an adjusted 0.2% quarter on quarter and 3.8% on the year, the Federal Statistics Office said on Wednesday. A Reuters poll had forecast 0.2% and 3.7%, respectively.

The reading meant that Germany skirted a recession, often defined as two quarters in a row of quarter-on-quarter contraction, after gross domestic product (GDP) fell by 0.3% at the end of 2021.

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While household and government spending remained mostly at the same level as in the previous quarter and exports were down at the start of the year, investments grew.

Construction investments, boosted by mild weather, were up 4.6% from the previous quarter, despite price increases, and machinery and equipment investments rose 2.5%.

German business morale rose unexpectedly in May as its economy showed resilience, according to an Ifo institute survey published this week that found no observable signs of a recession.

However, there is no upswing in sight either, and Sebastian Dullien, director of the Macroeconomic Policy Institute (IMK), predicted the effect of the war and pandemic-linked restrictions in China – Germany’s biggest trading partner last year, according to official data – would be much greater in the second quarter.

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ING economist Carsten Brzeski said he was sticking with his baseline scenario of a slight GDP contraction in the second quarter after Wednesday’s reading.

“The build-up of inventories and weak consumption in the first quarter, as well as very weak consumer confidence, clearly dampen the optimism that traditional leading indicators are currently conveying,” he said.

A consumer sentiment index by the GfK institute inched up slightly heading into June from an all-time low in May, with household spending burdened by inflation.

The government forecasts economic growth of 2.2% in 2022. (Reporting by Miranda Murray and Rene Wagner; Editing by Paul Carrel and John Stonestreet)

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