What Does it all Mean?

by | September 20, 2021

Investors, business leaders, policymakers and ordinary citizens take a natural interest in the health of the economy. And why not? The ups and downs of the business cycle matter for their portfolios, sales, fiscal or monetary policy settings, and job prospects, among other things.

Economists are there to help. But sometimes, when they peer at the incoming data, they struggle to make sense of it. Now may be one of those times. 

For instance, economists look to the collective wisdom of markets for insights into whether growth is accelerating or slowing, or whether inflation is temporary or more pervasive.

Yet today market signals are puzzling. The wisdom of the crowds who trade stocks, bonds and commodities seems to be muddled. 

For example, softening global equity markets could be suggesting growing concerns about economic activity. That view is supported by another tool developed by economists, namely growth surprise indices, which measure how an array of incoming economic datapoints are behaving relative to consensus forecasts. Those surprise indices have been falling over the past two months and have recently moved even deeper into negative territory. 

But if growth is slowing, someone forgot to tell bond and commodity investors. Over the past six weeks, bond yields have edged higher, not what you’d expect if growth worries were mounting. Indeed, since early August real (inflation-adjusted) yields have risen nearly 20 basis points. Also, growth-sensitive oil and copper prices have climbed over the past month. None of those dynamics should take place if growth is flagging.

Some observers counter that fixed income and commodity investors are instead fretting about higher inflation, bidding up bond yields and commodity prices as hedges against high inflation. But that argument doesn’t square with other market data. For instance, five-year expected inflation rates, derived from Treasury Inflation Protected Securities (TIPS), have hardly budged over the past six weeks. The very bond investors who ought to be most worried about inflation are seemingly the least concerned, with their feet firmly planted in the ‘inflation-is-transitory’ camp.

Which brings us to an important point. Occasionally, market prices transmit more noise than substance. Today, could be one of those times. As autumn approaches, professional investors may be subtly changing portfolios to lock in 2021 profits or to protect against potential losses. Price signals under these circumstances are not terribly useful for economists.

In any event, economists have many other tools at their disposal. Alongside surprise indices, aggregations of high frequency data, such as the Federal Reserve Bank of Atlanta’s GDP Now tool, can provide insights into how the economy is faring. For instance, in the second half of August the Atlanta Fed’s GDP Now forecast for current quarter US growth plunged from over 6% (annualized) to 3.7%. 

Yet in recent weeks, US and global economic conditions appear to have stabilized, providing mixed, rather than uniform, messages. 

For example, high frequency measures of US labor market performance, such as jobless claims or vacancies, point toward continued healthy gains in US employment and household income. Yet better jobs data has been offset by weakness in small business sentiment, as well as in Chinese consumer spending (retail sales). Meanwhile, US and European purchasing manager indices have stabilized in recent months at elevated levels, suggesting a positive outlook for manufacturing. That’s not terribly surprising, given widespread evidence of bottlenecks, unfilled orders and supply shortages requiring sturdy production to address shortfalls.

Taking it all together, what can economists say today about the global outlook for growth and inflation?

The most comforting message, perhaps, is not to worry. Global growth may be slowing, as Covid-stimulus measures and re-opening bounces fade. But household income is set to rise smartly, underpinned by jobs growth and rising wage. Supply shortages will similarly support rising industrial production and commercial activity in the months to come. Global growth may have downshifted, but it is unlikely to come to a standstill, much less go into reverse.

The second broad takeaway is that economists should be more confident about steady growth than the path for inflation. Even as some ‘transitory’ price increases peak or reverse – e.g. used car prices or airfares –  overall inflation is proving to be more resilient than previously thought. Also, inflation is turning out to be more widespread, with more goods and services reporting higher prices. Wage gains are also more persistent.

Finally, despite rising prices and wages, inflation expectations remain near long-term averages and consistent with policymakers’ objectives. That’s critically important, as it permits central bankers to keep highly accommodative policies in place for longer, which in turn underpins household, business, and investor confidence. 

In sum, the tools economists use to judge the state of the economy are imperfect. Signals can be confusing, as is the case today. But through it all, there are good reasons to believe that the world economy continues to heal from the pandemic recession. Unusual disruptions to labor markets, supply chains and production have slowed growth and boosted inflation, but those factors appear unlikely to derail the recovery.

About the Author

Larry Hatheway has over 25 years experience as an economist and multi-asset investment professional. He is co-founder, with Alexander Friedman, of Jackson Hole Economics, LLC, which offers commentary and analysis on the global economy, policy & politics, and their broad implications for capital markets. Prior to co-founding Jackson Hole Economics, LLC Larry worked at GAM Investments from 2015-2019 as Group Chief Economist and Global Head of Investment Solutions, where he was responsible for a team of 50 investment professionals managing over $10bn in assets. While at GAM, Larry authored numerous articles on the world economy, policy-making and multi-asset investment strategy.

Larry was also the lead investment manager for various mandates, funds and an actively managed multi-asset index. Larry also served on the GAM Group Management Board, was Chairman of the GAM London Limited Board and served as member of the GAM Investment Management Limited Board. Larry was also Chairman of the GAM Diversity & Inclusion Committee. During his tenure at GAM, Larry was based in London, UK and Zurich, Switzerland.

From 1992 until 2015 Larry worked at UBS Investment Bank as UBS Chief Economist (2005-2015), Head of Global Asset Allocation (2001-2012), Global Head of Fixed Income and Currency Strategy (1998-2001), Chief Economist, Asia (1995-1998) and Senior International Economist (1992-1995). During his tenure at UBS, Larry was also a standing member of the UBS Wealth Management Investment Committee. While at UBS, Larry worked in Zurich, Switzerland, London, UK (various occasions), Singapore and Stamford, CT.

At both GAM Investments and UBS Investment Bank Larry was widely recognised for his appearances on Bloomberg TV, CNBC, the BBC, CNN and other media outlets. He frequently published articles and opinion pieces for Bloomberg, CNBC, Project Syndicate, and The Financial Times, among others.

Before joining UBS in 1992, Larry held roles at the Federal Reserve (Board of Governors), Citibank and Manufacturers Hanover Trust. Larry Hatheway holds a PhD in Economics from the University of Texas, an MA in International Studies from the Johns Hopkins University, and a BA in History and German from Whitman College. Larry is married with four grown children and a loving Cairn Terrier, and resides in Wilson, WY.

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