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ZAIS Insights

Resilient but not invincible

By Bernhard Eschweiler, PhD3 minute read

  • The US economy avoided recession despite Fed tightening …
  • … thanks to low interest-rate sensitivity and fiscal pump priming
  • The economy may keep growing even as these supports fade …
  • … but it has not become invincible and more cracks are likely to emerge

The US economy has been surprisingly resilient despite 525 basis points of Fed rate hikes over the last two years.1

In our view, the two main reasons for the resilience were: 1) limited interest rate sensitivity thanks to households and businesses locking in low interest rates on their debt especially after the Fed had pushed down long-term interest rates during COVID and 2) massive fiscal stimulus over the last four years.

The economy has defied recession, but it has not become invincible. We expect that the conditions that sustained growth will fade and that is likely to reveal cracks in the vulnerable parts of the economy. The Fed may ease policy later this year, yet households and businesses still must adjust to higher interest rates, while the super loose fiscal policy stance is unlikely to be sustained for much longer.

On the other hand, the economy is not sick, and we believe that improving global growth conditions will support growth in the US as well. We also observe promising signs of structural change that may raise US productivity over time.

Impressive resilience

After a sluggish performance in 2022, most forecasters expected that the US economy would enter recession in 2023, although not a deep one (see Table 1). Unemployment was also predicted to rise and that was expected to bring down inflation. The Fed did not predict outright recession but was looking for a weak economy as well.2

Table 1: Forecasts and actual outcomes / 
        % Q4/Q4 except u-rate (% Q4)
Source: Blue-Chip Consensus Forecasts, Board of Governors of the Federal Reserve System, Bureau of Economic Analysis and Bureau of Labor Statistics3

The actual outcome beat expectations in two ways.

First, the economy avoided recession and even accelerated notably, while unemployment stayed low.

Second, inflation declined nevertheless (see Table 1 again). Housing activity had already contracted in 2022 when interest rates started to rise and stayed weak in 2023, but consumption made an impressive rebound and investment growth stayed firm, while government spending accelerated (see Table 1 again).

To be sure, other major economies with similar rate hikes, notably in Europe, managed to dodge recession as well, and also succeeded in taming inflation, but their growth performance has been poor compared to the US.4

Limited interest-rate sensitivity

Higher interest rates impact the economy by tightening financial conditions for businesses and households. The result is typically declining business investment, less housing activity and reduced household consumption as higher interest payments crowd out other spending. Depending on the degree and structure of indebtedness, the financial tightening can also result in financial stress and trigger a wave of foreclosures and defaults as during the financial crisis.

In this tightening cycle, we have seen housing affordability and activity plunge rapidly soon after the Fed started to raise interest rates.5 However, the rise in interest rates did not have an adverse effect on overall household debt-service payments as had been the case in past cycles (see Chart 1, debt-service payments as a share of disposable income are still below pre-COVID levels).

Chart 1: Household debt-service payments /
        % of disposable income
Source: Board of Governors of the Federal Reserve System.6 Note that the drop in debt-service payments in % of disposable income and the subsequent rebound between 2020 and 2021 were due to the temporary surge in disposable income caused by the large government transfer payments7

The reasons for the low level of debt-service payments are two-fold. First, households have reduced the overall debt-load by more than a quarter since the financial crisis.8 Second, most homeowners had locked in long-term mortgages before the Fed started to tighten policy. As a result, the effective interest rate that homeowners pay on their existing mortgage has increased only marginally despite the surge in new mortgage rates (see Chart 2).9

Chart 2: New and effective mortgage rates /
        % p.a.
Source: Bureau of Economic Analysis and Freddie Mac10

Businesses have on balance even benefited from rising interest rates. In contrast to past cycles, net interest payments have declined sharply in the course of COVID and through the period of Fed tightening (see Chart 3).

Chart 3: Non-financial corporate net interest payments
        % of gross value added
Source: Bureau of Economic Analysis11

This suggests to us that businesses have benefitted from Fed policy twice, first by locking in very low funding rates during COVID and second by earning more interest on their cash assets as the Fed tightened.

No financial stress

More broadly, the aggressive Fed rate hikes and banks’ tightening of lending standards to levels typically associated with recessions12 have failed to trigger financial stress. In fact, after some initial tightening, financial conditions even improved to levels normally seen in expansion periods (see Chart 4).

Chart 4: US financial stress index
        % z-score
Source: Federal Reserve Banks of Chicago, Kansas City and St. Louis13

One reason is clearly that the rise in interest rates has not inflicted wide-spread balance-sheet problems for businesses and households as discussed above. The other reason, in our view, is the absence of major imbalances such as debt and asset bubbles and the improved banking-sector health.14

Massive fiscal pump priming

While monetary tightening was not hurting the economy as much as feared, fiscal policy was stimulating more than expected. Chart 5 (on the next page) shows the inverse relationship between the unemployment rate and the primary budget balance15 (rising unemployment corresponds to an eroding primary balance and vice versa) and highlights the extent of fiscal pump priming.

Chart 5: Federal budget and unemployment
        % of GDP (left) and % (right)
Source: Office of Management and Budget and Bureau of Labor Statistics16

For the last few years, the primary budget balance has been much worse than what would have been consistent with the movements of the unemployment rate. In fact, the current low rate of unemployment would normally imply a primary budget surplus (see Chart 5 again).

Chart 6: Federal primary budget balance
        % of GDP (left)
Source: Office of Management and Budget and Bureau of Labor Statistics and ZAIS own calculations17

Chart 6 shows the cyclical component of the federal primary budget balance derived from the unemployment rate and the excess primary budget balance that is not driven by the cyclical state of the economy. The latter deteriorated before the pandemic and despite some post-COVID recovery remains on a negative trajectory. The excess primary fiscal deficit stood still at 6.7% of GDP at the end of 2023 and over the last 4 years accumulated a total of 33% of GDP (see Chart 6 again).

During the pandemic, the fiscal stimulus was targeted directly at households and businesses in the form of transfers and subsidies (see Table 2). Even in 2023, the level of these payments had not completely reversed to the pre-COVID levels. Last year, the fiscal stimulus was mostly directed at government consumption and investment spending (see Table 2 again). In our view, the fiscal stimulus during COVID not only safeguarded the economy through the pandemic but also cushioned it versus the impact of the subsequent Fed tightening.

Table 2: Government spending
        Percent
Source: Board of Governors of the Federal Reserve, Bureau of Economic Analysis18

Corporates maintain high profit margins

On the business side, this effect is most visible in profits. Profit margins typically fall before recessions and only start to rise again when the economy recovers. During COVID, however, profit margins jumped to new highs and eased only moderately afterwards (see Chart 7).

Chart 7: Corporate profit margins 
        % of gross value added
Source: Bureau of Economic Analysis19

In our view, the strength of profit margins reflects in parts the health of the corporate sector.

However, we think that the jump of profit margins to record highs during COVID and the following resilience are largely due to three special factors.

  • First, the sharp decline in net interest payments lifted profit margins more than 2 percentage points since the start of COVID.20
  • Second, the fiscal subsidies during COVID contributed about 2 percentage points to profit margins.21
  • Third, businesses were able to raise prices more than costs (most notably labor costs) especially during the period of rising inflation (see Chart 8), adding nearly one percentage point to profit margins.23

Chart 8: Chart 8: Nonfarm business costs & prices 
        Index 2019-Q4=100
Note that prices rose less than labor costs at the start of COVID but that was more than offset by fiscal subsidies.
Source: Bureau of Economic Analysis 23

With firms able to maintain high profit margins there was little pressure to cut employment and investment.

In fact, businesses were looking to hire more people than were unemployed.24 Investment growth remained firm25 and fiscal incentives under the Chips & Science Act as well as the Inflation Reduction Act have boosted investment in areas like manufacturing construction by close to 100% in 2023 (see Chart 9)

Chart 9: Real manufacturing construction 
        Index 2019=100
Source: Bureau of Economic Analysis26

Households kept spending

Fiscal pump priming during COVID, limited interest-rate sensitivity and solid job growth were the main factors that supported the household sector and kept consumption going.

With consumer spending accounting for roughly 70% of total GDP, this was key for maintaining overall growth and greasing the cycle of mutually supportive business investment and hiring as well as household spending.27

Especially the large fiscal transfers during COVID, which households were not able and willing to spend immediately, have created large excess savings that helped cushion the impact of rising interest rates and inflation trough 2023 (see Chart 10).

Chart 10: Private savings
          % of disposable income
Source: Bureau of Economic Analysis28

The decline of inflation in 2023 was also helpful, which pushed up real compensation per employee and together with solid job growth raised overall purchasing power (see Chart 11).

Chart 11: Real compensation and employment
          % over a year ago
Source: Bureau of Labor Statistics and Bureau of Economic Analysis29

How could inflation decline?

The reason for the Fed tightening was to bring down inflation. As the consensus forecasts as well as the Fed’s own predictions implied, that was expected to require an economic downturn and a rise in unemployment.30 As it turns out, the economy accelerated, unemployment stayed stable and yet inflation still came down.31 We see two factors that help explain the perceived puzzle.

First, most of the inflation decline from the peak in mid-2022 was driven by the goods sector (see Chart 12).

Chart 12: PCE inflation 
          % from a year ago
Source: Bureau of Economic Analysis32

In our view, that was primarily driven by the normalization in global supply chains and the decline in energy prices after the surge triggered by the attack of Russia on the Ukraine in early 2022 and not Fed tightening.

Second, there has been no wage-price spiral.33 We attribute that to the Fed’s success in keeping inflation-expectations anchored34 and the renewed influx of migrants which raised the prime-age labor force participation rate and prevented further wage growth increases (see Chart 13).

Chart 13: Migrant workers and labor force participation 
          % from a year ago (lhs) & % of labor force (rhs)
Source: Bureau of Labor Statistics35

Resilient but not invincible

All in all, we believe that the economy’s resilience reflects largely favorable policy conditions and prudent balance sheet management by households and businesses and is not a paradigm change. The economy has not become invincible and we expect that the favorable conditions that supported growth over the last two years will fade.

First, the Fed may cut interest rates later this year but we think monetary conditions will stay tight. As we argued in the prior ZAIS Insight “The Inflation Trap”, inflation may not fall sustainably to the 2% target, limiting the room for future interest rate cuts.36 On the other hand, real interest rates, which were deeply negative when inflation was running hot in 2021-22, only turned positive last year and are now reaching levels last seen before the financial crisis (see Chart 14).

Chart 14: Real Fed funds rate 
          2019=100
Source: Board of Governors of the Federal Reserve, Bureau of Economic Analysis and University of Michigan37

Thus, after more than a decade of mostly negative real interest rates, businesses and households will have to adjust to positive real interest rates. Already, there are signs of financial stress on the edges. Refinancing conditions for leveraged loans and office real-estate debt have deteriorated and that has lifted default rates (see Chart 15 on next page). Delinquency rates for credit card debt and auto loans are also rising (see Chart 16 on next page). We expect that defaults and credit bifurcation will rise further as the impact of higher interest rates trickles through the economy.

Chart 15: Leveraged loan and office real-estate debt default rates
          Percent
Source: Pitchbook LCD and TREPP38

Chart 16: Consumer delinquency rates
          Percent
Source: Federal Reserve Bank of New York39

The other adjustment that may not come immediately but seems inevitable to us concerns fiscal policy. The latest budget outlook of the Congressional Budget Office makes a grim reading projecting an uninterrupted rise in the debt-GDP ratio as net interest outlays as a share of GDP rise to new historical highs.40

In our view, this will increasingly limit the room for discretionary spending or force some form of tax increases.

Relocation and not resignation

The economy’s surprising resilience has been a humbling experience for many economists. To us, a key lesson is that basic economic principles have not been nullified but that they may play out differently than in the past due to changing circumstances.

Looking ahead, we expect that Fed tightening will have a longer lagged effect than in the past, while fiscal support will fade. However, we also see positive factors that may support growth for going forward.

First, while the factors behind the resilience are likely to fade, that does not have to push the economy immediately into recession in our view. Profit margins come from very high levels and household debt payments are low by past standards and we think that it will take a while until they deteriorate to levels at which recession becomes inevitable.

Second, there are more encouraging signs that the global economy starts to recover as the disruptive impact of high inflation and energy prices fades.41

Third, eye-catching to us is the rise in US new business applications (see Chart 17). This was triggered by COVID but has endured and, in our view, is more than a stopgap measure for people who lost their jobs.

Importantly, high-propensity new business applications, which are firms that either already employ people or are expected to hire employees, have risen as well and account for roughly a third of all new business applications.42

Chart 17: New business applications 
          2019=100
Source: US Census43

The large share of new business applications in sectors like retail and professional services suggests that many new businesses have moved closer to residential areas where more people work from home (see Chart 18).44

Chart 18: Contribution to growth of new business applications by sectors
          % change 2019 to 2023
Source: US Census45

This relocation effect will probably fade over time, but the rise in new business applications could still mark a shift to greater mobility in the economy, which combined with the rise and application of new technologies like artificial intelligence could lead to overall stronger productivity growth.

The list of possible positives and negatives for the US economic outlook is longer than the points we have listed here. We draw some firm conclusions, like the lagged impact of higher interest rates on households and businesses. However, we believe that the balance of all factors does not point strongly in a particular direction for the economy, while uncertainties remain high. Thus, it seems appropriate to us at this point to be more agnostic about the state and prospect of the economy.

More Information

As always, we are available to discuss our views with you. Please contact your Client Relations representative at +1 732 978 9722 or zais.clientrelations@zaisgroup.com

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Endnotes

  1. Board of Governors of the Federal Reserve System (US), Federal Funds Effective Rate [FEDFUNDS], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/FEDFUNDS
    U.S. Bureau of Economic Analysis, Real Gross Domestic Product [GDPC1], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/GDPC1
  2. See Table 1 derived from: Board of Governors of the Federal Reserve System (US); FOMC Projections materials, accessible version; December 14, 2022.
    https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20221214.htm
  3. Blue Chip Consensus Forecast; Projections for 2023 December from December 2022; from: The While House; Council of Economic Advisors; Q4 GDP Advance Estimate: Context for Today’s Strong Report; January 25, 2024.
    https://www.whitehouse.gov/cea/written-materials/2024/01/25/q4-gdp-advance-estimate-context-for-todays-strong-report/
    Board of Governors of the Federal Reserve System (US); FOMC Projections materials, accessible version; December 14, 2022.
    https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20221214.htm
    U.S. Bureau of Economic Analysis, Real Gross Domestic Product [GDPC1], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/GDPC1
    U.S. Bureau of Labor Statistics, Unemployment Rate [UNRATE], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/UNRATE
    U.S. Bureau of Economic Analysis, Personal Consumption Expenditures Excluding Food and Energy (Chain-Type Price Index) [PCEPILFE], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/PCEPILFE
    U.S. Bureau of Economic Analysis, Real Private Residential Fixed Investment [PRFIC1], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/PRFIC1
    U.S. Bureau of Economic Analysis, Real Private Nonresidential Fixed Investment [PNFIC1], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/PNFIC1
    U.S. Bureau of Economic Analysis, Real Government Consumption Expenditures and Gross Investment [GCEC1], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/GCEC1
  4. International Monetary Fund; World Economic Outlook Update; January 2024.
    https://www.imf.org/en/Publications/WEO/Issues/2024/01/30/world-economic-outlook-update-january-2024
  5. ZAIS Insight; The big housing correction; September 2022.
    https://www.zaisgroup.com/the-big-housing-correction.html
  6. Board of Governors of the Federal Reserve System (US), Household Debt Service Payments as a Percent of Disposable Personal Income [TDSP], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/TDSP
  7. U.S. Bureau of Economic Analysis, Disposable Personal Income [DSPI], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/DSPI
    U.S. Bureau of Economic Analysis, Personal Current Transfer Receipts [PCTR], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/PCTR
  8. The household debt to disposable income ratio dropped from 134.8% at the end of 2007 to 97.2% at the end of 2023. Board of Governors of the Federal Reserve System; Households and Nonprofit Organizations; Debt Securities and Loans; Liability, Level [CMDEBT], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/CMDEBT
    U.S. Bureau of Economic Analysis, Disposable Personal Income [DPI], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/DPI
  9. The decline of the effective interest on mortgages to new lows during Corona suggests that many homeowners used the opportunity to lock in the very favorable funding conditions (see also note 10).
  10. Bureau of Economic Analysis; National Income and Product Accounts; Mortgage Interest Paid, Owner- and Tenant-Occupied Residential Housing; March 29, 2024.
    https://apps.bea.gov/iTable/?reqid=19&step=2&isuri=1&categories=survey&_gl=1*191y40e*_ga*MjA5Njk1ODA2OC4xNzA1NTY5NDQy*_ga_J4698JNNFT*MTcxMDIzOTAyOS4yMy4wLjE3MTAyMzkwMjkuNjAuMC4w#eyJhcHBpZCI6MTksInN0ZXBzIjpbMSwyLDMsM10sImRhdGEiOltbImNhdGVnb3JpZXMiLCJNaXNjUHVibGljIl0sWyJOSVBBX1RhYmxlX0xpc3QiLCI2MDgyIl0sWyJGaXJzdF9ZZWFyIiwiMTk4MCJdLFsiTGFzdF9ZZWFyIiwiMjAyMyJdLFsiU2NhbGUiLCItOTk5OSJdLFsiU2VyaWVzIiwiUSJdXX0=
    Freddie Mac, 30-Year Fixed Rate Mortgage Average in the United States [MORTGAGE30US], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/MORTGAGE30US
  11. U.S. Bureau of Economic Analysis, Net value added of nonfinancial corporate business: Net operating surplus: Net interest and miscellaneous payments [B471RC1Q027SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/B471RC1Q027SBEA
    U.S. Bureau of Economic Analysis, Gross value added of nonfinancial corporate business [A455RC1Q027SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/A455RC1Q027SBEA
  12. Board of Governors of the Federal Reserve System; Senior Loan Officer Opinion Survey on Bank Lending Practices; January 2024.
    https://www.federalreserve.gov/data/sloos/sloos-202401.htm
  13. Federal Reserve Bank of Chicago, Chicago Fed Adjusted National Financial Conditions Index [ANFCI], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/ANFCI
    Federal Reserve Bank of Kansas City, Kansas City Financial Stress Index [KCFSI], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/KCFSI
    Federal Reserve Bank of St. Louis, St. Louis Fed Financial Stress Index [STLFSI4], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/STLFSI4
  14. Federal Reserve Bank of New York; Quarterly Trends for Consolidated U.S. Banking Organizations; Third Quarter 2023.
    https://www.newyorkfed.org/medialibrary/media/research/banking_research/QuarterlyTrends2023Q3.pdf?sc_lang=en&hash=92327C93E8F7CE420AFD46882D00354B
  15. The primary budget balance is the total budget balance excluding interest payments.
  16. U.S. Office of Management and Budget and Federal Reserve Bank of St. Louis, Federal Surplus or Deficit [-] as Percent of Gross Domestic Product [FYFSGDA188S], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/FYFSGDA188S
    U.S. Office of Management and Budget and Federal Reserve Bank of St. Louis, Federal Outlays: Interest as Percent of Gross Domestic Product [FYOIGDA188S], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/FYOIGDA188S
    U.S. Bureau of Labor Statistics, Unemployment Rate [UNRATE], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/UNRATE
  17. The cyclically-adjusted primary budget balance is based on a linear regression of the unemployment rate on the primary budget balance (% of GDP) between 1970 and 2016. The excess primary budget balance is the difference between the total primary budget balance and the cyclically-adjusted primary budget balance.
    Same data sources as footnote 16.
  18. Board of Governors of the Federal Reserve System (US), General Government; Subsidies Paid, Transactions [BOGZ1FA366402005Q], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/BOGZ1FA366402005Q
    Board of Governors of the Federal Reserve System (US), General Government; Social Contributions Paid, Transactions [BOGZ1FA366404005Q], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/BOGZ1FA366404005Q
    Board of Governors of the Federal Reserve System (US), General Government; Contributions for Government Social Insurance Received, Transactions [BOGZ1FA366601005Q], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/BOGZ1FA366601005Q
    U.S. Bureau of Economic Analysis, Gross Domestic Product [GDP], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/GDP
    U.S. Bureau of Economic Analysis, Real Government Consumption Expenditures and Gross Investment [GCEC1], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/GCEC1
  19. U.S. Bureau of Economic Analysis, Net value added of nonfinancial corporate business: Corporate profits with IVA and CCAdj: Profits after tax with IVA and CCAdj [W328RC1Q027SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/W328RC1Q027SBEA
    U.S. Bureau of Economic Analysis, Gross value added of nonfinancial corporate business [A455RC1Q027SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/A455RC1Q027SBEA
  20. U.S. Bureau of Economic Analysis; National Income and Products Account; Table 1.14. Gross Value Added of Domestic Corporate Business in Current Dollars and Gross Value Added of Nonfinancial Domestic Corporate Business in Current and Chained Dollars; March 29, 2024.
    https://apps.bea.gov/iTable/?reqid=19&step=3&isuri=1&1921=survey&1903=55#eyJhcHBpZCI6MTksInN0ZXBzIjpbMSwyLDMsM10sImRhdGEiOltbIk5JUEFfVGFibGVfTGlzdCIsIjU1Il0sWyJDYXRlZ29yaWVzIiwiU3VydmV5Il0sWyJGaXJzdF9ZZWFyIiwiMjAxOCJdLFsiTGFzdF9ZZWFyIiwiMjAyMyJdLFsiU2NhbGUiLCItOSJdLFsiU2VyaWVzIiwiUSJdXX0
  21. Same source as footnote 20.
  22. Same source as footnote 20.
  23. U.S. Bureau of Economic Analysis, Price per unit of real gross value added of nonfinancial corporate business [A455RD3Q052SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/A455RD3Q052SBEA
    U.S. Bureau of Economic Analysis, Costs per unit of real gross value added of nonfinancial corporate business: Compensation of employees (unit labor cost) [A460RD3Q052SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/A460RD3Q052SBEA
  24. U.S. Bureau of Labor Statistics, Job Openings: Total Private [JTS1000JOL], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/JTS1000JOL
    U.S. Bureau of Labor Statistics, Unemployment Level [UNEMPLOY], retrieved from FRED, Federal Reserve Bank of St. Louis; , March 29, 2024.
    https://fred.stlouisfed.org/series/UNEMPLOY
  25. U.S. Bureau of Economic Analysis, Real Private Nonresidential Fixed Investment [PNFIC1], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/PNFIC1
  26. U.S. Bureau of Economic Analysis, Real private fixed investment: Nonresidential: Structures: Manufacturing [C307RX1Q020SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis; , March 29, 2024.
    https://fred.stlouisfed.org/series/C307RX1Q020SBEA
  27. Bureau of Economic Analysis; Gross Domestic Product, Fourth Quarter and Year 2023; Gross Domestic Product: Level and Change from Preceding Period.
    https://www.bea.gov/sites/default/files/2024-02/gdp4q23-2nd.pdf
  28. U.S. Bureau of Economic Analysis, Personal Saving Rate [PSAVERT], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/PSAVERT
  29. U.S. Bureau of Economic Analysis, National income: Compensation of employees [A033RC1A027NBEA], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/A033RC1A027NBEA
    U.S. Bureau of Labor Statistics, All Employees, Total Nonfarm [PAYEMS], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/PAYEMS
    U.S. Bureau of Economic Analysis, Personal Consumption Expenditures: Chain-type Price Index [PCEPI], retrieved from FRED, Federal Reserve Bank of St. Louis; March 3, 2024.
    https://fred.stlouisfed.org/series/PCEPI
  30. See Table 1.
  31. See Table 1 again.
  32. U.S. Bureau of Economic Analysis, Personal consumption expenditures: Goods (chain-type price index) [DGDSRG3M086SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/DGDSRG3M086SBEA
    U.S. Bureau of Economic Analysis, Personal consumption expenditures: Services (chain-type price index) [DSERRG3M086SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/DSERRG3M086SBEA
  33. Wages and prices have both increased but not in a synchronized and mutually supportive fashion. In fact, the two-year rolling correlation between wage growth and inflation has been negative for the last four years.
    U.S. Bureau of Economic Analysis, National income: Compensation of employees [A033RC1A027NBEA], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/A033RC1A027NBEA
    U.S. Bureau of Economic Analysis, Personal Consumption Expenditures: Chain-type Price Index [PCEPI], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/PCEPI
  34. Short-term inflation expectations have been rising in 2021 and through the first half of 2022 and subsequently have been falling yet medium-to-long-term inflation expectations have remained stable.
    University of Michigan; Surveys of Consumers; Charts January 2024; Expected change in prices during the next year.
    https://data.sca.isr.umich.edu/get-chart.php?y=2024&m=1&n=32r&d=ylch&f=pdf&k=230f22ffd14f19798a2477d01fe088ea8994fe505dbda1cd9752ec6edccdd18f
    University of Michigan; Surveys of Consumers; Charts January 2024; Expected change in prices during the next 5 years.
    https://data.sca.isr.umich.edu/get-chart.php?y=2024&m=1&n=33r&d=ylch&f=pdf&k=c54d079b7ad3a29ee651e4aaf4e6e9808817c72fa46c0b18c777604d500843f7
  35. U.S. Bureau of Labor Statistics, Population Level - Foreign Born [LNU00073395], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/LNU00073395
    U.S. Bureau of Labor Statistics, Labor Force Participation Rate - 25-54 Yrs. [LNS11300060], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/LNS11300060
  36. ZAIS GROUP; News and Insights; The Inflation Trap; February 2024.
    https://www.zaisgroup.com/the-inflation-trap.html
  37. Board of Governors of the Federal Reserve System (US), Federal Funds Effective Rate [FEDFUNDS], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/FEDFUNDS
    U.S. Bureau of Economic Analysis, Personal Consumption Expenditures: Chain-type Price Index [PCEPI], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/PCEPI
    University of Michigan, University of Michigan: Inflation Expectation [MICH], retrieved from FRED, Federal Reserve Bank of St. Louis; March 29, 2024.
    https://fred.stlouisfed.org/series/MICH
  38. Pitchbook LCD – Morningstar LSTA US Leveraged Loan Index; LLI Default Rates; February 2024.
    https://www.lcdcomps.com/lcd/idx/index.html?rid=10&menu=index-us
    TREPP Loan Performance Report; Retrieved 30+ days delinquency percentage for compendium deal list.
    https://www.trepp.com/trepptalk/cmbs-delinquency-rate-inches-up-in-february-driven-by-office
  39. Federal Reserve Bank of New York; Quarterly Report on Household Debt and Credit; February 2024.
    https://www.newyorkfed.org/microeconomics/hhdc
  40. Congressional Budget Office; Thee Budget and Economic Outlook: 2024-2034; February 2024.
    https://www.cbo.gov/system/files/2024-02/59710-Outlook-2024.pdf
  41. "Global economic growth accelerates to eight-month high in February”; J.P.Morgan Global Composite PMI; March 5, 2024; The J.P.Morgan Global Composite PMI® is produced by S&P Global in association with ISM and IFPSM.
    https://www.pmi.spglobal.com/Public/Home/PressRelease/61a6ae08fb1d4709803a52b29c36b514
  42. US Census; Business and Industry; Time Series; Trend Charts.
    https://www.census.gov/econ/currentdata/?programCode=BFS&startYear=2004&endYear=2024&categories[]=TOTAL&dataType=BF_PBF8Q&geoLevel=US&adjusted=1¬Adjusted=0&errorData=0
  43. Same source as footnote 42.
  44. See also: Ryan Decker and John Haltiwanger; Surging Business Formation in the Pandemic: Causes and Consequences? Brooking’s Papers on Economic Activity; September 2023.
    https://www.brookings.edu/wp-content/uploads/2023/09/4_Decker-Haltiwanger_unembargoed.pdf
  45. Same source as footnote 42.

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