Tags: gdp | inflation | stagflation | federal reserve | stocks

Economic Growth Down, Inflation Up: Stagflation Ahead?

Economic Growth Down, Inflation Up: Stagflation Ahead?

Michael Busler By Thursday, 25 April 2024 12:39 PM EDT Current | Bio | Archive

The Bureau of Economic Analysis just announced that real gross domestic product growth for the first quarter of this year slowed to 1.6%. That’s down from the 3.4% GDP growth in the fourth quarter of last year and down further from the 5% growth recorded in the third quarter of last year. At the same time, consumer inflation is rising, That means the country could be heading toward stagflation, which I discussed in a February column.

At that time, contrary to the consensus view, I forecasted that inflation would increase, not decrease this year. I also noted that economic activity would slow this year and may even turn negative by summer. It looks like that may be happening.

Economic growth has been boosted for the last two years mainly from the federal government’s huge deficit spending. Large wage increases also helped fuel the increase in economic growth. This year wage inflation is contributing to the increase in consumer prices.

Congress must address the deficit spending problem. The public debt, which is the sum of all deficit spending, is now more than $34.5 trillion. There is no mechanism in place to ever pay down that debt. Rather when a ten or twenty year bond matures and must be repaid, the government rolls over that debt by selling new bonds.

That means, unless there is a surplus in the annual budget, which has occurred only four times in the last 63 years, the public debt will never be repaid. Debt that is maturing today has interest rates of less than 2%. Rolling over that debt will mean the bonds pay more than 4% annual interest. That will double the interest expense. Already this year the interest on the public debt will be higher than the country’s defense budget.

With debt as high as it is, it will be nearly impossible for the federal government to increase government spending to stimulate the economy and avoid or end a recession.

After ignoring the price stability goal of the Federal Reserve while inflation was increasing from January 2021 to June 2022, the Fed finally aggressively raised from mid-2022 to late 2023. Then in September 2023 they paused the interest rate increases. Pausing the rate increases too soon allowed inflation to initially linger and then accelerate this year.

Now the Fed must keep interest rates where they are. If inflation worsens in the coming months, which is very likely primarily because energy prices are rising, the Fed may even be forced to raise interest rates maybe as early as this summer. That means the Fed can’t stimulate economic growth through Monetary Policy.

If the economy slows further growth could turn negative. And neither fiscal nor monetary policy can be used to stimulate growth. A recession could follow.

Wage inflation will continue to put upward pressure on prices. Because corporations experienced inflationary profit growth, labor demanded higher wage increases. Last year some organized labor, like the auto workers and health care workers, received huge annual wage increases for multi-year contracts. That means increased costs for the corporations which puts upward pressure on prices, leading to higher inflation.

Putting all of this together, a likely scenario is the economic growth continues to slow while the government cannot take either monetary or fiscal policy actions to stimulate growth. Inflation increases as higher energy prices and wage inflation continue. That leads our economy to stagflation.

This is a very difficult problem to solve. Any action to stimulate growth puts upward pressure on prices which increases inflation. Any action to reduce inflation tends to slow economic growth.

The only solution that works is to look to supply-side economic policies. These actions will tend to increase output and add to economic growth.  The increase in output puts downward pressure on prices. Supply-side policies focus on increasing capital formation to stimulate growth.

The current administration will not consider these actions simply because actions taken to increase capital formation are viewed simply as “tax cuts for the wealthy.”

In 1980 when the country had a very severe stagflation problem, supply-side economic policies brought the inflation rate down and significantly increased economic growth. By 1984, annual growth exceeded 7% as the inflation rate tumbled. That’s what we need today.

Michael Busler is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years.

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The Bureau of Economic Analysis just announced that real gross domestic product growth for the first quarter of this year slowed to 1.6%. That's down from the 3.4% GDP growth in the fourth quarter of last year and down further from the 5% growth recorded in the third...
gdp, inflation, stagflation, federal reserve, stocks
Thursday, 25 April 2024 12:39 PM
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