“For a climber, saying that you are stopping by Everest is like saying that you are stopping by to see God.”
– Roland Smith, Peak
The pace of GDP growth is likely to peak in Q2. That makes sense given the amount fiscal stimulus in the first few months.
But it is the pace of deceleration that matters more, and that remains an open question.
This is interest because the pace will affect inflation, yields, and the Fed.
At the moment, it looks “peakish” from GDP expectations to Fed hike timing to CPI forecasts.
Lots of Lines… But Useful
It is a messy chart. But it communicates the point of growth being peakish for the moment and the deceleration in the future. For the second quarter, the growth expectations may be a touch high given the lagging labor market recovery (more on that topic below). That should spill into the third quarter as individuals return to work.
But the story is really about the fourth quarter and the beginning of 2022. Those estimates remain well above the longer term “potential growth” of the U.S. That is somewhere around 2.25%. This summer will continue to see eye-popping GDP and growth statistics as the economy reopens. But the question is what happens after that.
Lots of Churn
There has been a tremendous amount of commentary and headlines surrounding the JOLTS report with much of the focus on the number of job openings soaring. But what might be more important for understanding the labor market dynamics at work here is how many people are quitting their jobs. There is an incredible amount of churn in the U.S. labor force. That 3.1% quit rate represents just under 4 million people.
One side-effect of rising wages is to incentivize job switching. It may turn out that the wage gains were largely captured by quitters and switchers – not necessarily those coming back to the workforce. The churn helps explain the lack of an uptick in labor force participation while hires have moved above pre-covid levels.
How does this tie into the narrative around GDP? With this type of dynamism and job openings, it increases the likelihood of exceedingly strong growth this summer.The question of the pace of deceleration becomes a fourth quarter and 2022 question.
CPI Should Normalize
Then there is inflation.
The above chart is similar to the GDP chart only the retreat toward normality is quicker. Again, all of this makes sense. Inflation pressures are expected to be transitory. But the question is – again – the rapidity of the retreat. After all, the “base effects” that are helping make inflation look horrid today will be completely the opposite in 2022. Simply, the deceleration of inflation could be one of the more surprising features of late 2021 and 2022.
All in 2023
Why is any of the above important? All of the above complicates the Fed’s decision-making. Not to mention, the dynamics of the deceleration will also affect yields – particularly longer duration. For the moment, markets believe 2023 is the year of the hike. Expectations for 2021 and 2022 have receded. Maybe it was all the “talking about talking about taper” talk that moved expectations for a hike higher. Oddly, taper talk (and eventual tapering) would have the effect of pushing down growth and inflation expectations. And therefore yields.
And that is the odd part of all of the above. GDP is going to decelerate with inflation (probably) following suit to even greater extent. All of this while the Fed is talking about talking about tapering their asset purchases. Maybe the decline in the 10-year yield is more signal than noise. With seemingly everything looking peakish, it is worth contemplating what the otherside might look like.
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