Economy

Is the U.S. Economy Too Hot or Too Cold? Yes. – The New York Times

Published

3 years ago

July 21, 2021

The economy is a riddle, but clearly it’s having a harder time rebooting itself than had seemed possible in the spring.

Here’s a riddle: What is both too hot and too cold? The answer: the United States economy in the summer of 2021.

That is the common thread that comes through in economic data; shifts in financial markets; anecdotes from businesses; and experiences of ordinary people who are simultaneously enjoying higher incomes and facing higher prices and shortages.

In the mid-2021 economy, employers are offering higher pay to attract scarce workers; airports and car lots are bustling; and a G.D.P. report due out next week will probably show blockbuster growth. It is also an economy in which inflation is outstripping pay gains for many workers; the share of the population working remains far below prepandemic levels; and bond markets are priced at levels that suggest a high risk of returning to sluggish growth in the years ahead.

Essentially, the economy is having a harder time rebooting itself than had seemed likely in the heady days of spring, when many Americans were getting vaccinated and stimulus payments hit checking accounts.

The Biden administration and the Federal Reserve are betting that they can achieve a smooth transition to an economy that enjoys prosperity without frustratingly high inflation. But for that to happen, a huge mismatch — between economywide demand for goods and services, and the supply of them — will need to be resolved. It’s not clear how long that will take.

“I think we should have expected there to be frictions in getting the economy reopened after this unprecedented shock,” said Karen Dynan, a Harvard economist and a former official at the Federal Reserve and Treasury. “We’ve seen serious frictions, and it’s totally reasonable to expect those frictions to continue.”

Consumer demand for goods, and increasingly services, is exceptionally high, as Americans spend their pent-up savings, government stimulus payments and higher wages. Retail sales were 20 percent higher last month than in June 2019.

But businesses have had a harder time increasing production to fulfill that demand than forecasters were expecting in the spring. This has been particularly glaring in the case of cars, where a shortage of microchips has constrained production.

But supply shortages are evident across all sorts of industries. The latest survey of manufacturers from the Institute for Supply Management cites complaints from makers of furniture, chemical products, machinery and electrical products about the difficulties of fulfilling demand.

That is generating price inflation steep enough to make it ambiguous whether wage increases are truly leaving workers better off. Average hourly earnings in the private sector rose slower than the Consumer Price Index in each of the first six months of the year.

Because of the unique circumstances of the post-pandemic reopening, those numbers most likely understate the pay increase a typical worker has experienced, but the gist is clear: Workers are gaining higher wages, yes, but also paying more for the things they buy.

Much of this appears to be “transitory” inflation pressures that are set to diminish, and in some cases reverse. Bottlenecks are set to resolve — lumber prices have fallen sharply in recent weeks, for example, and used car prices may finally be stabilizing at high levels. But there are also slower-moving effects that could reduce a dollar’s purchasing power for months to come.

Rents are starting to rise sharply, according to a range of data sources. And businesses facing higher prices for supplies and labor may be in the early stages yet of passing on those higher costs to consumers. The Producer Price Index, which tracks the costs of the supplies and services that companies buy, rose 1 percent in June, an acceleration from April and May. This is a signal that inflationary forces may still be working their way through the economy.

“We call it a whiff of stagflation,” said Paul Ashworth, chief U.S. economist at Capital Economics, using the term for a combination of stagnant growth and inflation. “Real growth isn’t weak, but it’s just not as strong as we thought it was going to be. There was a lot of optimism, and now things are coming back to earth a little bit.”

The labor market is the clearest example of a market that is simultaneously too hot and too cold.

Businesses are complaining of labor shortages and offering all kinds of inducements to attract workers. Yet the unemployment rate is a recession-like 5.9 percent. And the share of adults in the labor force — either working or looking for work — has been essentially flat for months, failing to make clear progress to return to its prepandemic level. It was 63.3 percent in February 2020 but has bounced around between 61.4 percent and 61.7 percent for more than a year.

Individuals may be making rational choices for themselves not to work. Older workers may be retiring a few years early, for example, or families may be deciding to get by on one income instead of two. But in the aggregate, the depressed levels of labor force participation will limit the productive potential of the economy.

Hanging over it all is great uncertainty over whether the Delta variant of the coronavirus will create a new wave of disruptions to commerce — both domestically and overseas in places with less vaccine availability. That concern has helped cause big swings in global financial markets, which are increasingly priced in ways suggesting the years ahead will be less the roaring 2020s and more similar to the sluggish 2010s.

In the first three months of the year, longer-term bond yields soared and the yield curve — which charts the difference between shorter-term and longer-term interest rates — steepened. Those both tend to be indicators that investors expect higher growth rates ahead.

That has reversed in recent weeks. The 10-year Treasury yield was 1.22 percent Tuesday, down from 1.75 percent at the recent high at the end of March.

Where does all that leave the too-hot, too-cold U.S. economy? A lot of work has been done to enable the economy to reopen, and there is no shortage of demand from Americans who are feeling flush. But until the economy can find a new equilibrium of prices, wages, output and demand, things aren’t going to feel just right.

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Economy

Canada’s unemployment rate holds steady at 6.5% in October, economy adds 15,000 jobs

Published

1 week ago

November 8, 2024

Anne Joseph

OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.

Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.

Business, building and support services saw the largest gain in employment.

Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.

Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.

Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.

Friday’s report also shed some light on the financial health of households.

According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.

That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.

People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.

That compares with just under a quarter of those living in an owned home by a household member.

Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.

That compares with about three in 10 more established immigrants and one in four of people born in Canada.

This report by The Canadian Press was first published Nov. 8, 2024.

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Economy

Health-care spending expected to outpace economy and reach $372 billion in 2024: CIHI

Published

1 week ago

November 6, 2024

Anne Joseph

The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.

The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.

CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.

This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.

While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.

Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.

The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.

This report by The Canadian Press was first published Nov. 7, 2024.

Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.

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Economy

Trump’s victory sparks concerns over ripple effect on Canadian economy

Published

2 weeks ago

November 6, 2024

Anne Joseph

As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.

Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.

A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.

More than 77 per cent of Canadian exports go to the U.S.

Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.

“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.

“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”

American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.

It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.

“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.

“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”

A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.

Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.

“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.

Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.

With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”

“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.

“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”

This report by The Canadian Press was first published Nov. 6, 2024.

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