A combination of weaker activity and stubborn inflation is the message from today's US data so far. Monthly growth for both personal income and spending was negative in May, and below the consensus forecasts. Core inflation was slightly above the consensus forecasts for both the monthly and annual measures. April inflation was revised higher across the board.
The economy is weakening, but not weak, says El-Erian
Economist Mohamed El-Erian expressed concern, as consumers and businesses pull back spending and investors appear to question the role of the U.S. dollar.
Thursday morning, we learned that gross domestic product for the first quarter of the year was lower than previously reported, in part because consumers pulled back on their spending. Tomorrow we’ll learn more about the state of the macroeconomy, with new data on consumer sentiment, as well as the latest measure of the Federal Reserve’s preferred inflation gauge.
In the meantime, “Marketplace” host Kai Ryssdal spoke with Mohamed El-Erian to make sense of where this economy stands right now. El-Erian is the president of Queens’ College, Cambridge, economic advisor at Allianz, and former CEO of PIMCO.
“We have a weakening, not a weak, a weakening economy, with inflation staying high,” El-Erian said. “We’re seeing both the ability and the willingness to spend under pressure.”
- “What that tells you is that the role of the dollar is starting to be questioned,” he said.
- “That’s a real concern for the U.S. because the U.S. gets incredible, exorbitant privileges by having its currency as the reserve currency.”.
- GDP Growth Slowing: Recent data indicates a slowdown in US economic growth, with the first quarter of 2025 showing a decrease in real GDP after a strong 2024.
- Inflation Still Elevated: While inflation has come down significantly from its peak in 2022, it remains above the Federal Reserve's target of 2%. Experts forecast inflation to pick up slightly in 2025 and 2026, driven by factors like expected tariff increases.
- Potential for Increased Unemployment: Some economists predict a rise in unemployment, although it is expected to remain historically low compared to previous periods of stagflation.
- Tariffs and Trade Tensions: President Trump's tariff policies have been cited as a potential contributor to both higher prices and slower economic growth.
- Supply Chain Disruptions: Global events, such as geopolitical conflicts, can disrupt supply chains and lead to higher costs.
- Sticky Inflation: Core inflation (excluding food and energy) has proven more persistent.
- Reduced Purchasing Power: Rising prices can erode consumer spending power, even if incomes rise, as the increase in costs outpaces wage growth.
- Challenges for Businesses: Businesses might face a squeeze on profits due to higher input costs and potentially weaker consumer demand.
- Uncertainty for Policymakers: The Federal Reserve faces a difficult task in balancing its goals of controlling inflation and promoting employment in a stagflationary environment. Tools used to combat inflation (like raising interest rates) could potentially worsen unemployment, and vice-versa.
- While stagflation is a concern, it's not a certainty. Many experts believe the economy is still growing and that the current conditions don't fully meet the criteria for a severe stagflationary period like the 1970s.
- The term "mild stagflationary wind" suggests that while the risks are present, the potential negative impacts might be less severe than a full-blown stagflationary crisis.
No comments:
Post a Comment