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 various 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, international benchmark Brent crude oil prices have 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. While the current national average price of $3.88 per gallon of gasoline is still well below its peak of $5 in June 2022, Yardeni said in a note on Monday that rising prices are “a matter of concern.”
He warned: “If oil prices breach $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 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 inflationary spiral that is difficult to contain.
“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 the likelihood of a U.S. economic recovery Very 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%. Rather than warning signs, the economic data Goldman Sachs has seen suggest the likelihood of a severe recession is low.
“Continuing positive inflation and labor market news have led us to further lower our estimate of the U.S. 12-month recession probability,” 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 that 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 fund the Vietnam War and his Great Society programs, including Medicaid and the National Endowment for the Arts, through deficit spending 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 with price tags of $280 billion and $1.2 trillion respectively, we are replicating that scenario. Mild 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 Federal Reserve 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 of which were triggered by wars in the Middle East,” Yardeni explains. These two periods saw increases of 213% and 166% respectively, triggering two U.S. recessions.
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 a recession. Yardeni said the nearly 20% rise in crude prices so far this year was “unlikely to lead to a recession” unless another geopolitical crisis breaks out in the Middle East, causing oil prices to surge.
Wages and union contracts
Finally, both in the 1970s and the 2020s, workers demanded higher wages to combat rising inflation. During the Great Inflation Era, the powerful Teamsters union, which represents truck drivers, was able to negotiate significant pay increases for its members. In 1970, postal workers went on strike and formed their own, more powerful union, forcing 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 fuel inflation today in the same way.
“Unions today are energized by stagnant real wages. They’ve made substantial pay 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
Despite the 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 that inflation caused by wage growth will “moderate”, allowing the Fed to end its Hike movement. 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 that forced the Federal Reserve to raise interest rates until it led to a recession.
“The recent increase in oil prices is somewhat reminiscent of what happened during the Great Inflation of the 1970s. So is the union push 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.
