Stagflation Concerns Split Wall Street as US Economy Slows

A Wall Street sign is pictured outside the New York Stock Exchange amid the COVID-19 pandemic in the Manhattan borough of New York City, on April 16, 2021. Carlo Allegri/Reuters

News Analysis

Wall Street is split on the U.S. economy possibly facing the threat of stagflation in the post-pandemic recovery.

Stagflation—a trifecta of slowing economic growth, rising inflation, and high unemployment—is the talk of the finance industry. Goldman Sachs analysts recently revealed that stagflation is “the most common word in client conversation.” The widespread discussions come as slowing economic data, surging inflation, an escalating supply chain crisis, and intensifying energy woes dominate business headlines.

Bank of America Global Research recently declared that “stagflation is here,” while Jean Boivin, head of the BlackRock Investment Institute, expects growth to accelerate as tighter inventories ease.

“The inflation pressures we expected are here. This is not stagflation, and we remain pro-risk,” he wrote in a weekly commentary report (pdf) last month.

Market analysts are combing through the data to determine the trajectory of the U.S. economy over the next 12 months.

A family shops for toys at a Target store in Houston, on Oct. 25, 2021. Brandon Bell/Getty Images

A Look at the Latest Numbers

The IHS Markit manufacturing purchasing managers’ index (PMI) declined to 58.4 in October, from 60.7 in September—anything above 50 indicates expansion. The reading fell short of market estimates of 59.2.

The Institute of Supply Management’s (ISM) manufacturing PMI slipped to 60.8 last month from 61.1 in the previous month. It came in slightly higher than the median forecast of 60.5. Employment and prices increased while new orders contracted.

According to the U.S. Census Bureau, construction spending tumbled 0.5 percent in September, the first monthly contraction since February. In addition, spending on manufacturing, utilities, health care, and public construction fell from August.

This comes after the Bureau of Economic Analysis (BEA) confirmed that the gross domestic product expanded at an annualized rate of 2 percent in the third quarter, below economists’ projections of 2.7 percent. This was also down from the 6.7 percent growth in the second quarter.

The Bureau of Labor Statistics will release its October non-farm payrolls data this week. The market is penciling in a gain of 450,000 new jobs and an unemployment rate of 4.7 percent.

What Does the Market See Ahead?

Goldman Sachs recently slashed its U.S. gross domestic product growth targets to 5.6 percent for 2021 and 4 percent for 2022, down from previous estimates of 5.7 percent and 4.4 percent, respectively.

The financial institution also cut its quarterly economic growth projections: 4.5 percent in the fourth quarter of 2021 and the first quarter of 2022, 4 percent in the second quarter, and 3 percent in the third quarter. However, Goldman Sachs analysts raised their fourth-quarter forecast to 1.75 percent.

A survey from BofA Global Research revealed in September that the number of fund managers who anticipated stagflation jumped 14 percentage points in October to a nine-year high.

The November IBD/TIPP Poll Economic Optimism Index slumped 2.9 points to a six-year low of 43.9. The consumer confidence survey is a composite of three significant components: short-term prospects of the economy, the outlook of personal finances, and sentiment of how well the government’s economic policies are working.

But not everyone is worried, with some economists calling for growth to “re-accelerate” in the October-to-December period.

“Delta is the biggest reason why we have this noticeable deceleration,” Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania, said in an interview with Reuters. “We’re going to see growth re-accelerate in the fourth quarter and the first half of next year as the effect of the Delta variant begins to wane. It doesn’t mean that we won’t have future waves of COVID, but with each passing wave, the economic costs continue to diminish.”

Carl Weinberg, the chief economist at High Frequency Economics, told CNBC in September that skyrocketing prices were a “temporary spate of supply issues” instead of systemic inflationary challenges.

“Inflation is a process and not a one-time change in the level of prices, which I think is what we’re seeing right now,” he said. “We’re seeing an adjustment to new temporary realities on the supply side but we’re not seeing the stagflation process that we saw in the 1970s recurring again.”

Others say that the broader slowdown in the economy will subside, although inflationary pressures could persist.

“We are confident that the fourth quarter will be much better,” said James Knightley, economist at ING, in a research note. “High-frequency consumer activity numbers such as flights, restaurant dining, and hotel stays have turned higher through mid-September into October as the Delta wave subsided.”

“At this early stage, we think the U.S. growth story will get back on track with the economy set to expand by around 6% in 4Q.”

Chief Threats to the Economy

What could be the top risks to the U.S. economy?

New measurements produced by Bloomberg Economics reveal that international supply changes that are increasing prices could be a substantial factor in the post-crisis recovery.

Be it overloaded transportation networks or labor shortages at notable ports, there are many factors that pose new threats, Bloomberg noted. Because this could lead to prolonged inflation, the Federal Reserve and other central banks could be forced to pull the trigger on earlier-than-expected higher interest rates. This monetary policy tightening to fight higher prices, strategists purport, could threaten the economy and record-high equity and real estate values.

“If the Fed reacts too strongly to thwart inflation, we could see damage to GDP and higher unemployment,” Kevin Rich, a consultant to Perth Mint, told The Epoch Times. “If the Fed doesn’t react strongly enough then we probably see inflation move higher and stay longer. The Fed is in a tough position, to say the least.”

Another critical “negative for growth” risk might be soaring global economy prices, especially as the Northern Hemisphere heads into winter.

Last month, Claudio Piron, a top market strategist at BofA Securities in Asia, told CNBC that multi-year oil and gas prices could amplify the stagflation risk.

“I think you'd be at your peril to basically underplay the stagflation risk,” Piron said. “The squeeze higher in inflation is not necessarily all due to demand. It’s due as well to supply-side, supply-chain constraints. That is negative for growth.”

West Texas Intermediate and Brent crude oil futures are above $83 and $84, respectively. Natural gas prices are trading in the $5.50 range. Gasoline prices soared to a seven-year high. Some analysts believe crude could top $100 per barrel as inventories at the Cushing, Oklahoma, storage facility are at critically low levels, with tanks continuing to deplete each week.

White House Expects ‘Solid’ Recovery

Treasury Secretary Janet Yellen championed her confidence in the post-pandemic recovery in an interview with Bloomberg News on Oct. 31.

“I think what we’re going to see is a good, solid recovery. The unemployment rate has gone down considerably, and this is nothing like the recovery from the 2008 financial crisis,” she said.

Yellen added that President Joe Biden’s Build Back Better agenda could further support the economic rebound as the various mechanisms, such as child care subsidies and universal pre-K, could support “long-term potential output.”

The administration also asserts that the new spending proposals could curb inflation and grow the economy.

“My desire was to build this economy from the bottom up and the middle out, not from the top down. And that’s what’s in process of happening,” Biden told reporters on Oct. 31 in Rome.

“The economy is changing, and the United States has to stay ahead of the curve.”