Megan Greene, a senior fellow at the Mossavar-Rahmani Center for Business at the Harvard Kennedy School, delivered the keynote address at Seafood Expo North America/Seafood Processing North America on 13 March, 2022.
Greene said with COVID-19, supply chain disruptions, and the economic ramifications of Russia’s invasion of Ukraine – and subsewquent sanctions issued by numerous countries – uncertainty has been the rule.
“I have to say it's a weird time to be giving a global macroeconomics overview, just because things are changing so much,” Greene said.
The U.S. economy has been facing a fiscal drag since the first quarter of 2021, as government stimulus efforts payments waned and rising inflation created an expectation that the U.S. Federal Reserve would eventually raise interest rates – which it did on Wednesday, 16 March. Greene said she expects four or five rate hikes in total in 2022, which would likely leave benchmark interest rates at below the Federal Reserve’s long-run neutral rate of 2.5 percent, but will still create headwinds for the U.S. economy.
“We're going to make the second-largest fiscal adjustment in our history. This year relative to last year, will be second only to 1946,” Greene said. “Even though interest rates will still be pretty low, historically speaking, it will be a big change in one year, and that should drag on investment.”
Besides the Russia situation, there are three interrelated factors curtailing the U.S. economy’s growth: COVID-19 impeding normal buying and spending habits, labor shortages, and inflation.
According to data from the U.S. Transportation Security Administration (TSA), Americans are flying more – almost at pre-pandemic levels, and reservations made through Open Table have risen over the past several months, with both figures up after a dip around the holidays due to the surge of the omicron variant.
“[The data] suggests that people are getting on with their lives and are out in the world consuming. We're starting to come out from under it,” Greene said. “That being said, growth in the U.S. is slowing down pretty significantly from where it was last year. I want to be clear, last year it was way above potential, so that's not necessarily a bad thing. I'm not saying we're going into recession. I’m just saying we’re slowing down a bit this year.”
A longer-term trend in the U.S. of people moving from buying goods to buying services has reversed slightly during the COVID-19 pandemic, Greene noted, but that may not matter because inflation is now hitting both goods and services.
“Is that a shift that's going to stay, or is it just because people are worried that going out to a restaurant or a bar is going to send them to the hospital?” she said. “I tend to think that it's not structural and that it's more worries about COVID. And once COVID becomes more endemic that should abate, but we don't know, it's a big question mark. Most of the inflation that we've seen is in goods, so we're buying more goods and we're seeing a lot of the price gains in goods. But recently, we’ve seen more inflation in services as well. That's because we're starting to shift back away from goods to services. It matters that because services are five times the weight of goods in the inflation basket, and so we should continue to see higher inflation even as we shift back to our old spending patterns.”
With higher spending has come a tighter labor market, and that competition for labor has driven wages up, Green said.
“The labor market is really tight and, anecdotally, companies are constantly complaining about finding workers and having to pay them more. It's a big concern for small businesses,” Greene said. “There are concerns that companies will feel like they have to pay workers more in order to attract them. But then they need to pass those higher costs on to end users in the form of higher prices. And then, when people face higher prices, they are going to demand higher wages and you just go around and around in a wage price spiral. This happened to some degree in the 1970s as well, and that's left a lot of scarring on people.”
But Greene noted a major difference between today’s economy in the U.S. and its predecessor in the 1970s: productivity. Since most of the U.S. workers who lost their jobs in the pandemic were hourly service workers, Greene said U.S. worker productivity has improved “because of a compositional effect that wasn't really a structural shift.”
“We're still dealing with that noise as those hourly service workers are slowly reentering the workforce and getting jobs. So there is still a question around whether there's been a structural shift, but the survey data would suggest that there hasn’t been and so if that's the case, you can have higher wages. You can pay people more because you're also getting more output out of them. You don't have to pass the higher costs off to the end user. It comes through in profits anyhow, so you don't end up in a wage price spiral and I think that's where we are on this one,” she said.
American workers who left their jobs during the pandemic are returning to the workforce in droves, Greene said, but some remain on the sidelines due to concerns over catching COVID-19 or the need to take care of kids at home. According to financial data, however, Americans have generally run through the money the government gave them to get through the pandemic, and so economists will get a chance to see whether this cohort of people return to the workforce in coming months
“If people aren't coming back into the workforce, then actually our labor market is way tighter than many of us realize. If they are coming back into the workforce, then that's not as inflationary and we don't need to worry about the labor market being tight,” Greene said.
Greene said the most-asked question she receives is whether current inflationary trends “are a blip, or whether it’s a structural shift in the American economy.”
“I actually think it's a blip,” Greene said. “We put our economy into deep freeze and then tried to thaw it out. And now on top of that there's a war in Europe. So there's a lot of uncertainty.”
However, because of a number of extenuating circumstances, such as the war in Ukraine and China’s zero-COVID policy, “the blip could last a really long time."
“I think inflation will be much higher than the Feds target for another year at least,” she said. “I would have said by the end of this year, it would be fading, but the Russian invasion of Ukraine shifts that just because energy costs will go up so much.”
Greene said enduring inflationary concerns from the Fed’s decision-makers, many of whom came of age during the hyperinflation of the 1970s, may drive them to overreact.
“I would say the Fed will probably tip us into recession by doing too much too quickly, just because interest rates are an incredibly blunt tool. They kick in with lags, and so it's really difficult to perfectly manage interest rates so that you can lean against inflation but keep growth high enough. The risk is that they do too much too quickly, and we have a recession,” she said.
Regardless of what actions U.S. officials take on handling the domestic economy, global issues will also play a role in the fate of the U.S. economy, Greene said. China, for example, has set a goal of 5.5 percent growth in 2022.
“If you had told me that five years ago, I would have said that's a disaster – the world going to hell in a handbasket. That's really low for China,” Greene said.
But the slowdown is tactical, according to Greene. China is conducting a major reform of its real estate sector and is aiming for more balance in its GDP growth, retail sales, and fixed asset investment, Greene said.
Greene’s bigger concern is a debt crisis in emerging markets.
“Emerging markets were already overleveraged before the pandemic hit them, and then the pandemic hit and they had to borrow even more to fund their pandemic response. As a result, a lot of emerging markets are hellbent on retrenchment this year, next year, and the following year,” Greene said.
With the U.S. Federal Reserve raising interest rates, “for any emerging market countries that have borrowed in U.S. dollar-denominated debt, that's going make that debt a lot more expensive to service … investors aren't sending money to emerging markets now either, so that all creates a pretty difficult environment for most emerging market economies this year.”
Europe also faces its own set of troubles, primarily due to Russia’s aggression and the reaction it has triggered across the continent. As the European Union severs its ties to Russia, Russian companies have ceased being able to make payments due to European firms because they’ve been cut off from the global banking system. Additionally, many European nations have vowed to spend massively on defense, with some of that money coming out of funding previously earmarked for its transition to cleaner, domestic energy sources. But lowering overall funding for that effort will also cost Europe as it deals with the fallout of a massive shift in its energy sector.
“The [European Union] will suffer much higher energy costs … Europe is incredibly exposed to Russia. It relies on Russia for 30 percent of its oil, 40 percent of its natural gas, and 50 percent of its coal. So while the embargo by the U.S. and U.K. was largely symbolic, the most-important piece about it is it might have put enough pressure in the E.U. to follow suit – I think there's a good chance that it will embargo Russian oil,” Greene said. “Europe was already looking weak in the first quarter, the second quarter, and then in third quarter they were supposed to do better. But I think there's going to be a massive income squeeze from higher energy prices in Europe. So I think Europe is much closer to stagflation, a nightmare scenario where you have no growth but really high inflation. Central banks don't know what to do with that because then they either have to support growth or push against inflation and they can't try to hit both targets.”
Photo courtesy of Cliff White/SeafoodSource
