You don’t need to reach too far into the past to recall a time when economists were concerned with the growth of the U.S. economy. Before the pandemic, over the previous 20 years, our economy barely eked out a 2% rate of growth per year. Today the conversation around if the U.S. will knock itself out of its growth rut seems silly. Within the last few months, we’ve seen record readings for inflation and corporate profitability. Should we now be concerned with a runaway economy, or is this just the apex of an economy continuing to digest a massive helping of federally-funded stimulus?
To those in the camp of inflation is here and only going to get worse, you have no shortage of data points to use to back up your argument. The 800-pound gorilla in the room is wage growth. Job openings hit a record high in April as companies were seeking to fill 9.3 million jobs. Incentives, including signing bonuses, increased base wages, and health care coverage, have all been offered to lure new employees to work. However, if the labor supply continues to fall short even after increased unemployment benefits expire in September, we could see wage growth continue to pressure inflation higher.
Couple a worker supply shortage with companies struggling with their supply chains in addition to input cost increases, and you can see how inflation becomes a scarier prospect than what we’ve become accustomed to in the past. Even during the most recent Federal Reserve meeting Chairman Jerome Powell stated, “Inflation has come in above expectations.” The Fed further reiterated this viewpoint by updating their inflation expectations to 3% for 2021, which is higher than their long-term expectation of 2%.
Despite the ominous clouds of inflation forming above our economy, let’s consider the opinion that many of the inputs related to inflation may have peaked and are on their way back towards a more normalized level. Lumber prices are a great example of this. As you can see in the following chart from a recent Wall Street Journal article, lumber prices skyrocketed to begin the year but have since fallen over 40% from their peak. While prices are still relatively elevated from years past, the trend suggests this critical input for home building should continue to fall and release some pricing pressure from the industry.
Taking a more global perspective, China has in recent weeks repeatedly stated they’ll do everything they can to ensure inflation stays in check. Just last week, the Chinese government committed to releasing their metal reserves to reduce price increases on copper and aluminum. We’ve also seen signs of prices normalizing across other industries as companies increase their output in response to higher demand in the post-pandemic world.
Where do we stand on peak everything? We tend to agree with this assumption. With the pandemic-era stimulus fading away towards the end of the year, we anticipate inflation and associated input prices to fall back to more normalized levels during 2022 and beyond. Corporate earnings should continue to be strong but are unlikely to match their outstanding first-quarter results. And while the Fed appears to be complacent with inflation running hot this year, their recent messaging suggests they’ll be prepared to take action should the specter of inflation become a reality.
Much of what we’ve experienced the past few months was largely expected. Prices were assumed to increase as we all returned to normal. Reacting too quickly to these changes could have caused more trouble down the road. This would have been akin to a parent worrying themselves about how tall their children are when they’re younger, only to have them hit a growth spurt and shoot a few inches higher within a year. We all knew growth was coming. The question was always not if but how much. We’re beginning to get a better sense of how much growth we’ll experience, and it seems as though it’ll stay in check longer-term.