November 14, 2023 - 4:15pm
Tuesday’s US inflation report brought a rare bit of good news. After the figures came in lower than expected, traders uncorked the champagne. The narrative that had been building, that the Federal Reserve has turned the corner in its war on inflation and interest rates will soon come back down, received apparent reinforcement. Bond yields plummeted and stocks surged, heralding the start of a so-called Santa Claus rally before the Christmas break.
Of course, the celebration could yet turn out to be premature. Even though it came down more than expected, core inflation remains elevated, and its trend is not yet unambiguously downward. The evidence can be read to support either that core inflation is falling or that it has levelled off around 4%. Which of these one chooses to believe remains essentially a matter of faith.
But, at their current level, real interest rates remain barely positive, which suggests markets are priced for perfection: traders have more or less baked in that the inflation surge has run its course, the pre-pandemic normal will be fully re-established next year, credit will become cheap again, and markets will resume their unending ascent. All it would take to burst this bubble would be for next month’s inflation report to reveal core inflation as remaining stubborn. If that happens, the rally could quickly reverse, and it could turn out to be a dark Christmas for markets.
If, however, next month’s inflation report produces more good news, it could suggest that something really significant is at play in the US economy. In Europe, inflation has fallen on the back of economic weakness and slowing demand. In the United States, it has done so despite an economy that steadfastly refuses to go into recession. On the contrary, job markets remain strong and real wages are even improving. Meanwhile, after falling from last year’s peak, corporate profits now seem to have levelled off.
What that would suggest is that producers are able to cut prices not by slashing wages or profits, but instead because workers are producing more. The most recent productivity report from the US recorded a sharp rise in labour productivity, which allowed labour costs to fall despite better wages. One shouldn’t make too much of a single report, as productivity figures can be quite volatile, but it’s significant that the US surge breaks with the trend in other Western countries, where productivity remains flat or is even falling.
This is, of course, just what the proponents of the Biden administration’s industrial policy said would happen. By pouring public money into new industries, particularly those that advance the decarbonisation of the economy, they claimed they could kickstart a new industrial revolution. The rise in productivity would sustain economic growth, boosting tax revenues and thus allowing the debts incurred to fund the programme to be easily paid off.
In contrast, the long experiment in austerity and tax cuts, of the sort to which the British and German governments continue to cling, has yielded nothing similar. This report could just point to the emergence of a new economic orthodoxy — as the Biden administration has put it, the end of the old Washington consensus and the start of one that is more reminiscent of the New Deal economics of the more distant past.
Whether or not this turns out to be another false dawn, one thing can be said with confidence. In the midst of other uncertainties, we can be sure that dramatic economic news will keep coming from America.
John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).
jarapley
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SubscribeI won’t pretend to know anything about economics, but it seems to me that throwing around a bunch of subsidies to favoured industries isn’t even an economic policy. It’s wishful thinking IMO.
“I won’t pretend to know anything about economics”
Yep, I think we all knew that already.
Snide and uncalled for.
‘The evidence can be read to support either that core inflation is falling or that it has levelled off around 4%.’
It was 1.6% when Biden won the election.
In July 2023 this year Kamala Harris proclaimed ‘Most Americans are a 400 dollar unexpected expense away from bankruptcy.’
Moody’s has just downgraded America’s credit rating, citing the huge debt.
Biden spent a huge amount of money, just like the article claims. It is easy to create jobs by pouring money into projects.
Not so easy to get the money back out again……
Are you seriously suggesting that inflation is Biden’s fault. Even I, who loathe the Tories, don’t blame them for far worse inflation in the UK.
SO Biden has no influence over the rate of inflation? That rather skewers the point of the article, I would say.
According to the Guardian ‘US inflation rate rose to 6.8% in 2021, its highest since 1982’2021 was, of course, when Biden moved into the White House.
Agree. Focussing on inflation misses a number of points particularly around fiscal dominance. Whilst lower interest rates will help US govt debt, CRE challenges and corporate zombies (many of which are coming up for refinancing), congress is still spending like drunken sailors and the debt:gdp ratio is deemed by many macro economists to have reached doom loop levels. There are also questions being raised about the jobs numbers; these are now revised post issue with regular monotony. My undersranding is that analysts are increasing bespoke measures becase of a lack of faith in official numbers. But I’m no economist.
‘Bidenomics’. Something tells me he is not the brains behind this strategy. Or any strategy.
Stop watching Fox and reading Breitbart. Try thinking for yourself.
I suspect your idea of “thinking for yourself” has a lot in common with Joe Biden.
Yes, unlike the sheep who post the usual right wing talking points around here.
Sound familiar, Stevie?
It does, from the last time you posted it.
So the toady admits it.
Never watched either. I’ve seen plenty of clips of Sleepy Joe at the wheel however. Seriously – this guy seems to be high on sleeping pills or something the whole time.
Stop watching BBC and reading Salon. Try thinking for yourself.
‘The rise in productivity would sustain economic growth, boosting tax revenues and thus allowing the debts incurred to fund the programme to be easily paid off.’
As Del Boy would say, lovely jubbly.
Just 4 days ago, CNN reported ‘Even the prospect of a US downgrade could hurt Americans’ investment portfolios, make it even more expensive for them to borrow money, and make it more costly for the government to pay off its debts.
These effects would likely be even more painful if Moody’s does eventually downgrade the US debt.’
If CNN says Biden is in deep doo-doo, you can imagine how deep the doo-doo must really be.
Well, let’s remember that the New Deal turned recession into depression and prolonged the economic downturn all the way to WWII. Moreover, the inflation is cumulative, and as such, even the 4%, keeps on adding on.
And, I’m sorry, where is the connection between Bidenomics and the falling inflation? The inflation is falling chiefly due to the Fed limiting money supply and raising the interest rates. It has nothing to do with the avalanche of government subsidies and irresponsible industrial policy this administration is pushing.
More of the same elitist claptrap exemplified by Krugman and others of his ilk telling us that things are going great economically, we’re just to stupid to realize or appreciate it. ‘It’s not inflation, it’s prices’. And you wonder why we hate you.
What’s he talking about austerity has worked a treat in the UK. We’ve never had it so good!
Potholed roads, shuttered public services, wages in real terms lower than they were a decade ago, record government debt. It’s a utopia!
Seriously, why is the author carrying water for Joe Biden? His statistics be damned: every trip to the grocery store reminds me that Bidenomics is not working!