Ed Yardeni, founder and chief investment strategist at Yardeni Research, remains steadfastly bullish despite more than two years of warnings from his peers about the possibility of a U.S. recession. The veteran market watcher, who has worked for decades in prestigious positions on Wall Street and previously as a Federal Reserve economist, has long argued that the U.S. economy is headed for a “hard landing” due to subdued inflation and strong economic growth. “The possibility is relatively low. labour market.
But on Monday, Yardeni revealed that this summer’s rapid rise in oil prices raised the prospect of an era of sustained inflation and recession in the 1970s.
As OPEC+ and Russian crude oil production continue to cut production, the price of international benchmark Brent crude oil has risen 30% since June 27 to more than $94 per barrel, causing U.S. retail gasoline prices to rise more than 8% during the same period.Although currently $3.88 Yardeni noted in a report on Monday that the national average price per gallon of gasoline remains well below its peak of $5 in June 2022, and that rising prices are “a matter of concern.”
“If oil prices break above $100 a barrel and gasoline prices rise steadily above $4 a gallon, and both remain above these levels for some time, it could trigger a new wage-price spiral and a new wage-price spiral,” he warned. Higher inflation expectations.”
A wage-price spiral occurs when workers demand increased wages to maintain income during a period of inflation. The theory goes that this will ultimately increase costs for businesses, which will then raise prices to compensate, leading to an unstoppable spiral of inflation.
“This scenario is reminiscent of the 1970s,” Yardeni explained, quickly adding, “It’s not what we think is the most likely scenario, but it poses a risk to our better prospects. “
With the risk of a return to high inflation and several other recent developments, including a widening federal budget deficit, a UAW strike and a possible government shutdown this month, Yardeni now sees a good chance of a U.S. economic recovery. big. By the end of 2024, the recession rate is 25%, higher than his previous forecast of 15%.
Yardeni’s forecast conflicts with that of Goldman Sachs, which earlier this month lowered the probability of a recession from 25% to the historical average of 15%. The economic data seen by Goldman Sachs did not raise alarm bells, but suggested that the likelihood of a severe recession was low.
“Continued positive inflation and labor market news have led us to further lower our estimate of the 12-month probability of a U.S. recession,” Jan Hatzius, chief economist at the investment bank, wrote in a note to clients.
Another era of guns and butter?
Yardeni, who teaches at Columbia University Business School, outlined similarities and differences between inflation in the 1970s and the 2020s in a report on Monday, arguing that another era of sustained inflation poses a serious risk to the U.S. economy — even if it is unlikely.
First, he emphasized how federal policies began to reflect President Lyndon Johnson’s “guns and butter” approach, which laid the foundation for the Great Inflation of the 1970s and early 1980s, when the consumer price index soared to 14 %.
In the late 1960s, Johnson’s decision to use deficit spending to fund the Vietnam War and his Great Society programs, including Medicaid and the National Endowment for the Arts, caused inflation to rise, Yardeni said. Now, after years of pandemic relief and Ukraine war spending, and the passage of the CHIPS and Science Act and the Infrastructure Investment and Jobs Act, which carry price tags of $280 billion and $1.2 trillion respectively, we are replicating the tameness of this scenario Version. .
However, Yardeni said fiscal policy was unlikely to cause the same serious damage as in the 1970s. He noted that a healthy labor market and a strong dollar helped prevent commodity prices from rising as sharply as they did in that era, and argued that the Fed has been raising interest rates more aggressively to curb inflation.
rising oil prize
Another major similarity between the 2020s and the 1970s is the continued rise in oil prices caused by war.
“We have no doubt that the Great Inflation of the 1970s was caused by two oil price spikes in 1973/74 and 1979, both triggered by wars in the Middle East,” Yardeni explains. These two periods grew by 213% and 166% respectively, triggering two recessions in the United States.
However, although the war in Ukraine also caused oil prices to surge by 46% in the first half of 2022, the modest increase did not trigger an economic recession. Yardeni said that unless another geopolitical crisis breaks out in the Middle East and causes oil prices to surge, the nearly 20% increase in crude oil prices so far this year is “unlikely to lead to a recession.”
Wages and union contracts
Finally, both in the 1970s and the 2020s, workers demanded higher wages to combat rising inflation. In the era of great inflation, the powerful Teamsters union, which represents truck drivers, was able to obtain substantial gains through negotiations. salary increase for its members. In 1970, postal workers went on strike and formed a more powerful alliance Their own actions forced the federal government to eventually provide them with multiple raises as well.
Yardeni said the strength of the labor movement ultimately kept wage inflation high, leading to continued increases in consumer prices during that era, and he believes the current rise of unions could exacerbate inflation today in the same way.
“Today’s unions are energized by the fact that real wages are stagnant. They’ve made substantial wage gains in recent negotiations,” he said, referring to the recent UAW strike and the UPS union agreement that included wage increases. .
However, Yardeni also explains that union members make up a much smaller proportion of the workforce than before, which should have helped prevent the sharp rise in wage prices in the 1970s. The proportion of union membership in private sector employment fell from 16.8% in 1983 to 6%.
productivity and technology
Although there are striking similarities between the 1970s and today, productivity growth may save the U.S. economy from repeating the mistakes of the past. By the time the Great Inflation ended in the early 1980s, productivity growth had fallen to historic lows, but Yardeni doesn’t think that will happen this time.
“We expect that a large number of technological innovations will improve the productivity of more industries and more companies than ever before. In this sense, all companies now are technology companies.” He said.
Yardeni believes that annual productivity growth (just 1.6% in the second quarter of this year) will return to an upward trend of 4% later this year, and inflation caused by wage growth will “moderate”, allowing the Fed to End its interest rate hike campaign. Unless there are unexpected oil supply disruptions in the Middle East, he does not expect current crude prices to continue to rise. This means that there is unlikely to be a “second peak of inflation” like the one in the 1970s, which forced the Federal Reserve to raise interest rates until it led to a recession.
“The recent rise in oil prices is somewhat reminiscent of what happened during the Great Inflation of the 1970s. So is the push by unions for higher wages to offset the rapid rise in the cost of living. Still, we don’t expect a repeat of the 1970s.” Yardeni concluded.
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