Christophe Boucher, chief investment officer at ABN Amro Investment Solutions, has been looking for an explanation.
In the US inflation has fallen to 2.7 per cent, economic growth has remained robust, unemployment has remained low and wages have risen – conditions that are not merely supposed to be mutually exclusive, but which policymakers almost want to make mutually exclusive, as they fear the wage growth element would cause inflation to persist.
That this has not happened is the 'Goldilocks' scenario so popular with investors.
Boucher’s view is that growth initially arrived via fiscal stimulus, and excess savings from the pandemic being unwound.
He says the key to growth continuing is likely to be that as inflation is falling, real incomes, that is incomes after any rise inflation is taken into account, continue to rise, enabling consumer spending to remain robust.
He adds that fiscal stimulus continues in the US, and would be expected to continue regardless of which candidate wins the general election.
But Boucher does feel the Goldilocks economy might be giving way to something more akin to a soft landing, with signs of 'deceleration' now evident, though he says: “We are comfortable with the economy now and are overweight to US equities.
"The recent wave of migration into the US is helping to boost demand and reduce inflation, but the only way that an economy can be performing as the US has been is if productivity is also increasing, whereas it may not be increasing in Europe."
Guy Miller, chief economist at Zurich, is another who sees signs of deceleration in the US economy.
He says markets have been “eerily calm” in recent months, mostly as a result of the relatively benign economic data.
Miller says economies are going through a period of “great normalisation”, that is, after a period where there was “too much stimulus, too much inflation, too much demand for goods, too high interest rates.”
He says: “US consumer data is showing a moderation, and it may be that consumer activity goes below trend in the next quarter, but it needed to moderate in order for inflation to come down.”
But even within the consumption, there is a stark divergence, according to Boucher.
He says: “During the pandemic people everywhere spent a lot on durable goods, because they couldn’t spend on services, but now the spending is focused on services. Indeed, durable goods inflation is -5 per cent, which shows the extent of what is happening in the services part of the economy. This is very unusual.”
Strong demand in the services side of the economy has a particular impact on the general level of inflation in the wider economy because the bulk of costs incurred within the services economy are wage costs, so strong demand there is likely to push wages upwards, which impacts the general level of inflation in the economy.
