In the second quarter of 2021, the US economy was extremely hot. Growing With an annual rate of 6.5%, inflation adjusted and above pre-pandemic levels.Good news, but there was a problem: much of Wall Street Be expected A heated economy with a growth rate of over 8%. Moreover, that expectation comes after it has drifted lower than recently. Therefore, real GDP growth could not even reach its reduced target.
Washington has to be careful of disappointment, especially the Biden White House and Congressional Democrats trying to push two big spending bills. If the government injects money into the economy at a level that exceeds its ability to productively meet its growing demand, the result will be higher inflation rather than more substantial growth. And post-inflationary growth leads to higher take-out wages for workers.
But rising prices are eating up those profits. Excluding inflation, the economy grew at a pace of 13%. This is the fastest non-pandemic quarter growth since the third quarter of 1981. However, inflation offset almost half of that increase. Too much money indicates that you may be chasing too few products. Or higher, as consulting firm Capital Economics characterized the GDP report in a morning research note. “
And while some of these supply constraints are temporary, the concern among economists is that if prices continue to rise, whatever the nature of the first cause, the surge will raise expectations for future inflation. It’s about to change. And if workers start demanding higher wages and companies start charging higher prices as a result of their beliefs, those changed expectations can be self-fulfilling.
Now that the economy is larger than it was before the outbreak of COVID-19, policy makers need to consider how their actions will affect both future growth and inflation. From that perspective, the progress of the $ 1 trillion bipartisan infrastructure bill is encouraging. Of that amount, about $ 550 billion is new spending, which so far includes $ 110 billion for roads, bridges, and major projects. $ 66 billion for passenger and freight railroads. $ 39 billion for public transport. $ 65 billion for broadband. $ 17 billion in ports and waterways.
It’s a lot of money and will spread over more than a decade, but the goal is to increase the long-term productivity of the economy by improving both physical and digital connections. A better infrastructure makes it easier for both atoms and bits to move from here to there. And by boosting the productivity or “supply side” of the economy, persistent inflation is less likely to become a chronic problem.
Other legislation that Congress is working on can be more problematic. Everything close to the $ 3.5 trillion social spending plan (including education, childcare, climate change, paid family and medical leave) is inflation today by pushing more money into a limited supply economy There is a risk of increased pressure. Therefore, if moderate Democrats succeed in reducing that amount, it may help to prolong this recovery. Finally, what is needed is an inflationary shock in which the Federal Reserve raises interest rates and, in some cases, ends the expansion. Whatever good Democrats wonder what their social spending will do, much can be canceled by the recession and rising unemployment. The pre-pandemic expansion was historically slow, but it was long. And finally, wages were rising across the spectrum, even for low-skilled people.
Still, if the United States is about to achieve the sustainable and rapid growth of the Roaring Twenties of the 20s, much of the hard work will come from the private sector. And in the last two weeks alone, there has been a lot of good news in that regard. Hey, mock super billionaire Jeff Bezos and his provocative rocket, but the millionaire “space race” is a technological advance that is essential to creating a trillion dollar economy in space Is helping. A recent announcement by Google-owned AI company DeepMind shows that the AlphaFold algorithm can confidently predict protein structure, potentially creating new drugs and weather-resistant crops.Then there is Wall Street report The startup Form Energy may have found the “Holy Grail” in the renewable energy sector. It’s an inexpensive battery that provides long-lasting power storage on the grid.
To get the most out of these and other innovations, the United States needs not only an efficient infrastructure system, but also a stable macroeconomic environment. Unfortunately, Washington is now over-focusing on the former rather than the latter. Maybe this disappointing GDP report will help change that perspective.