What is the outlook for the US economy?

But the current economic data emerging from the US appears to question the worth of some of those guiding ideas in the world following the pandemic. 

Interest rates in the US have increased sharply over the past year but unemployment has not risen much, while economic growth has continued to be strong, with the latest gross domestic product figure of 2.4 per cent for the second quarter of 2023. 

Tighter monetary policy is supposed to deliver precisely the opposite of those effects. This is prompting many investors to ponder if it truly is different this time, or whether the current situation is an aberration that time and data will wash away. 

The economist Alfred Marshall created the notion of a supply curve and a demand curve, each determining the short-term performance of an economy.

In a perfectly functioning economy, both curves arc gently upwards in parallel, with the supply of goods and services rising at the same pace as demand.

The pandemic-era restrictions on the movements of individuals caused both the supply and demand curves to flatten. But consumer incomes did not fall as they built up excess savings

In a typical recession, demand for goods and services falls, causing the demand curve to flatten, and this eventually leads to market participants reducing the supply of goods and causing the supply curve to flatten, until the supply and demand curves are aligned again.

In a typical period of high inflation, demand for goods and services expands at a faster rate than the supply of goods is able to expand. This leads to rapid economic growth, but then prices rise until either the level of supply catches up with the extra demand, or demand falls back into line with the available supply, stabilising prices. 

The pandemic-era restrictions on the movements of individuals caused both the supply and demand curves to flatten. But consumer incomes — that is, their capacity to provide demand — did not fall as they built up excess savings.

When restrictions were lifted, those excess savings meant the demand curve steepened far more quickly than the supply curve in most parts of the economy, as providers of goods and services scrambled to find employees and equipment to reopen to meet demand. This led to the first wave of inflation.

Then came Russia’s invasion of Ukraine, which caused the supply of energy-related commodities to flatten, just as global organisations were trying to expand to meet the extra demand. This created the second wave of inflation.

The Biden stimulus policies

Preston Caldwell, chief US economist at Morningstar, adds that the stimulus policies of the Biden government have also contributed to the level of demand in the economy, even as higher interest rates dampened the demand. 

The primary way central banks can impact the performance of supply and demand curves is through managing the supply and demand for money, by raising or increasing the price (interest rate) at which money trades in the economy.

Higher rates are expected to reduce the level of demand in an economy because existing debt becomes more expensive to service, so people have less to spend on other things and less incentive to take on debt to make purchases.