American economists are suffering from a plague of cognitive dissonance. They worry that because of AI, there will not be enough jobs to provide employment for all available US workers. They worry, too, that a declining population — due to ageing and a closing of the border — means that a shortage of workers will stifle economic growth.
They see the upward pressure on prices resulting from the war with Iran, and wonder if they should raise interest rates. But they also see the replacement of incremental firings with mass lay-offs at major companies, and wonder whether they should lower rates.
The cause of the plague is a plethora of contradictory information. Kevin Hassett, White House chief economist, points to the lowering of food prices, including those for eggs and steaks, to argue that inflation is due primarily to “the situation with Iran” that has raised oil prices, which will be reversed once “the situation” ends.
Others counter with tomatoes and lettuce, up 22.6 per cent and 13.8 per cent, respectively, over the past year. Still others hark back to the days before Covid and point out that the price of the president’s Diet Cokes is up from its pre-pandemic benchmark by 82 per cent — but Coca-Cola is unworried; his demand is sufficiently inelastic to preclude a reduction in his 12-cans-a-day consumption.
From trawling through multiple measures of inflation, and through anecdotes, we can conclude with confidence that the inflation rate is far above the Federal Reserve’s 2 per cent target. It probably hovers around a 3 per cent annual rate, and is likely to increase as rising costs filter through the economy. Among those are electricity, auto and home insurance, the cost of rebuilding damaged oil production facilities and supply chains, and oil that left the Strait of Hormuz before the war and is now being delivered at a shortage-induced spot price of $123 a barrel, well above the headline price of $95 for Brent crude.
Consumers are expecting that increase in their cost of living. The Federal Reserve Bank of New York reports that year-ahead inflation expectations are on the rise.
The “big beautiful bill” and postponements of refunds due last year are about to pump $200 billion (£150 billion) in spending power into the economy. That should help continue the six-month consecutive run of retail sales increases, as reported by the National Retail Federation. Core retail sales (excluding restaurants, auto dealers and petrol stations) were up in March by 7.05 per cent compared with last year.
But all is far from well on the economic front. The University of Michigan survey of consumer sentiment has fallen to its lowest level in its 74-year history. The savings rate has dropped a full percentage point from last year, and delinquency rates on loan repayments, as a percentage of household incomes, are at their highest level since 2017, suggesting stretched consumers.
Meanwhile, unsolicited offers from employers have given way to unrequited résumés from recent graduates. Fear of jobless growth is spreading as the rate of adoption of artificial intelligence exceeds that of the PC and the internet in their early years. The housing sector is moribund.
Although Goldman Sachs lowered it full-year growth forecast by 0.5 percentage points to 2.3 per cent, in line with most other forecasters, The Wall Street Journal economists panel has its at 2.0 per cent, the International Monetary Fund guesses 2.3 and the Congressional Budget Office foresees 2.2 per cent. That adds dirge-like background music to the “experienced economy” — disaster at the petrol pumps, houses unaffordable, rising healthcare costs, sudden surcharges for fuel, baggage and credit card use, uncertainty generated by late-night presidential postings.
With Donald Trump so ubiquitous a presence in the lives of Americans, claiming power over all things secular and clerical, unhappy consumers blame him for their trials, real and imagined, and become unhappy voters. Only 37.3 per cent of voters polled approve of his performance on the economy while 59.9 per cent disapprove.
Trawl through all this information and a picture of the economy emerges, as seen through a glass darkly. Despite tariffs off and on again, a war, some of the most severe weather that parts of the country have ever seen, the economy rumbles on. Perhaps it’s best to ignore the indices and anecdotes, and remember that money talks the loudest in a still-capitalist economy. So, follow the money.
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Investors, encouraged by reports of an overall 12.6 per cent increase in year-on-year first-quarter earnings per share, according to FactSet, have driven the S&P 500 index to new record levels. Overseas investors are beginning to deliver on their promises of billions. One asset manager, BlackRock, reported net cash inflows of $130 billion in the first quarter of this year. Banks are thriving.
The management consultancy McKinsey & Co estimates that approximately $2.8 trillion will be spent in the US on data centre infrastructure through 2030. The bond vigilantes, who set the price that the government pays to borrow money, seem relatively unperturbed by prospects for deficits and inflation.
Listening to the money, we hear a tale of an economy headed for strong growth.
But money is a fickle and mobile thing.
Irwin Stelzer is a business adviser