Final 2021 Assessment
In his final assessment of 2021’s economic outlook, Maryland Smith's Bill Longbrake acknowledges what he didn't see coming: the surge in inflation, which reached 7% by year end. He explains why inflation spun out of control and how it could have been anticipated. He notes that despite all COVID's frustrations and disruptions, unemployment dropped to 3.9% in December – and jobs are plentiful. “Would you rather have this kind of outcome at the cost of a burst in inflation or the long, drawn-out recovery that followed the Great Recession, when it took nine years for unemployment to fall to 3.9%, but inflation averaged 1.7%?” he asks. Looking forward, he says he is optimistic that the economy will do well and inflation will wane, but he cautions that unanticipated events may yet occur and bring powerful disruptive impacts. He says he’s searching for a new and more reliable crystal ball.
Read the letter
Yet another ugly inflation report. The Fed acknowledged that higher inflation is no longer transitory and monetary policy accommodation should be reduced more quickly by ending asset purchases and raising rates as much as 75 basis points by the end of 2022. Adding to ongoing uncertainty, another COVID variant – Omicron – emerged. The pandemic has been a powerful disruptive force. Its impacts continue to reverberate throughout the U.S. and global economies. But as history indicates, disruption of the old status quo can usher in renewal. So, perhaps and hopefully, a much better future lies ahead. Let us hope that the Fed crafts monetary policy that is successful in reining in inflation without squashing the building economic momentum that has so much potential to improve the lives of many.
Read the December 2021 letter
Pandemics disrupt every aspect of life and economic activity. The history of 19 pandemics over 700 years suggests that a better world will emerge. Pandemics fundamentally impact social psychology in ways that affect social behaviors, disrupt entrenched ways of doing things and open doors to significant changes. History shows that interest rates remain low, productivity rises and inflation-adjusted wages increase for many years following a pandemic. Right now uncertainty is unusually high as soaring inflation reflects. Risks remain high. In this month’s letter, Maryland Smith's Bill Longbrake reviews inflation and employment risks and comments on the Fed’s monetary policy challenges. It will take time for a new stability to emerge, but history tells us that a better future lies ahead.
Read the November 2021 letter
Employers are screaming about labor shortages. Yet official statistics indicate that unemployment is elevated. Consumer prices are up 5.4%. But the Federal Reserve believes high inflation is transitory. Could transitory inflation morph into persistent inflation? Are employment markets tight, or aren’t they? In this month’s Longbrake Letter, Bill Longbrake explores these questions. Answers are important for policymakers, particularly for the Federal Reserve’s implementation of monetary policy.
Read the October 2021 letter
The Delta coronavirus variant is messing with global economic recovery, but this will prove transitory, and the pace of economic activity will pick up in the fourth quarter. In China, a series of regulatory initiatives has contributed to a slowdown in its economic activity, but this, too, will prove transitory. In this month's letter, Maryland Smith's Bill Longbrake explores these initiatives, most of which are directed at internet companies. They are intended to maintain and enforce China's longstanding cultural predominance of the collective welfare of society relative to the rights of individuals. Regulatory activism includes the linkage between data security and national security, reducing reliance on foreign technologies and supply chains, preventing market dominance from subverting innovation, promoting the right kinds of social and family values, promoting market and social stability, and encouraging population growth.
Read the September 2021 letter
With the Delta variant surging, inflation soaring, wildfires burning and consumer sentiment plunging, is the economic recovery in jeopardy? There is much to worry about, Maryland Smith's William Longbrake writes in his latest letter. But the economy has created 1.9 million jobs in the past two months, prices of stocks and homes have continued to rise, interest rates have remained low, and Congress has been moving steadily forward to approve as much as $3 trillion in new spending for infrastructure, education, health care and poverty reduction. There may be wobbles, but the economic momentum is likely to remain very strong. Eyes now are on the Fed. Will it contain inflation risks in the right way at the right time? And, will the Fed’s monetary policy innovations lead to unintended consequences?
Read the August 2021 letter
For a fourth month, the consumer price index exceeded forecasters’ expectations, bringing the annual increase in prices to 5.3%. With the benefit of hindsight, this spike in inflation should not have come as a surprise. The pandemic severely disrupted normal economic relationships. Governments responded with massive support programs. Now that things are reopening, cash is flooding into an economy that is still badly broken – and demand is overwhelming diminished supply. How will it all play out? Will price inflation normalize or will the dynamics of price inflation fundamentally change? Financial markets and the Fed appear to agree that today’s inflation is transitory. In this month’s letter, Maryland Smith's Bill Longbrake explains why the Fed and the market are probably right.
Read the July 2021 letter
After 15 months, we are rapidly emerging from the scourge of the coronavirus pandemic. Better days are ahead. While there remains some uncertainty about what the future will be like, there is reason for optimism, at least in terms of economic well-being and opportunity. In this month's letter, Maryland Smith's Bill Longbrake discusses three significant developments, set in motion by the disruptive impacts of the pandemic, which collectively could increase the rate of growth in economic activity, raise the standard of living substantially, and might even contribute to a lessening of income inequality.
Read the June 2021 letter
Consumer prices soared 4.2% in April and will be up 4.7% or more in May. The Fed was unfazed, dismissing the surprising surge in inflation as transitory. Fed Chair Jerome Powell has emphasized repeatedly that the economy "is a long way" from the Fed's employment and inflation goals, adding "it is likely to take some time for substantial further progress to be achieved." This means keeping interest rates near zero for at least another two years. But with new COVID-19 infections plummeting, vaccinations rising and copious amounts of cash from the federal government burning holes in people's pockets, what if the economy takes off and the recent burst in inflation proves to be anything but transitory? In this month's letter, Bill Longbrake discusses why the Fed is willing to be patient. He says the Fed's patience is the right call, that the inflation scare will abate in time, and that inflation expectations, while they may edge higher, are unlikely to trigger self-fulfilling behaviors. Further, he says, a more preemptive monetary policy, while reducing the inflation threat, would slow a return to full employment.
Read the May 2021 letter
The sheer size of the American Rescue Plan and the speed with which authorized funds are disbursed and spent will have significant benefits on the U.S. and global economies, but will also pose some risks. In this month's Longbrake Letter, Maryland Smith's Bill Longbrake concludes that the American Rescue Plan will accelerate economic and labor market recovery. However, he cautions, many social and economic processes, which were severely disrupted by the pandemic, will take time to restore. Further, he warns that U.S. stimulus could strain capacities and potentially lead to overheating. While benefits of the package will be enormous, he says, an overheating could create and accentuate significant risk.
Read the April 2021 letter
Spring has sprung. Vaccinations, a flood of government stimulus, overflowing bank accounts, and low interest rates collectively have paved the way for lives to return to normal. By summertime consumers will be on a spending binge unlike anything witnessed since 1946 and 1947 following World War II. Will the spending frenzy ignite an inflationary spiral? The Fed doesn't think so, but others aren't so sure. In this month's Longbrake Letter, Maryland Smith's Bill Longbrake explores inflation risks posed by a booming economy.
Read the March 2021 letter
Congress is working to pass the Biden administration's American Rescue Plan, a $1.9 trillion stimulus package designed to address the myriad problems caused by the COVID-19 pandemic. The size of the package, hot on the heels of $900 billion approved by Congress in December, has raised vigorous debate about whether the size of stimulus is too much and might overheat the economy and unleash inflation. In this month's letter, Bill Longbrake explains why he believes that is not a threat. But there is another debate that needs to occur, he writes. Despite copious amounts of cash provided to families, unemployed workers and struggling organizations, the American Rescue Plan doesn't provide long-term solutions for those whose jobs and businesses were permanently destroyed by the pandemic. This omission risks exacerbating the fraying cohesion of our social and political fabric.
Read the February 2021 letter
As forecasters peer into their crystal balls, there are super optimists, optimists (the consensus), and skeptics. Maryland Smith's Bill Longbrake counts himself among the super optimists. Super optimists expect 2021 will be a boom year with real GDP increasing 6% or more. They expect COVID-19 vaccinations will put an end to the pandemic by the middle of the year. Then, the enormous horde of savings that built up during 2020 and the additional fiscal stimulus likely to flow into the pockets of consumers and businesses during the first half of 2021 will spark a go-for-broke spending binge. Optimists, the consensus, expect 2021 to be a very good year with real GDP growing about 5%, but consumers and businesses are more cautious. Skeptics expect a good year, too, but worry about COVID-19 vaccine distribution bottlenecks and new variants that delay herd immunity.
Read the 2021 outlook
Maryland Smith's Bill Longbrake looks back at 2020 – a year in which the pandemic changed everything – and looks ahead at this year. Pandemic herd immunity is in sight – and with it boom times. In financial markets, questions are being raised about whether those boom times will ignite inflation. Most expect Inflation and interest rates to stay low for years to come. But it would be imprudent to dismiss the possibility of a fundamental shift that unleashes inflation. The inflation process is like a glacier. Both move slowly. But both are hard to stop. And both can have long-run consequences that are dramatic.
Read the January 2021 letter