2022: Back to the Future

“Transitory” was not a word generally associated with investing until the Fed started to use it to describe its recent forecasts for inflation. So far, the Fed’s forecasts have proven incorrect as inflation has been higher for longer than the Fed anticipated, and they have decided to drop the word from their communication.

But, the US and global economies might indeed be in a transitory state, and the important investment question is transitioning to what? It seems highly unlikely the economy will return to its pre-pandemic state.

Many investors are apparently assuming economic growth will return to the sub-5% nominal GDP growth that existed during the majority of the past 20 years (See Chart 1). Absent of a full-fledged recession, the pandemic after-shocks are so far suggesting such slow nominal growth seems increasingly unlikely. 2022 might be a year of transitioning back to some sort of pre-1980, or at least pre-2000, economy. Investors’ asset allocations seem ill-prepared for such a change in nominal growth.

Chart1: US Nominal GDP Growth (12/31/1960 – 9/30/2021)

Source: Bloomberg Finance L.P.

The US is a price-taker not a price-setter

Because the US imported so much oil, the 1970s oil embargos illuminated the stark reality that the US was a price-taker and not a price-setter for oil. The US may be a bigger price-taker for a broader range of goods today.

The massive and seemingly ever-growing US trade deficit indicates the US is increasingly a price-taker rather than a price-setter. In other words, the US’s inflation rates may have been influenced more by globalization than by US monetary or fiscal policies.