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The spring of 2022 was rough for the U.S. economy. Markets plunged while inflation spiked. "Stagflation" was the word of the day, and for a period of time, there was some merit to that outlook.
Both economic trends arose from the unique market dynamics caused by the pandemic, but getting a handle on them has been more difficult because measures of inflation lag behind changes in the growth outlook. Investors who last year thought stagflation was here to stay were wrong, and they'll be wrong again if they count on Goldilocks sticking around. Growth and inflation will line up sooner or later, and it's the growth data that provides a better signal for the trajectory of the economy.
Let's focus on housing since that's the clearest example. Housing market activity and single-family housing suffered a deep chill in the second quarter of 2022 as rising prices and higher mortgage rates squeezed affordability. Between last year's second and fourth quarters, the decline in residential investment pulled GDP down more than 1% on average per quarter.
Yet in the Consumer Price Index data, housing inflation was picking up during that time. That's because housing costs are calculated on the monthly payment determined when a lease is signed - usually once a year. But the market rate for rents fluctuates throughout the year. So housing can still show up in the inflation data as a contributor to higher prices even as rents are falling.
A year later, the situation has reversed. Demand for new construction is up, in part due to the shortage of existing homes for sale. Lennar Corp., the second-largest U.S. homebuilder, said in its earnings report last week that it expects more new orders and deliveries next quarter than it previously anticipated. It's increasing production to match demand. Housing will probably be a positive contributor to GDP growth in the second or third quarter of 2023 for the first time since the first quarter of 2021.
Yet while residential investment is picking up steam, the decelerating trend in market rents that I've been tracking since last fall is beginning to show up in the inflation data. In the CPI, rent growth on an annualized basis was running close to 10% in the latter part of 2022, and has now fallen to close to 6%. By the first half of 2024, I anticipate that to drop to the low single digits based on current market trends.
Automobiles, which have been another big source of inflation over the past two years, are now seeing production pick up and sales rise as supply-chain problems finally ease. That should put downward pressure on inflation.
The technology sector has gone through quite the 180-degree turnaround in sentiment over the past six months. The year started with companies like Meta Platforms Inc. and Amazon.com Inc. laying off more than 10,000 workers in response to slumping demand and stock prices. Now tech stock prices are surging once again as the artificial intelligence frenzy has rekindled optimism and renewed speculative appetites. This should support hiring and spending in the sector in the months ahead.
It's understandable why investors, who were worried about sluggish growth and persistently high inflation, would cheer the pickup in housing and tech activity and the signs of softening inflation. Such a rapid shift from stagflation to Goldilocks wasn't in anyone's playbook.
But investors shouldn't take too much comfort in this Goldilocks environment. Like last year's stagflation concerns, it's probably just another passing phase as the economy continues to work through the after-effects of the pandemic. If growth remains strong, the auto and rental markets will eventually start putting upward pressure on inflation again. Booming stock markets, if they lead to even more hiring and investing in the short run, could accelerate that process.
That probably won't unfold until 2024 because we're still watching the rental and auto markets loosen up every month. Eventually, though, as markets stabilize and growth kicks in more strongly, inflation is going to rebound - even if it doesn't show up in the data for a while.
(COMMENT, BELOW)
Previously:
• 05/24/23 Bye-Bye, New York. Hello, Fayetteville
• 04/04/23 What makes this economic slowdown different from the others?
• 02/15/23 Higher mortgage rates is what the housing market needs now
• 01/06/23 The January inflation bump Americans should welcome
• 01/04/23 Why millennials are following boomers to the South
• 10/24/22 Two bright spots in a cooling housing market
• 08/18/22 Future remote workers need to network more --- in college
• 06/17/22 Housing market cooldown will only lead to more dysfunction
• 05/27/22 Welcome to our be-careful-what-you-wish-for economy
• 05/04/22 The Amazon economic indicator says inflation is easing
• 01/20/22 Don't call me on Friday. That's my 'me time'
• 01/06/22 2022 is the year to buy your first luxury electric car
• 06/03/21 The post-pandemic boom will have a sequel in 2022
• 05/31/21 Florida may lose some of its boomer shine
• 01/11/21 Colleges bet on football in their own K-shaped recovery
• 12/31/20 Just send the bigger bucks already
• 08/24/20 Young people can't buy homes until older owners . . . move on
• 08/18/20 Our pandemic love affair with e-commerce could soon sour
• 08/10/20 Booming 'zoom towns' should ease city housing costs
• 07/11/20 With a Biden economy, will America be condemned to relive the '70s?
• 07/14/20 Renting and homebuying swap roles in the covid-19 market
• 07/13/20 Markets may have a reason to rise along with covid-19 cases
• 04/27/20 U.S. economy may have hit the coronavirus bottom
• 11/12/19 The 2020 economy should feel a lot better: What to, realistically, expect
• 04/23/19: Gen Z is likely to temper aging socialist millennials
• 03/25/19: All signs point to a housing boom ahead
• 02/19/19: Trump's economic gamble might make sense
• 02/15/19: Scaring off Amazon will backfire for the Left
• 01/29/19: The 2020 election will shred the Obama coalition
• 11/15/18: Amazon proving the 'rich get richer'?
• 11/13/18: How gerrymandering can reduce the partisan divide
• 10/22/18: The politics of the next recession will be a disaster
• 08/02/18: The future of the US looks a lot like ...
• 05/05/18: Brick-and-mortar stores may start to make sense again
• 05/05/18: College admissions season is about to get much easier
• 05/03/18: Changing housing needs of millennials will change economic development
• 02/13/18: The big idea for Middle America is to think small
• 02/07/18: Dems are caught in a tax bill trap this year
• 10/25/17: Good times have come to Trump-leaning states
Sen is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.