Our global economy is in a mess today - inflation has reached 9.1% in June, the highest level in 40 years. In conventional term, we should be experiencing a recession now, as defined by two consecutive quarters of decline in a country's Gross Domestic Product (GDP). However, other indictors such as consumer demand and employment rate don't agree so.
This toxic stew of high inflation and low unemployment rate weights on my mind as I plan my entry into the U.S. equity market. Today's development is eerily similar to the 1970s - stagflation - where the recovery took 10 years as a testament of the dark period that led to the global crisis. In light of the lessons learnt, can the FED successfully manipulate a crisis to create a soft landing?
Stagnation
Stagflation refers to a period of high inflation rate in a slowing economy and/or recession. High prices squeeze household budgets and reduce consumer spending, while weakening economy cutes lower corporate revenue. The rarity of this occurrence will definitely be a challenge for the Federal Reserve to curb inflation while avoiding a recession.
1970 - 2022 Similarities:
Fiscal and monetary policy simulation to lower unemployment rate.
Supply-side shock
Stance towards inflation tolerance
1970 - 2022 Differences:
Smaller magnitude of shock
More flexible economies
More controlled fiscal budget
Can the U.S. avoid a recession?
There's tonnes of good news circulating the social media spaces recently. The latest report revealed that unemployed rate has fell to a decade low of 3.5%, with an accelerated wage growth.
July Jobs Report: U.S. Added 528,000 New Jobs as Unemployment Rate Fell to 3.5%
It's good news - as ordinary folks like you and me are likely to be employed! With more cash to deploy, we are safe. Yay?
The tight labour market contributing to higher wages will escalate production prices as inflation soars to its highest point in more than 40 years. To curb inflation and demand, the Fed will have to continue aggressively tightening monetary policies. A precise balance has to be achieve to cushion a shrinking economy with a rising unemployment rate. An ideal that is challenging to achieve.
According to former U.S. Treasury Secretary Lawrence Summers, every time inflation exceeded 4% while unemployment falls below 5% over the past 75 years, the U.S. slips into a recession within two years (read more here).
I did an analysis from 1960, and those period coincides:
From June 1968 to June 1970 | Recession period: 1969 - 1970 (11 months)
From March to December 1973 | Recession period: 1973 - 1975 (16 months)
From May to July 2006 | Recession period: 2007 - 2009 (18 months)
"We need five years of unemployment above 5% to contain inflation"
Former U.S. Treasury Secretary Lawrence Summers is concerned for a heated economy that is currently staging for stagflation (read more here).
Key data report this week
Wednesday (10 Aug): Consumer Price Index
Thursday (11 Aug): Producer Price Index
Friday (12 Aug): Michigan Consumer Sentiment Index
In my opinion, this is a manipulated crisis; creating the paradox of a soft landing. Let's see how thing pan out this week!
Tune in to my FB Live tonight, 8pm to hear my thoughts as a seasoned investor.
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