Show Transcript
The U.S. economic recovery remains on track, with strong jobs growth and a resilient consumer. But the year ahead may also be fraught with risk. Kim Parlee speaks with Beata Caranci, Chief Economist, TD Bank, about the outlook for U.S. economic growth.
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We are with Beata Caranci, Chief Economist at TD Bank, and we are now going to dig into the US outlook for this year and perhaps a bit beyond. Beata, we were just talking earlier and you talked about the growth for the US. Again, lots of things going on in the world, but 3.7%, I know you'll correct me in terms of exactly what you're looking for, but maybe let's start there. What are you seeing in the States right now?
Well, in the States it's an interesting phenomena playing out because you have an incredible amount of job demand, at least up until this point. And we're starting to see the labor market react with participation rates rising. We are seeing significant wage push type pressures coming through, higher wages. And that's attracting people into the labor force. And so this combination of factors is helping to support the consumer spending profiles. We're seeing inventory rebuilding, that might get interrupted, though. So there's a number of dynamics happening, even export growth that the U.S. is experiencing. That's allowing it to have fairly decent economic growth rates at this stage. And so this is the reason that it's, there's a lot happening on the global front. But domestically, the fundamentals are sound as a starting point, and it's a matter of how much erosion occurs based on the duration of risks that we're going to see.
Let's talk about some of the risks. The central banks obviously try to manage inflation. Before the Russia-Ukraine crisis, I think there is 6, 7, 8, I think I saw some people are saying 10 rate hikes expected, but then it went down with the Russia-Ukraine crisis, and now think it's gone back up. Just talk to me a bit about the Fed. What do you expect to hear from them and what the impact is going to be?
Yeah. So for this year, there's I think about 6 rate hikes currently priced in. To your point, it moves around a lot, depending on the day. From the Federal Reserve, we're expecting a rate hike on March 16th of 25 basis points. There used to be speculation they might go 50 basis points, and that's come off the table now, given that people are trying to balance the risks. Interestingly, the war has not really changed the rate hike expectations, meaning 1) everybody's still expecting the central bank to move, 2) it's still expecting six hikes, which is very similar to pre-war. It's just maybe how it gets spaced out. So that hasn't changed, and we do expect the Federal Reserve to come out with a hike, but perhaps noting a few things that are different, obviously. One is they may indicate their intention to continue to raise rates, but at the same time remain very flexible to evolving events because I don't think they'd want to lock themselves into a position that they're going to hike regardless, because we actually don't know the degree to which what we're seeing in financial markets could disrupt economic growth. We haven't had enough time to observe. So they're going to want to maintain optional or maximum flexibility on that front. But at the same time create the confidence to markets that they are going to be addressing inflation. One thing we have seen from the war is that inflation expectations have really risen on both a five year and a ten year trajectory. And in fact, they're higher than what you would expect to see historically at other crisis periods. So that is something that they're going to have to address that is part of their mandate to anchor those inflation expectations. So they're going to have to have a lot of credibility around the timing of the rate hikes as they go forward, so they cannot remove them off the table, which is why the markets are still expecting those six hikes this year.
I got two last things I want to ask with the US economy. Just the consumer, because we know how much of the U.S. economy is driven by the consumer. You talk about the Fed raising rates, trying to fight inflation, inflation eats away at the consumer's ability to spend. But you could also get some fiscal stimulus in there that'll maybe help things out. How resilient is the US consumer?
Well, so far, they've proven themselves to be exceptionally resilient. I think this has been a global phenomenon that we've seen consumers quite resilient. There's an element there of whether people start rotating their spending. So you've got to drive to work. You can't really take that off the table in terms of gasoline. Will we start to see vacations being readdressed, maybe delayed? Will people rethink road trips? So that's what we're looking for in terms of high frequency metrics that we can follow in terms of movement of individuals, through traffic at airports would be an interest. Actually through traffic at airports was higher now than it was pre-pandemic. So it goes to the point that consumers are resilient, they're willing to spend. And it's a matter of whether we start to see that taper off. But there's quite a bit of resilience there, and I think this is what people have, including economists, have underestimated in the pandemic. I think the question now is does the accelerating inflation kind of take the confidence out of individuals, and that's going to come down to how strong the job market remains because in my opinion, if you have a job and you have strong wages, you'll likely persevere through this.
So I guess my question for the last one is, what should we be watching? The headlines grab people's attention, but it's often the things that are moving out of the surface that can be more material. Midterm elections coming in the States what else is on your radar for the States?
Yeah, that's a big one. And then you had mentioned previously that we might see fiscal stimulus. That's looking more remote in the case of the U.S. There's too much concern happening that any fiscal spending could be further inflationary. And so this environment that we're in now definitely makes a hot potato to try to address. If we do see fiscal spending, I think that should get on everybody's radar because it's where is it in terms of how is the money distributed? Is it support to low income to offset costs? Or is it more broadly spending that we need to be concerned that it could add more fuel into the inflation environment? So that's definitely one to keep an eye out. But really in the near term, it's financial markets, financial markets, financial markets, and unfortunately there's extreme volatility happening. But what we're looking for specifically, are we seeing any signs of financial contagions? Are we seeing emerging market strains coming through? The answer right now is no. Are we seeing strains coming in on interbank lending rates? The answer right now is no. There's stresses, but not strains. So we're really watching those financial linkages because if anything takes an economy into recession, it would be a financial market contagion effect, which so far is not there. But it's certainly on our watch list.
Well, in the States it's an interesting phenomena playing out because you have an incredible amount of job demand, at least up until this point. And we're starting to see the labor market react with participation rates rising. We are seeing significant wage push type pressures coming through, higher wages. And that's attracting people into the labor force. And so this combination of factors is helping to support the consumer spending profiles. We're seeing inventory rebuilding, that might get interrupted, though. So there's a number of dynamics happening, even export growth that the U.S. is experiencing. That's allowing it to have fairly decent economic growth rates at this stage. And so this is the reason that it's, there's a lot happening on the global front. But domestically, the fundamentals are sound as a starting point, and it's a matter of how much erosion occurs based on the duration of risks that we're going to see.
Let's talk about some of the risks. The central banks obviously try to manage inflation. Before the Russia-Ukraine crisis, I think there is 6, 7, 8, I think I saw some people are saying 10 rate hikes expected, but then it went down with the Russia-Ukraine crisis, and now think it's gone back up. Just talk to me a bit about the Fed. What do you expect to hear from them and what the impact is going to be?
Yeah. So for this year, there's I think about 6 rate hikes currently priced in. To your point, it moves around a lot, depending on the day. From the Federal Reserve, we're expecting a rate hike on March 16th of 25 basis points. There used to be speculation they might go 50 basis points, and that's come off the table now, given that people are trying to balance the risks. Interestingly, the war has not really changed the rate hike expectations, meaning 1) everybody's still expecting the central bank to move, 2) it's still expecting six hikes, which is very similar to pre-war. It's just maybe how it gets spaced out. So that hasn't changed, and we do expect the Federal Reserve to come out with a hike, but perhaps noting a few things that are different, obviously. One is they may indicate their intention to continue to raise rates, but at the same time remain very flexible to evolving events because I don't think they'd want to lock themselves into a position that they're going to hike regardless, because we actually don't know the degree to which what we're seeing in financial markets could disrupt economic growth. We haven't had enough time to observe. So they're going to want to maintain optional or maximum flexibility on that front. But at the same time create the confidence to markets that they are going to be addressing inflation. One thing we have seen from the war is that inflation expectations have really risen on both a five year and a ten year trajectory. And in fact, they're higher than what you would expect to see historically at other crisis periods. So that is something that they're going to have to address that is part of their mandate to anchor those inflation expectations. So they're going to have to have a lot of credibility around the timing of the rate hikes as they go forward, so they cannot remove them off the table, which is why the markets are still expecting those six hikes this year.
I got two last things I want to ask with the US economy. Just the consumer, because we know how much of the U.S. economy is driven by the consumer. You talk about the Fed raising rates, trying to fight inflation, inflation eats away at the consumer's ability to spend. But you could also get some fiscal stimulus in there that'll maybe help things out. How resilient is the US consumer?
Well, so far, they've proven themselves to be exceptionally resilient. I think this has been a global phenomenon that we've seen consumers quite resilient. There's an element there of whether people start rotating their spending. So you've got to drive to work. You can't really take that off the table in terms of gasoline. Will we start to see vacations being readdressed, maybe delayed? Will people rethink road trips? So that's what we're looking for in terms of high frequency metrics that we can follow in terms of movement of individuals, through traffic at airports would be an interest. Actually through traffic at airports was higher now than it was pre-pandemic. So it goes to the point that consumers are resilient, they're willing to spend. And it's a matter of whether we start to see that taper off. But there's quite a bit of resilience there, and I think this is what people have, including economists, have underestimated in the pandemic. I think the question now is does the accelerating inflation kind of take the confidence out of individuals, and that's going to come down to how strong the job market remains because in my opinion, if you have a job and you have strong wages, you'll likely persevere through this.
So I guess my question for the last one is, what should we be watching? The headlines grab people's attention, but it's often the things that are moving out of the surface that can be more material. Midterm elections coming in the States what else is on your radar for the States?
Yeah, that's a big one. And then you had mentioned previously that we might see fiscal stimulus. That's looking more remote in the case of the U.S. There's too much concern happening that any fiscal spending could be further inflationary. And so this environment that we're in now definitely makes a hot potato to try to address. If we do see fiscal spending, I think that should get on everybody's radar because it's where is it in terms of how is the money distributed? Is it support to low income to offset costs? Or is it more broadly spending that we need to be concerned that it could add more fuel into the inflation environment? So that's definitely one to keep an eye out. But really in the near term, it's financial markets, financial markets, financial markets, and unfortunately there's extreme volatility happening. But what we're looking for specifically, are we seeing any signs of financial contagions? Are we seeing emerging market strains coming through? The answer right now is no. Are we seeing strains coming in on interbank lending rates? The answer right now is no. There's stresses, but not strains. So we're really watching those financial linkages because if anything takes an economy into recession, it would be a financial market contagion effect, which so far is not there. But it's certainly on our watch list.
