GROWTH VS INFLATION: TIME TO SEE THE FOREST THROUGH THE TREES?
Retired strategist Jim Paulsen believes that a one-time exogenous surge in inflation coming out of a global health crisis, which ended almost three years ago, has seemingly blinded U.S. economic policy officials to an even larger and more important U.S. crisis, and that is a sustained decline in the ability of the U.S. economy to generate satisfying growth.
Paulsen, an economist and seasoned Wall Street watcher who most recently worked as chief investment strategist at Leuthold Group, notes during the last few years, U.S. consumer confidence has never been this deeply and persistently pessimistic, U.S. job creation has been anemic, and real GDP growth has returned to stall speed status near 2%.
“Despite nearly 20 years of suboptimal real economic growth and near recession-like conditions currently, U.S. economic officials continue to employ highly contractionary economic policies. What are we doing?” writes Paulsen in a note.
According to Paulsen, current M2 money supply growth is slower than 73% of the time since 1950, and in recent years, the yield curve has been inverted longer than at any other time during the post-war era. He adds that the average Fed Funds Rate between 2006 to 2020, before the pandemic, was 67 basis points under the inflation rate. Currently, even though real GDP growth is only 2%, the Fed Funds rate is 113 basis points above the inflation rate.
During the last 15 years, he says the real U.S. dollar index rose by more than 50% and it is currently higher than 95% of the time since 1970. Total government receipts as a percentage of nominal GDP – the average U.S. tax rate — is currently 28.3% — higher than 64% of the time since 1947. Finally, Paulsen says “President Trump has recently enacted one of the largest global tariffs hikes in U.S. history while simultaneously deporting illegal immigrants and restricting new immigration, worsening U.S. labor supply growth.”
“My guess is U.S. officials will soon be forced to clearly see the forest (weak economic growth) despite their contemporary obsession with the trees (inflation risk).”