It is difficult to predict with certainty whether the United States of America is headed towards stagflation, inflation, or deflation. It will depend on a variety of factors, such as economic growth, inflation levels, and the state of the labor market.
In a previous post I wrote about the likelihood that the US economy would experience Inflation (including the hyper-inflation variety), deflation and stagflation.
You can read the full reasoning in that post, but the short answer was that I saw the most likely outcome to be surging inflation followed by deflation. I didn’t make much of stagflation at that time, but it may be time to reassess…
The reason is a best highlighted by a respondent to the Kansas City Fed’s recent Manufacturing Survey said:
“Stimulus and increased unemployment money are wrecking the labor pool. Lower level employees are quitting to make just as much not working.”
Job openings and postings are up, but the labor participation rate (number of working age adults) is still at a rather high 61.4% and unemployment is still 6.2%. This shows that people are not looking for work.
Why?
Many of those not in the labor force (and not looking to be) are in lower paying, menial jobs and they’ve discovered that it’s easier to sit at home and collect stimulus checks and COVID bonus payments than to work a low wage job.
In short: The Biden Administration’s stimulus package has distorted the labor market.
This not only raises the cost of employment (and hence the cost of goods and services, as employment costs are passed on to consumers), it also means more supply chain disruptions and scarcity:
“It is very difficult to handle the increased business with supply chain issues across all materials and finding anyone who wants to work. The federal government has incentivized people to stay home and not be productive.”
Other employers report:
“Unemployed workers have no incentive to return to work given the COVID bonus payments.”
This also has other repercussions for the real economy, such as a labor shortage that could stall the recovery.
A stalled economy means “Stagflation”, and higher prices mean “Inflation”, so the system now looks primed for a stag-flationary outcome.
About the Author
My name is Michael. My background is in technology, not finance.
What this means is that my head isn’t filled with high-flying, new-economy financial theory nonsense that universities pump out these days to justify the absurdity of wall street.
What I lack in letters following my name I make up for in experience. 20 years of active investing experience – counting 3 (as of March, 2020) bubbles and subsequent busts, to be exact.
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