As stimulus measures wind down, we expect economic growth to slow, but remain firmly positive. This is good news, as it means the economy is healthy enough to expand on its own, buoyed largely by business and consumer spending. Consumers are in especially good shape; household net worth has risen sharply, increasing by $32 trillion in the past two years, according to the Federal Reserve. Years of rising stock prices and home values, combined with low interest rates, have reduced the debt burden for consumers, which creates more disposable income. Both wealthy and middle class Americans have more money to spend and higher savings. This is particularly important for growth, as consumer spending represents close to 70% of GDP. Business spending has lagged consumer spending, and has been constrained by a number of factors. Persistent supply chain disruptions have led to shortages of many raw materials – especially electronic components, building materials, and imported goods. This translates to longer wait times and low availability of finished goods, especially durable goods like automobiles, appliances, and electronic devices. In the coming months, we expect a gradual improvement in these supply chain disruptions as companies adapt and COVID restrictions ease. When met with demand, the aforementioned has the potential to fuel consumption and growth.
Inflation remains a risk, and is still manifesting in a variety of ways. The current supply chain issues have led to higher prices for producers and manufacturers, who have been passing price increases on to their customers. It is a frequent topic on most corporate earnings calls, and one reason we are especially focused on companies with strong pricing power. We expect core inflation (which excludes food and energy) to remain elevated for the remainder of the year. While we do not expect sustained inflation or a severe inflation shock, we believe it will take time for these supply-induced inflation pressures to moderate, and that they will continue to be a modest headwind to growth and pose a tricky problem for policy makers who may feel compelled to tighten monetary policy sooner than anticipated.
Wage inflation also represents a potential headwind to growth. The unemployment rate has fallen sharply from a peak of 14.8% in April of 2020 to 5.2% in August of this year. Even with supplemental federal assistance programs ending in recent weeks, the demand for labor far exceeds supply. Half of small businesses report that they have at least one position that they are unable to fill, according to the NFIB, as firms struggle to find workers with the necessary skills. Wages have increased 5.9% for the two years ending in August, the strongest increase in almost four decades. Currently, there are approximately 8 million unemployed workers competing to fill 10.9 million job openings. In aggregate, this suggests labor market conditions will remain tight, and wage pressures will continue to weigh on corporate profits and economic growth. One potential benefit of wage growth is its ability to increase consumer spending, which may partially offset its previously mentioned negative impact on growth. Another positive development from these labor market dynamics is that some indicators point toward improved productivity over time, which will allow businesses to offset higher wages with greater output. From the standpoint of long-term growth in the economy, we view higher productivity as a key force for sustaining growth going forward.