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Kenan Institute 2022 Annual Theme: Stakeholder Capitalism
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Market-Based Solutions to Vital Economic Issues

Commentary

In the below commentaries, institute experts analyze and respond to the most pressing economic and business news of the day. To speak with one of our authors, please contact External Affairs Associate Rob Knapp.

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First, the good news. Given what we know about current economic conditions, it is likely that the consumer inflation rate has peaked in the U.S. for the current cycle. Recent inflation reports on the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) Implicit Price Deflator, which is the Federal Reserve’s preferred measure, show a jump to new 40-year highs in March but signs of moderation in coming months. For example, consumer goods with very large 12-month cost runups such as used cars and food away from home are starting to see prices moderate. Likewise, prices of important household goods like apparel, furnishings, prescription drugs and recreation commodities (think TVs and Pelotons) are flattening. Furthermore, some important energy prices such as crude oil and gasoline have stabilized in April after jumps in the first quarter. So, while inflation will surely remain elevated for some time, it is unlikely to get much worse.

Much has been made about the labor force participation rate, or the percentage of Americans over 16 who are working or actively looking for work — and for good cause, given the number of unfilled vacancies at U.S. firms. If fewer Americans are working, it is going to be harder for firms to staff all of their openings. Currently, 62.2% of adult Americans are working or looking for work. This compares with a historical average of 63.9% in 2019. With 259 million adult Americans, this 1.7 percentage point decrease in the labor force participation rate translates to a missing 4.4 million workers. And the narrative to date has primarily focused on how many Americans made changes following the COVID-19 pandemic (in response to lockdowns, layoffs, health concerns or care responsibilities) and the sizable fraction of these Americans who are still sitting on the sidelines. Given the steady drumbeat of news about how firms are unable to fill all their positions, there is much interest in how and when we expect these workers to return to the labor force. So, when can we expect them to join the labor pool?

Much attention is being focused on energy supply security issues, especially for European oil and gas supplies. The latest Russian decision to halt natural gas sales to Poland and Bulgaria has reinforced that continent’s awareness of the perils of unreliable suppliers. Europe’s short-term focus is on sanctioning Russia and then backfilling the forgone oil and gas from other sources.

The spread between 10-year and 3-month Treasuries – my favorite economic indicator – remains strongly in positive territory, suggesting a recession is not in the cards soon. This indicator has predicted all recessions since the mid-1960s, with a lead time of roughly one year, though the timing is inexact. The 10-year/2-year spread, which briefly inverted recently, is less reliable.

The latest report from the Department of Labor showed continued robust job growth. Employers added 431,000 jobs in March. The news of sustained job gains speaks to the strength of the U.S. economy. Moreover, the labor force participation rate inched up slightly to 62.4% in March, from 62.3% in February, indicating more Americans are reentering the workforce. We still have a long way to go to resolve the imbalance between job openings and unemployed people, however, and this means that current issues of worker burnout will also linger.

Concerns about further supply-chain troubles are on the rise. Just a few months ago the “temporary disruptions” stemming from covid were predicted to work themselves out in 2022. However, businesses are now faced with the possibility of disruptions much more severe than those experienced to date. These stem from two sources: interrupted supplies in essential raw materials and agricultural commodities resulting from Russia’s invasion of Ukraine and the potential for a rapid (and massive) spread of COVIC-19 in China resulting in suspensions to manufacturing operations there.

“Every business I enter is looking for employees” was a common refrain in our Carolina Across 100 survey, with 79% of the total survey sample selecting employment/staffing concerns among their top three negative impacts of COVID-19 on their organization. Is the staffing shortage just a function of COVID-19 that will correct itself as COVID abates or are there larger demographic and economic forces at work? The answer is a bit of both.

Out of the rubble of World War II, we collectively and deliberately built an institutional order that established norms of acceptable behavior and placed constraints on powerful nations. While work remains to create broader economic opportunity and some regions have suffered terrible conflict, the economic and financial globalization that this order fostered nevertheless yielded the greatest period of peace and economic prosperity that humanity has ever known. The more than 70 years since the war’s conclusion are, however, very atypical, and we are now returning to a setting far more familiar to any student of history, where strength and power supersede norms and rules. The world is characterized by a renewed struggle between illiberal autocracy and liberal democracy.

Inflation hit a 40-year high of 7.8% in February. We estimate energy prices will raise inflation by another percentage point in March. If sustained, the runup in gas prices will take a $100 billion-sized bite out of households’ wallets, weighing on consumer spending – and ultimately, inflation.

Stakeholder Capitalism

Together with many business and economic leaders around the globe, we at the Kenan Institute of Private Enterprise support the harshest feasible sanctions against Vladimir Putin in the immediate interest of Ukraine and its people. More broadly, we view such measures as vital to the long-term survival of democratic values. But as the Russian invasion continues, seemingly unabated by unprecedented economic and financial sanctions, we must ask: what more is feasible? And for how long can such restrictions be sustained?

The jumps in the inflation rate over the last few months have been larger and longer-lasting than expected.  For much of 2022 economic forecasters, including those at the Federal Reserve, assumed that higher inflation rates would be short-lived—or “transitory” using the preferred jargon of the day. Inflation was expected to start shifting back towards the Fed’s 2% target as supply-chain bottlenecks were resolved and a pandemic-induced shift in demand for consumer goods swung back toward consumer services.  Instead, recent inflation prints have set 40-year records and we are seeing more discussion about the possibility of a “wage-price” spiral. 

As part of President Joe Biden’s efforts to refocus the Federal Reserve Board, the Senate conducted confirmation hearings for several nominees this past week. While these hearings traditionally raise spirited exchanges about the nominees’ views on monetary policy and bank supervision, a new and more controversial topic involves the extent to which the Federal Reserve should internalize climate risks into its purview. Before wading into central bank wonkishness, it is important to make clear that climate change represents a serious risk to not only the U.S. economy but to humanity itself. Nevertheless, we need to be very deliberate in the assessment of the available policy tools, with an eye to where unintended consequences may reside.