Economic Outlook | Summer 2021
In response to the closing of our economy in March of 2020, the government pulled a play out of the 2008 financial crisis playbook; put spending money into the pockets of Americans. The Cares Act and subsequent stimulus payments put billions of dollars into consumer’s bank accounts. Under normal circumstances people would be motivated to spend that money immediately, but during Covid those spending habits were curtailed. With nowhere to go, we spent quite a bit less in 2020 than a typical year. The average savings of Americans skyrocketed in 2020 and many of us still have frothy bank accounts to prove it. However, with over half of the population vaccinated, those bank accounts have grown anxious.1 People are looking for ways to spend those excess dollars. This has led to an increase in demand which few businesses are prepared to meet. Restaurants, factories, and stores are all working overtime to create enough product, serve enough tables, or work enough shifts to keep up with the surge. This combination has led to an imbalance in supply and demand.
What does the imbalance look like?
Consumer spending accounts for about 70% of the U.S. economy and was up significantly in the first half of 2021. In May 2021, retail sales were up by 28% year over year. Food service was up 70.6%, and gas stations saw increases of 57%.2 California has dropped its mask mandate and opened most facilities to full capacity. Though consumer demand rages forward, it is met consistently with supply shortages from furniture to automobiles. Across the globe, the supply chain is still ramping up production and staffing, not the least of which is the world’s largest chip maker, Taiwan Semiconductors. These are the chips required to power the processing in modern automobiles. Exacerbating the Covid created supply chain issues throughout the world are events like the blockage of the Suez Canal. The U.S. supply chain particularly has been hit by a bevy of ransomware attacks on major oil and food production sites and the winter storm which raged through Texas earlier this year. Interestingly, even with the increased demand for workers, unemployment remains at 5.9% or 9.5 million unemployed persons.3
How do we handle the current inflation?
The inflation we are currently experiencing is the result of excess cash and pent-up demand being met by major supply shortages. Everything seems to be more expensive. Housing prices climbed 24% over the last 12-months; a 20-year high.4 Used cars saw their largest monthly price increase in 68 years, which is when UBS researchers began tracking the number.5
The looming question is whether these price hikes are temporary or the beginning of a long-term trend. The Federal Reserve is mandated to control both the unemployment rate and inflation. Fed Chairman Jerome Powell recently indicated that the inflation pressure was likely temporary and specifically related to the Covid-19 shutdown and reopening. The basic assumption is that prices will trend downward as factories and people get back to work, and the supply of goods catches up with the demand for them, through the remainder of 2021.
Could this be a long-term trend?
It is important to remember that long term inflation is primarily driven by consumer psychology. For inflation to persist over time, consumers would have to believe that the things we buy like TVs, cars, cellphones, or groceries will be more expensive in the future than they are today. Habits and expectations are hard things to break, and over the last thirty years, we have typically assumed the opposite. The rise of the information age has conditioned us to assume that technology will continue to more efficiently provide the products we want to buy, making them cheaper over time. It is not likely that Covid has permanently changed our psychology on this matter. However, the Fed does have significant influence over the future value of our money. They have been entrusted to act as the “guardian of our currency” says Wharton Professor of Finance, Dr. Jeremy Siegel. 6 Only time will tell how the fiscal and monetary choices made today will affect inflation and ultimately, our economy in the long run.