Broadly speaking, earnings reports have shown that profit growth continues, and results from some big firms, like Microsoft and Facebook’s parent, Meta Platforms, did briefly ease the panic on Wall Street. About 80 percent of companies in the S&P 500 to report results through Thursday did better than analysts had expected, data from FactSet shows.
But other companies have only added to the downdraft. Netflix plunged after it said last week that it expected to lose subscribers — 200,000 in the first three months of the year, and an additional two million in the current quarter. The stock dropped more than 49 percent for the month.
On Friday, Amazon slid 14.1 percent after it reported its first quarterly loss since 2015, citing rising fuel and labor costs and warning that sales would slow. Its shares fell 23.8 percent in April.
General Electric warned on Tuesday that the economic fallout from Russia’s invasion of Ukraine would weigh on its results. Its shares fell 10 percent that day and about 18.5 percent for the month.
The war, which began in February, brought a new risk to the fragile global supply chain: Western countries’ sanctions on Russia, including a ban on oil imports from the country by the United States, and European promises to limit purchases of Russian oil and gas.
Now, executives are also assessing how the Covid-19 lockdowns in China, which has the world’s second-largest economy, could affect profit margins. Multiple Chinese cities are on lockdown, and although factories remain open, the country’s draconian “zero Covid” policy has led to interruptions in shipments and delays in delivery times.
Texas Instruments Inc. and the machinery maker Caterpillar cautioned investors this week that the lockdowns in China were affecting the company’s manufacturing operations. On Thursday, Apple also warned that the outbreak there would hamper demand and production of iPhones and other products. The company’s shares fell 3.7 percent on Friday, and ended April with a loss of 9.7 percent.
The outlook for the economy, the effects of the Ukraine invasion, the lockdowns in China and exactly how fast the Fed will raise interest rates are still not clear. Markets are likely to stay volatile until they are.
“There are definitely a lot of open-ended and unquantified risks looming,” said Victoria Greene, the chief investment officer at G Squared Private Wealth, an advisory firm. “The U.S. economy lives and dies for the consumer, and as soon as this consumer starts to slow down, I think that will hit the economy hard.”
The pandemic, and now the war in Ukraine, have altered how America’s economy functions. While economists have spent months waiting for conditions to return to normal, they are beginning to wonder what “normal” will mean.
Some of the changes are noticeable in everyday life: Work from home is more popular, burrito bowls and road trips cost more, and buying a car or a couch made overseas is harder.
But those are all symptoms of broader changes sweeping the economy — ones that could be a big deal for consumers, businesses and policymakers alike if they linger. Consumer demand has been hot for months now, workers are desperately wanted, wages are climbing at a rapid clip, and prices are rising at the fastest pace in four decades as vigorous buying clashes with roiled supply chains. Interest rates are expected to rise higher than they ever did in the 2010s as the Federal Reserve tries to rein in inflation.
History is full of big moments that have changed America’s economic trajectory: The Great Depression of the 1930s, the Great Inflation of the 1970s and the Great Recession of 2008 are examples. It’s too early to know for sure, but the changes happening today could prove to be the next one.
kept at it.
Now, Russia’s invasion of Ukraine threatens the global geopolitical order, yet another shock disrupting trade and the economic system.
For Washington policymakers, Wall Street investors and academic economists, the surprises have added up to an economic mystery with potentially far-reaching consequences. The economy had spent decades churning out slow and steady growth clouded by weak demand, interest rates that were chronically flirting with rock bottom and tepid inflation. Some are wondering if, after repeated shocks, that paradigm could change.
“For the last quarter century, we’ve had a perfect storm of disinflationary forces,” Jerome H. Powell, the Fed chair, said in response to a question during a public appearance this week, noting that the old regime had been disrupted by a pandemic, a large spending and monetary policy response and a war that was generating “untold” economic uncertainty. “As we come out the other side of that, the question is: What will be the nature of that economy?” he said.
began to raise interest rates this month in a bid to cool the economy down and temper high inflation, and Mr. Powell made clear this week that the central bank planned to keep lifting them — perhaps aggressively. After a year of unpleasant price surprises, he said, the Fed will set policy based on what is happening, not on an expected return to the old reality.
“No one is sitting around the Fed, or anywhere else that I know of, just waiting for the old regime to come back,” Mr. Powell said.
The prepandemic normal was one of chronically weak demand. The economy today faces the opposite issue: Demand has been supercharged, and the question is whether and when it will moderate.
Before, globalization had weighed down both pay and price increases, because production could be moved overseas if it grew expensive. Gaping inequality and an aging population both contributed to a buildup of savings stockpiles, and as money was held in safe assets rather than being put to more active use, it seemed to depress growth, inflation and interest rates across many advanced economies.
Japan had been stuck in the weak-inflation, slow-growth regime for decades, and the trend seemed to be spreading to Europe and the United States by the 2010s. Economists expected those trends to continue as populations aged and inequality persisted.
Then came the coronavirus. Governments around the world spent huge amounts of money to get workers and businesses through lockdowns — the United States spent about $5 trillion.
The era of deficient demand abruptly ended, at least temporarily. The money, which is still chugging out into the U.S. economy from consumer savings accounts and state and local coffers, helped to fuel strong buying, as families snapped up goods like lawn mowers and refrigerators. Global supply chains could not keep up.
were able to raise prices without losing customers, they did so. And as workers saw their grocery and Seamless bills swelling, airfares climbing and kitchen renovations costing more, they began to ask their employers for more money.
Companies were rehiring as the economy reopened from the pandemic and to meet the burst in consumption, so labor was in high demand. Workers began to win the raises they wanted, or to leave for new jobs and higher pay. Some businesses began to pass rising labor costs along to customers in the form of higher prices.
The world of slow growth, moderate wage gains and low prices evaporated — at least temporarily. The question now is whether things will settle back down to their prepandemic pattern.
The argument for a return to prepandemic norms is straightforward: Supply chains will eventually catch up. Shoppers have a lot of money in savings accounts, but those stockpiles will eventually run out, and higher Fed interest rates will further slow spending.
As demand moderates, the logic goes, forces like population aging and rampant inequality will plunge advanced economies back into what many economists call “secular stagnation,” a term coined to describe the economic malaise of the 1930s and revived by the Harvard economist Lawrence H. Summers in the 2010s.
The Russia-Ukraine War and the Global Economy
Card 1 of 6
Shortages of essential metals. The price of palladium, used in automotive exhaust systems and mobile phones, has been soaring amid fears that Russia, the world’s largest exporter of the metal, could be cut off from global markets. The price of nickel, another key Russian export, has also been rising.
Financial turmoil. Global banks are bracing for the effects of sanctions intended to restrict Russia’s access to foreign capital and limit its ability to process payments in dollars, euros and other currencies crucial for trade. Banks are also on alert for retaliatory cyberattacks by Russia.
Fed officials mostly think that reversion will happen. Their estimates suggest that low inflation and slow growth will be back within a few years, and that interest rates will not have to rise above 3 percent to achieve that moderation. Market pricing also suggests inflation will slow with time, albeit to higher levels than investors expected in 2018 and 2019.
But some of today’s trends look poised to linger, at least for a while. Job openings are plentiful, but the working-age population is growing glacially, immigration has slowed, and people are only gradually returning to work from the labor market’s sidelines. Labor shortages are fueling faster wage gains, which could sustain demand and enable companies to charge higher prices.
a recent essay.
Global forces could exacerbate those trends. The past year’s supply chain issues could inspire companies to produce more domestically — reversing years of globalization and chipping away at a force that had been holding down wage and price growth for decades. The transition to greener energy sources could bolster investment, pushing up interest rates and at least temporarily lifting costs.
“The long era of low inflation, suppressed volatility and easy financial conditions is ending,” Mark Carney, a former head of the Bank of England, said of the global economy in a speech on Tuesday. “It is being replaced by more challenging macro dynamics in which supply shocks are as important as demand shocks.”
Russia’s invasion of Ukraine, which has the potential to rework global trade relationships for years to come, could leave a more lasting mark on the economy than the pandemic did, Mr. Carney said.
“The pandemic marks a pivot,” he told reporters. “The bigger story is actually the war. That is crystallizing — reinforcing — a process of de-globalization that had begun.”
Mr. Summers said the current period of high inflation and repeated shocks to supply marked “a period rather than an era.” It is too soon to say if the world has fundamentally changed. Over the longer term, he puts the chances that the economy will settle back into its old regime at about 50-50.
“I don’t see how anyone can be confident that secular stagnation is durably over,” he said. On the other hand, “it is quite plausible that we would have more demand than we used to.”
That demand would be fueled by government military spending, spending on climate-related initiatives and spending driven by populist pressures, he said.
In any case, it could take years to know what the economy of the future will look like.
What is clear at this point? The pandemic, and now geopolitical upheaval, have taken the economy and shaken it up like a snow globe. The flakes will eventually fall — there will be a new equilibrium — but things may be arranged differently when everything settles.
Prices for groceries, couches and rent are all climbing rapidly, and Federal Reserve officials have been warily eyeing that trend.
On Wednesday, they took their biggest step yet toward counteracting it, raising their policy interest rate by a quarter of a percentage point.
That small change carries a major signal: Policymakers have fully pivoted to inflation-fighting mode and will do what is necessary to make sure price gains do not remain hot for months and years to come.
The Fed is acting at a tense moment for many consumers and investors. Here’s what happened, and what it is likely to mean for markets and the economy.
other types of interest rates — on mortgages, car loans and credit cards. Some of the interest rates that consumers pay to borrow money have already moved higher in anticipation of the Fed’s coming adjustments.
Policymakers projected that six more similarly sized rate increases would happen this year.
That’s because inflation is hot.
perpetuate supply chain disruptions.
The Fed is also in charge of fostering maximum employment, but with hiring rapid and more open jobs than there are available workers, that goal appears to have been achieved, at least for now.
already beginning to see). With less activity happening, companies need fewer workers. Less demand for labor makes for slower wage growth, which cools demand further. Higher rates effectively pour cold water on the economy.
Fed changes could also hurt stock and other asset prices.
The effects of higher rates might be visible in markets. Higher interest rates tend to eventually lower stock prices — in part because it costs businesses more to operate when money is expensive to borrow, and in part because Fed rate increases have a track record of touching off recessions, which are terrible for stocks. Pricier borrowing costs also tend to weigh on the value of other assets, like houses, as would-be buyers shy away from the market.
The Fed is also preparing to shrink its balance sheet of bond holdings, and many economists expect Fed officials to release a plan to do so as soon as May. That could push up longer-term rates and will probably further pull down stock, bond and house prices.
The goal here is a soft landing.
You might wonder why the Fed would want to slow down the economy and hurt the stock market. The central bank wants a strong economy, but sustainability is the name of the game: A little pain today could mean less pain tomorrow.
The Fed is trying to get inflation down to a level where price increases do not influence people’s spending choices or daily lives. Officials hope that if they can slow the economy enough to reduce inflation, without damaging it so much that it tips into a recession, they can set the stage for a long and steady expansion.
“I think it’s more likely than not that we can achieve what we call a soft landing,” Mr. Powell said during recent testimony before lawmakers.
The Fed has let the economy down easy before: In the early 1990s it raised rates without sending unemployment higher, and it appeared to be in the process of achieving a soft landing before the pandemic struck, having raised rates between 2015 and 2018.
But economists have warned that it could be a tough act to pull off this time around.
“I wouldn’t rule it out,” Donald Kohn, a former Fed vice chair, said of a soft landing. But he said a clampdown on demand that pushed unemployment higher was also possible.
After months of working from home, Caroline McNaney, 29, was excited about going back to work in an office, even if her new job in Trenton, N.J., meant commuting an hour each way.
But when she spent $68 filling the tank of her blue Nissan Maxima this week, she felt a surge of regret about switching jobs.
“Is this for real?” Ms. McNaney recalled thinking. “I took a job further from home to make more money, and now I feel like I didn’t do anything for myself because gas is so high.”
The recent rise in gas prices — which the war in Ukraine has pushed even higher — has contributed to her sense of disappointment with President Biden. “I feel like he wants us to go out and spend money into the economy, but at the same time everything is being inflated,” she said.
higher heating bills. Natural gas reserves are running low, and European leaders have accused Russia’s president, Vladimir V. Putin, of reducing supplies to gain a political edge.
Shortages of essential metals. The price of palladium, used in automotive exhaust systems and mobile phones, has been soaring amid fears that Russia, the world’s largest exporter of the metal, could be cut off from global markets. The price of nickel, another key Russian export, has also been rising.
Financial turmoil. Global banks are bracing for the effects of sanctions intended to restrict Russia’s access to foreign capital and limit its ability to process payments in dollars, euros and other currencies crucial for trade. Banks are also on alert for retaliatory cyberattacks by Russia.
While oil prices worldwide have shot up since the Russian invasion of Ukraine, President Biden and Democrats, who hold control of Congress, have faced consumers’ ire.
Cat Abad, 37, who lives in the San Francisco area, where prices have hit nearly $6 for the highest-grade gas, said she saw stickers on the pumps at one local station saying that Mr. Biden was responsible for the rise. She took the stickers off, she said, believing that he was not at fault.
Still, she said, “It’s a good time to have a Prius,” as she filled up for her commute down the peninsula to Foster City.
Inflation is already proving a perilous issue for Mr. Biden and fellow Democrats as the midterm elections approach, with many voters blaming them for failing to control the rising cost of living. The higher gas prices add further political complexity for Mr. Biden, who has vowed to curb the nation’s dependence on fossil fuels.
In light of the war in Ukraine, the energy industry is pushing the Biden administration to support more domestic oil production by opening up drilling in federal lands and restarting pipeline projects.
“This moment is a reminder that oil and natural gas are strategic assets and we need to continue to make investments in them,” said Frank Macchiarola, a senior vice president at the American Petroleum Institute, a trade group.
There is a chance that the strain on consumers may be temporary as global oil supply and demand are rebalanced. And, in the near term, lower consumer spending may have some benefits. Reduced spending could help constrain inflation, but at the expense of slower economic growth.
Even before Russia invaded Ukraine, rapidly rising energy prices were contributing to the fastest inflation in 40 years. Energy prices — including not just gasoline but home heating and electricity as well — accounted for more than a sixth of the total increase in the Consumer Price Index over the 12 months ending in January.
The recent jump in energy prices will only make the problem worse. Forecasters surveyed by FactSet expect the February inflation report, which the Labor Department will release on Thursday, to show that consumer prices rose 0.7 percent last month, and are up 7.9 percent over the past year. The continued run-up in gasoline prices over the past week suggests overall inflation in March will top 8 percent for the first time since 1982.
Some drivers said the higher gas prices were a necessary result of taking a hard line on Mr. Putin.
Alan Zweig, 62, a window contractor in San Francisco, said: “I don’t care if it goes to $10 a gallon. It’s costing me dearly, but not what it’s costing those poor people in Ukraine.”
Destiny Harrell, 26, drives her silver Kia Niro hybrid about 15 minutes each day from her home in Santa Barbara to her job at a public library. She is now considering asking her boss if she can spend some days working from home.
She said the rise in prices has contributed to her anger at Mr. Putin and his decision to invade Ukraine.
“It’s super frustrating that a war that shouldn’t even really affect us has global reach.”
Ben Casselman, Coral Murphy Marcos and Clifford Krauss contributed reporting.
The price increases bedeviling consumers, businesses and policymakers worldwide have prompted a heated debate in Washington about how much of today’s rapid inflation is a result of policy choices in the United States and how much stems from global factors tied to the pandemic, like snarled supply chains.
At a moment when stubbornly rapid price gains are weighing on consumer confidence and creating a political liability for President Biden, White House officials have repeatedly blamed international forces for high inflation, including factory shutdowns in Asia and overtaxed shipping routes that are causing shortages and pushing up prices everywhere. The officials increasingly cite high inflation in places including the euro area, where prices are climbing at the fastest pace on record, as a sign that the world is experiencing a shared moment of price pain, deflecting the blame away from U.S. policy.
But a chorus of economists point to government policies as a big part of the reason U.S. inflation is at a 40-year high. While they agree that prices are rising as a result of shutdowns and supply chain woes, they say that America’s decision to flood the economy with stimulus money helped to send consumer spending into overdrive, exacerbating those global trends.
The world’s trade machine is producing, shipping and delivering more goods to American consumers than it ever has, as people flush with cash buy couches, cars and home office equipment, but supply chains just haven’t been able to keep up with that supercharged demand.
by 7 percent in the year through December, its fastest pace since 1982. But in recent months, it has also moved up sharply across many countries, a fact administration officials have emphasized.
“The inflation has everything to do with the supply chain,” President Biden said during a news conference on Wednesday. “While there are differences country by country, this is a global phenomenon and driven by these global issues,” Jen Psaki, the White House press secretary, said after the latest inflation data were released.
the euro area. Data released in the United Kingdom and in Canada on Wednesday showed prices accelerating at their fastest rate in 30 years in both countries. Inflation in the eurozone, which is measured differently from how the U.S. calculates it, climbed to an annual rate of 5 percent in December, according to an initial estimate by the European Union statistics office.
“The U.S. is hardly an island amidst this storm of supply disruptions and rising demand, especially for goods and commodities,” said Eswar Prasad, a professor of trade policy at Cornell University and a senior fellow at the Brookings Institution.
But some economists point out that even as inflation proves pervasive around the globe, it has been more pronounced in America than elsewhere.
“The United States has had much more inflation than almost any other advanced economy in the world,” said Jason Furman, an economist at Harvard University and former Obama administration economic adviser, who used comparable methodologies to look across areas and concluded that U.S. price increases have been consistently faster.
The difference, he said, comes because “the United States’ stimulus is in a category of its own.”
White House officials have argued that differences in “core” inflation — which excludes food and fuel — have been small between the United States and other major economies over the past six months. And the gaps all but disappear if you strip out car prices, which are up sharply and have a bigger impact in the United States, where consumers buy more automobiles. (Mr. Furman argued that people who didn’t buy cars would have spent their money on something else and that simply eliminating them from the U.S. consumption basket is not fair.)
Administration officials have also noted that the United States has seen a robust rebound in economic growth. The International Monetary Fund said in October that it expected U.S. output to climb by 6 percent in 2021 and 5.2 percent in 2022, compared with 5 percent growth last year in the euro area and 4.3 percent growth projected for this year.
“To the extent that we got more heat, we got a lot more growth for it,” said Jared Bernstein, a member of the White House Council of Economic Advisers.
$5 trillion in spending in 2020 and 2021. That outstripped the response in other major economies as a share of the nation’s output, according to data compiled by the International Monetary Fund.
Many economists supported protecting workers and businesses early in the pandemic, but some took issue with the size of the $1.9 trillion package last March under the Biden administration. They argued that sending households another round of stimulus, including $1,400 checks, further fueled demand when the economy was already healing.
Consumer spending seemed to react: Retail sales, for instance, jumped after the checks went out.
loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation costs and toys.
What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains could also lead to higher wages and job growth.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
Americans found themselves with a lot of money in the bank, and as they spent that money on goods, demand collided with a global supply chain that was too fragile to catch up.
Virus outbreaks shut down factories, ports faced backlogs and a dearth of truckers roiled transit routes. Americans still managed to buy more goods than ever before in 2021, and foreign factories sent a record sum of products to U.S. shops and doorsteps. But all that shopping wasn’t enough to satisfy consumer demand.
stop spending at the start of the pandemic helped to swell savings stockpiles.
And the Federal Reserve’s interest rates are at rock bottom, which has bolstered demand for big purchases made on credit, from houses and cars to business investments like machinery and computers. Families have been taking on more housing and auto debt, data from the Federal Reserve Bank of New York shows, helping to pump up those sectors.
But if stimulus-driven demand is fueling inflation, the diagnosis could come with a silver lining. It may be easier to temper consumer spending than to rapidly reorient tangled supply lines.
People may naturally begin to buy less as government help fades. Spending could shift away from goods and back toward services if the pandemic abates. And the Fed’s policies work on demand — not supply.
“He kept shouting, ‘The governor said we no longer have to wear masks,’” Mr. O’Brien said. The woman’s response — that they were still required in places with a certain number of workers — only made him angrier.
Finally, the owner arrived and “told the customer never to return,” Mr. O’Brien said.
It’s not just your imagination; behavior really is worse. In a study of 1,000 American adults during the pandemic, 48 percent of adults and 55 percent of workers said that in November 2020, they had expected that civility in America would improve after the election.
By August, the expectations of improvement had fallen to 30 percent overall and 37 percent among workers. Overall, only 39 percent of the respondents said they believed that America’s tone was civil. The study also found that people who didn’t have to work with customers were happier than those who did.
“There’s a growing delta between office workers and those that are interacting with consumers,” said Micho Spring, chair of the global corporate practice for the strategic communications company Weber Shandwick, which helped conduct the study.
At the same time, many consumers are rightly aggrieved at what they view as poor service at companies that conduct much of their business online — retailers, cable operators, rental car companies and the like — and that seem almost gleefully interested in preventing customers from talking to actual people.
“The pandemic has given many companies license to reduce their focus on the quality of the experience they’re delivering to the customer,” said Jon Picoult, founder of Watermark Consulting, a customer service advisory firm.
In part, the problem is the disconnect between expectation and reality, said Melissa Swift, U.S. transformation leader at the consulting firm Mercer. Before the pandemic, she said, consumers had been seduced into the idea of the “frictionless economy” — the notion that you could get whatever you wanted, the moment you wanted it.
Rocketing inflation has become a headache for U.S. consumers, and President Biden has a go-to prescription. He says a key way to help relieve increasing prices is to pass a $1.85 trillion collection of spending programs and tax cuts that is currently languishing in the Senate.
A wide range of economists agree with the president — but only in part. They generally accept his argument that in the long run, the bill and his infrastructure plan could make businesses and their workers more productive, which would help to ease inflation as more goods and services are produced across the economy.
But many researchers, including a forecasting firm that Mr. Biden often cites to support the economic benefits of his proposals, say the bill is structured in a way that could add to inflation next year, before prices have had time to cool off.
Some economists and lawmakers worry about the timing, arguing that the risk of fueling more inflation when it has reached record highs outweighs the potential benefits of passing a big spending bill that could help to keep prices in check while addressing other social goals. Prices have picked up by 6.2 percent over the past year, the fastest pace in 31 years and far above the Federal Reserve’s inflation target.
Joe Manchin III of West Virginia, has questioned whether high and rising prices should persuade lawmakers to tone down their ambitions.
“West Virginians are concerned about rising inflation,” he said on Twitter last week. “We cannot throw caution to the wind & continue to pile on debt that our country can’t afford.”
Democrats preparing to push it to a House vote as early as next week. But timing is uncertain in the Senate, where a vote is likely to be changed or delayed in response to Mr. Manchin’s concerns.
The extent to which Mr. Biden’s $1.85 trillion bill exacerbates inflation largely depends on how much it stimulates the economy and whether Americans increase their spending as a result of the legislation — and when all of that occurs.
Many economists say it could create a short-term stimulus because the plan is structured to raise money gradually by taxing wealthier Americans, who are less likely to spend each additional dollar they have, and redistribute it quickly to people who earn less and are more likely to spend newfound cash.
Because of the difference in timing between when the government spends money and when it starts to bring in more revenue, the bill is expected to pump money into the economy in its early years. Moody’s Analytics — the firm that the White House typically cites when arguing in favor of its legislation — estimates that the government will spend $163 billion more on the package than it takes in next year. And the redistribution could make the money more potent as economic stimulus.
“The spending is designed to go to the people who are more likely to spend it than to save it,” said Ben Ritz, the director of the Progressive Policy Institute’s Center for Funding America’s Future. But more than any specific program, “the bigger inflationary issue is the math.”
White House economists have countered those arguments. If the bill passes, they say, it would do relatively little to spur increased consumer spending next year and not nearly enough to fully offset the loss of government stimulus to the economy as pandemic aid expires. That the program spends more heavily next year is a feature, they say, because it will partly blunt the economic drag as fiscal help fades. They note that the bill is intended to be offset completely by tax increases and other revenue savings.
And they argue that by increasing the economy’s capacity to churn out goods and services, the president’s infrastructure plan and his broader program could both help to moderate costs over time.
Mr. Summers has argued.
There is less economic or political debate about Mr. Biden’s $1 trillion infrastructure plan, which cleared Congress last week and which the president will sign on Monday. Economists — including conservative ones — largely agree that it is likely to eventually expand the capacity of the economy, and that it is small and spread out enough that it will not meaningfully fuel faster inflation in the near term.
Among Democrats, there is widespread support for the economic ambitions contained in the administration’s broader spending bill, which aims to create more equity for low- and middle-class earners and a bigger safety net for working parents. But the measure is drawing more complicated reviews when it comes to its immediate effect on inflation.
Economists at Moody’s found in a recent analysis that the administration’s full agenda would slightly increase inflation in 2022, though they did not expect the program to ultimately raise it because of benefits that would later ease supply constraints. It estimates that with the infrastructure bill alone, inflation will be running at a 2.1 percent annual rate by the final quarter of next year. If the larger spending bill also passes, that grows to 2.5 percent.
Understand the Supply Chain Crisis
Card 1 of 5
Almost anything manufactured is in short supply. That includes everything from toilet paper to new cars. The disruptions go back to the beginning of the pandemic, when factories in Asia and Europe were forced to shut down and shipping companies cut their schedules.
Now, ports are struggling to keep up. In North America and Europe, where containers are arriving, the heavy influx of ships is overwhelming ports. With warehouses full, containers are piling up. The chaos in global shipping is likely to persist as a result of the massive traffic jam.
But Moody’s baseline assumption that inflation will moderate by the end of next year is relatively optimistic. Bank of America’s economics team said that core consumer prices would still rise at a 3.2 percent rate at the end of next year, incorporating the assumption that Mr. Biden’s plan passes.
companies scramble for workers, prices rise and supply chains struggle to keep pace with booming demand, this is the wrong moment to hit the economy with any added juice.
“We don’t have a lot of spare capacity,” said Kristin J. Forbes, an economist at the Massachusetts Institute of Technology. “We certainly don’t have a lot of spare workers today.”
Inflation looms more significantly in the near term because it is currently high, and if it remains that way for an extended period, consumers could change their behaviors and expectations, locking in faster gains. People who worry about the proposals say that 2022 is the wrong time to hand households more money.
Maya MacGuineas, the president of the Committee for a Responsible Federal Budget, said she was unsure whether the package would fuel inflation. But given the current pace of price increases, “you have to be more careful than you would be otherwise.”
The White House says the provisions of the bill that put money in families’ pockets, such as child care help, are not simple stimulus. They will allow caregivers into the labor market, they argue, an investment in the economy’s future that will allow it to produce more with time.
That makes the new program different from the spending passed earlier this year. The Biden administration increasingly acknowledges that sending households checks and offering expanded unemployment insurance supplemented savings, and that as households had more wherewithal to spend it helped to drive up prices.
Mr. Biden said in Baltimore on Wednesday. But the White House contends that this program is not the same as the previous package, and that it will make the price situation better, not worse.
“According to the economic experts, this bill is going to ease inflationary pressures,” the president said on Wednesday.
Still, the 17 Nobel Prize-winning economists that the White House regularly cites have specified that capacity improvements will ease inflation over time rather than imminently.
“Because this agenda invests in long-term economic capacity and will enhance the ability of more Americans to participate productively in the economy,” they wrote, “it will ease longer-term inflationary pressures.”
Job growth slowed to the year’s weakest pace last month as the latest coronavirus wave dashed hopes of an imminent return to normal for the U.S. economy.
Employers added just 194,000 jobs in September, the Labor Department said Friday, down from 366,000 in August — and far below the increase of more than one million in July, before the highly contagious Delta variant led to a spike in coronavirus cases across much of the country. Leisure and hospitality businesses, a main driver of job growth earlier this year, added fewer than 100,000 jobs for the second straight month.
“Employment is slowing when it should be picking up because we’re still on the course set by the virus,” said Diane Swonk, chief economist for the accounting firm Grant Thornton.
for the Federal Reserve, which is weighing when to begin pulling back support for the economy.
It is possible that the recent slowdown is a Delta-driven blip and will soon fade — or, indeed, may already be largely in the past. The data released on Friday was collected in mid-September, when the Delta wave was near its peak. Since then, cases and hospitalizations have fallen in much of the country, and more timely data from private-sector sources suggests that economic activity has begun to rebound. If those trends continue, people on the sidelines could return to the labor force, and hiring should begin to pick up.
“This report is a glance in the rearview mirror,” said Daniel Zhao, an economist at the career site Glassdoor. “There should be some optimism that there should be a reacceleration in October.”
But it is also possible that the damage done by the pandemic will take longer to heal than economists had hoped. Supply-chain disruptions have been unexpectedly persistent, and shifts in consumer behavior during the pandemic may not soon reverse. In surveys, many workers say they are reconsidering their priorities and do not want to return to their old ways of working.
Expanded unemployment benefits, which many businesses blamed for discouraging people from looking for work, ended nationwide early last month. Schools reopened in person in much of the country, which should have made it easier for parents to return to work. Rising vaccination rates were meant to make reluctant workers feel safe enough to resume their job searches. As recently as August, many economists circled September as the month when workers would flood back into the job market.
Instead, the labor force shrank by nearly 200,000 people. The pandemic’s resurgence delayed office reopenings, disrupted the start of the school year and made some people reluctant to accept jobs requiring face-to-face interaction. At the same time, preliminary evidence suggests that the cutoff in unemployment benefits has done little to push people back to work.
“I am a little bit puzzled, to be honest,” said Aneta Markowska, chief financial economist for the investment bank Jefferies. “We all waited for September for this big flurry of hiring on the premise that unemployment benefits and school reopening would bring people back to the labor force. And it just doesn’t seem like we’re seeing that.”
Ms. Markowska said more people might begin to look for work as the Delta variant eased and as they depleted savings accumulated earlier in the pandemic. But some people have retired early or have found other ways to make ends meet and may be slow to return to the labor force, if they come back at all.
In the meantime, people available to work are enjoying a rare moment of leverage. Average earnings rose 19 cents an hour in September and are up more than $1 an hour over the last year, after a series of strong monthly gains. Pay has risen even faster in some low-wage sectors.
Many businesses are finding that higher wages alone aren’t enough to attract workers, said Becky Frankiewicz, president of the Manpower Group, a staffing firm. After years of expecting employees to work whenever they were needed — often with no set schedule and little notice — companies are finding that workers are now setting the terms.
“They get to choose when, where and in what duration they’re working,” Ms. Frankiewicz said. “That is a role reversal. That is a structural change in the workers’ economy.”
Arizmendi Bakery, a cooperative in San Rafael, Calif., recently raised its wages by $3 an hour, by far the biggest increase in its history. But it is still struggling to attract applicants heading into the crucial holiday season.
“There are many, many, many more businesses hiring than there used to be, so we’re competing with many other businesses that we weren’t competing with before,” said Natalie Baddorf, a baker and one of the owners.
The bakery has managed to hire a few people, including one who began this week. But other workers have given their notice to leave. The bakery, which has been operating on reduced hours since the pandemic began, now has enough business to return to its original hours, but cannot find enough labor to do so.
“We’re talking about cloning ourselves,” Ms. Baddorf said.
Jeanna Smialek and Jim Tankersley contributed reporting.
The spread of the Delta variant has delayed office reopenings, disrupted the start of school and generally dashed hopes for a return to normal after Labor Day. But it has not pushed the U.S. economic recovery into reverse.
Now that recovery faces a new test: the removal of much of the aid that has helped keep households and businesses afloat for the past year and a half.
The Paycheck Protection Program, which distributed hundreds of billions of dollars in grants and loans to thousands of small businesses, concluded last spring. A federal eviction moratorium ended last month after the Supreme Court blocked the Biden administration’s last-minute effort to extend it. Most recently, an estimated 7.5 million people lost unemployment benefits when programs that expanded the system during the pandemic were allowed to lapse.
Next up: the Federal Reserve, which on Wednesday indicated it could start pulling back its stimulus efforts as early as November.
OpenTable, for example, have fallen less than 10 percent from their early-July peak. That is a far smaller decline than during the last Covid surge, last winter.
“It has moved down, but it’s not the same sort of decline,” Mr. Bryson said of the OpenTable data. “We’re living with it.”
$120 billion in monthly bond purchases — which have kept borrowing cheap and money flowing through the economy — but it will almost certainly keep interest rates near zero into next year. Millions of parents will continue to receive monthly checks through the end of the year because of the expanded child tax credit passed in March as part of President Biden’s $1.9 trillion aid package.
That bill, known as the American Rescue Plan, also provided $350 billion to state and local governments, $21.6 billion in rental aid and $10 billion in mortgage assistance, among other programs. But much has not been spent, said Wendy Edelberg, director of the Hamilton Project, an economic-policy arm of the Brookings Institution.
“Those delays are frustrating,” she said. “At the same time, what that also means is that support is going to continue having an effect over the next several quarters.”
Household savings could provide a buffer — if they last.
Economists, including officials in the Biden administration, say that as the economy heals, there will be a gradual “handoff” from government aid to the private sector. That transition could be eased by a record-setting pile of household savings, which could help prop up consumer spending as government aid wanes.
A lot of that money is held by richer, white-collar workers who held on to their jobs and saw their stock portfolios swell even as the pandemic constrained their spending. But many lower-income households have built up at least a small savings cushion during the pandemic because of stimulus checks, enhanced unemployment benefits and other aid, according to researchers at the JPMorgan Chase Institute.
“The good news is that people are going into the fall with some reserves, more reserves than normal,” said Fiona Greig, co-director of the institute. “That can give them some runway in which to look for a job.”
recent survey by Alignable, a social network for small business owners. Not all have had sales turn lower, said Eric Groves, the company’s chief executive. But the uncertainty is hitting at a crucial moment, heading into the holiday season.
“This is a time of year when business owners in the consumer sector in particular are trying to pull out their crystal ball,” he said. “Now is when they have to be purchasing inventory and doing all that planning.”
open a new location as part of a development project on the West Side of Manhattan.
Go big. If some aid ended up going to people or businesses that didn’t really need help, that was a reasonable trade-off for the benefit of getting money to the millions who did.
Today, the calculus is different. The impact of the pandemic is more tightly focused on a few industries and groups. At the same time, many businesses are having trouble getting workers and materials to meet existing demand. Traditional forms of stimulus that seek to stoke demand won’t help them. If automakers can’t get needed parts, for example, giving money to households won’t lead to more car sales — but it might lead to higher prices.
That puts policymakers in a tight spot. If they don’t get help to those who are struggling, it could cause individual hardship and weaken the recovery. But indiscriminate spending could worsen supply problems and lead to inflation. That calls for a more targeted approach, focusing on the specific groups and industries that need it most, said Nela Richardson, chief economist for ADP, the payroll processing firm.
“There are a lot of arrows in the quiver still, but you need them to go into the bull’s-eye now rather than just going all over,” Ms. Richardson said.
Eighteen months into the pandemic, Jerome H. Powell, the Federal Reserve chair, has offered the strongest sign yet that the Fed is prepared to soon withdraw one leg of the support it has been providing to the economy as conditions strengthen.
At the same time, Mr. Powell made clear on Friday that interest rate increases remained far away, and that the central bank was monitoring risks posed by the Delta variant of the coronavirus.
The Fed has been trying to bolster economic activity by buying $120 billion in government-backed bonds each month and by leaving its policy interest rate at rock bottom. Officials have been debating when to begin slowing their bond buying, the first step in moving toward a more normal policy setting. They have said they would like to make “substantial further progress” toward stable inflation and full employment before doing so.
Mr. Powell, speaking at a closely watched conference that the Kansas City Fed holds each year, used his remarks to explain that he thinks the Fed has met that test when it comes to inflation and is making “clear progress toward maximum employment.”
six million fewer jobs than before the pandemic. And the Delta variant could cause consumers and businesses to pull back as it foils return-to-office plans and threatens to shut down schools and child care centers. That could lead to a slower jobs rebound.
Mr. Powell made clear that the Fed wants to avoid overreacting to a recent burst in inflation that it believes will most likely prove temporary, because doing so could leave workers on the sidelines and weaken growth prematurely. While the Fed could start to remove one piece of its support, he emphasized that slowing bond purchases did not indicate that the Fed was prepared to raise rates.
“We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis,” he said in his address to the conference, which was held online instead of its usual venue — Jackson Hole in Wyoming — because of the latest coronavirus wave.
The distinction he drew — between bond buying, which keeps financial markets chugging along, and rates, which are the Fed’s more traditional and arguably more powerful tool to keep money cheap and demand strong — sent an important signal that the Fed is going to be careful to let the economy heal more fully before really putting away its monetary tools, economists said.
told CNBC on Friday that he supported winding down the purchases “as quickly as possible.”
“Let’s start the taper, and let’s do it quickly,” he said. “Let’s not have this linger.”
James Bullard, the president of the Federal Reserve Bank of St. Louis, said on Friday that the central bank should finish tapering by the end of the first quarter next year. If inflation starts to moderate then, the country will be in “great shape,” Mr. Bullard told Fox Business.
“If it doesn’t moderate, then I think the Fed is going to have to be more aggressive in 2022,” he said.
ushered in a new policy framework at last year’s Jackson Hole gathering that dictates a more patient approach, one that might guard against a similar overreaction.
But as Mr. Bullard’s comments reflected, officials may have their patience tested as inflation climbs.
The Fed’s preferred price gauge, the personal consumption expenditures index, rose 4.2 percent last month from a year earlier, according to Commerce Department data released on Friday. The increase was higher than the 4.1 percent jump that economists in a Bloomberg survey had projected, and the fastest pace since 1991. That is far above the central bank’s 2 percent target, which it tries to hit on average over time.
“The rapid reopening of the economy has brought a sharp run-up in inflation,” Mr. Powell said.
They warn that if the Fed overreacts to today’s inflationary burst, it could wind up with permanently weak inflation, much as Japan and Europe have.
White House economists sided with Mr. Powell’s interpretation in a new round of forecasts issued on Friday. In its midsession review of the administration’s budget forecasts, the Office of Management and Budget said it expected the Consumer Price Index inflation rate to hit 4.8 percent for the year. That is more than double the administration’s initial forecast of 2.1 percent.
initially expected. But they still insist that it will be short-lived and foresee inflation dropping to 2.5 percent in 2022. The White House also revised its forecast of growth for the year, to 7.1 percent from 5.2 percent.
Slow price gains sound like good news to anyone who buys oat milk and eggs, but they can set off a vicious downward cycle. Interest rates include inflation, so when it slows, Fed officials have less room to make money cheap to foster growth during times of trouble. That makes it harder for the economy to recover quickly from downturns, and long periods of weak demand drag prices even lower — creating a cycle of stagnation.
“While the underlying global disinflationary factors are likely to evolve over time, there is little reason to think that they have suddenly reversed or abated,” Mr. Powell said. “It seems more likely that they will continue to weigh on inflation as the pandemic passes into history.”
Mr. Powell offered a detailed explanation of the Fed’s scrutiny of prices, emphasizing that inflation is “so far” coming from a narrow group of goods and services. Officials are keeping an eye on data to make sure prices for durable goods like used cars — which have recently taken off — slow and even fall.
Mr. Powell said the Fed saw “little evidence” of wage increases that might threaten high and lasting inflation. And he pointed out that measures of inflation expectations had not climbed to unwanted levels, but had instead staged a “welcome reversal” of an unhealthy decline.
Still, his remarks carried a tone of watchfulness.
“We would be concerned at signs that inflationary pressures were spreading more broadly through the economy,” he said.
