Stagnation could go from a temporary to a permanent problem

Stagnation, an economic situation of slow growth and elevated inflation, has hit the US over the last year due to rising food and energy prices and could become more permanent for the economy for a number of reasons.

The first is the secular decline in the US workforce due to population aging, lower labor force participation, and tighter immigration.

For example, growth in the civilian labor force has fallen from about 50% in 1960-1980 to 38% in 1980-2020 and 12% in 2000-2020. Meanwhile, labor force participation has fallen from a peak of 67% in the late 1990s to a low of 62% in the early 2020s. In addition, net immigration, which exceeded one million in 2016, has declined annually, reaching 569,000 in 2019 and 477,000 in 2020.

Second is a secular decline in capacity utilization, a measure of how busy the country’s factories are. It fell from the high 80’s in the 1960’s to the low 80’s in the 1990’s. And it’s stayed in the high 70s for the last two decades.

The third is a recent decline in labor productivity growth, the sharpest since 1947.

All three trends point to a slowdown in the country’s productive potential, leading to slower growth. Statista estimates that GDP growth will remain below 2% over the next five years – well below the 3% trend the country has experienced over the past 60 years.

Worse, slow economic growth may not be enough to meet rising demand. As a result, the US economy could face prolonged stagflation even as food and energy price increases ease.

Paul Kutasovic, a professor of finance at the New York Institute, is cautious about drawing definitive conclusions about the direction of the economy for a number of reasons.

One is that due to the tight labor market, unemployment is still low and will remain low for a number of years. Therefore, stagflation should not be used in the conventional sense of the term, which includes increased unemployment. And second, labor productivity statistics could still be skewed by the pandemic. Instead, he points to multifactor productivity, which has been growing at a healthy pace. Therefore, economic stagnation may not be as bad as labor productivity numbers suggest.

Nonetheless, Kutasovic sees that the tight labor market will continue to put downward pressure on wages, meaning work will increase its share of national income at the expense of corporate profits. And that’s a negative development for US stocks going forward.

In addition, he believes that higher wages could push up inflation and interest rates, which in turn is bad for stocks.

Does that mean stocks are in for a prolonged bear market?

Kutasovic doesn’t think so. But he sees worse times ahead for investments in US stocks.

“The bottom line is that stagflation, however defined, cannot propel US stocks into a bear market,” Kutasovic said. “But it will result in modest gains.”

https://www.ibtimes.com.au/us-economy-stagflation-could-turn-temporary-permanent-problem-1838361?utm_source=Public&utm_medium=Feed&utm_campaign=Distribution Stagnation could go from a temporary to a permanent problem

Fry Electronics Team

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