Momentum: Recap
Genevieve Signoret & Delia Paredes
(Hay una versión en español de este artículo aquí.)
What follows is a slightly edited excerpt from Quarterly Outlook 2023–2025: It All Hinges on Rates.
We believe that equity and commercial real estate valuations are being driven by long-term rates, that house prices are at risk of decline owing to long-term rates, and that rates are high for three reasons: debt isssuance has swelled; monetary policy is tight at the Fed and worldwide; and investors worry that inflation will stay high, thus policy will stay tight.
We see these inflation worries as valid. Nominal GDP by at least one measure is above neutral and diverging from its neutral path, in part because of the lagged effects of Covid-era fiscal stimulus, but also because nominal salaries are so high.
Salaries are high because workers now have stronger bargaining power than they used to, thanks to strong demand for consumer services and for construction. The consumer service and construction sectors both are labor-intensive.
The strength we see in these two sectors traces back to Covid. Covid caused the economy to shut down, setting off labor shortages that left employers psychologically scarred: they continue to hoard labor.
And the shutdown followed by reopening caused consumers to lurch from buying mountains of goods to buying oodles of services.
Also, monetary stimulus during Covid led to a wave of mortgage refinancing that today translates to a shortage of homes for sale and a resulting mini-boom in home construction and thus construction payrolls.
These trends do in fact threaten to keep inflation high and therefore monetary policy tight; the fears pushing up on long-term rates are valid.
Previous excerpts from Quarterly Outlook 2023–2025: It All Hinges
on Rates:
- Summary
- Long-term rates and equity valuations
- Rates, Covid and real estate valuations
- Why have US long-term rates trended up? Hypothesis 1: Debt issuance
- Why have US long-term rates trended up? Hypothesis 2: Tight policy
- Why have US long-term rates trended up? Hypothesis 3: Investor inflation worries
- Why is US nominal income unexpectedly high?