Market Perspectives
Zevin Asset Management
Q3 2024 Market Outlook

Maybe it really is different this time. A typical business cycle usually consists of an overheating economy followed by higher policy rates imposed by central banks. This eventually leads to a slowing economy, and in 6 out of the last 7 monetary tightening episodes in the U.S since 1970, the economy has fallen into recession. Higher lending rates slow consumption, leading to layoffs, which further slows consumption and more layoffs, and so on. However, this cycle has been different so far. When the Fed began raising interest rates in 2022 to fight inflation, the personal consumption response was much more muted than usual, thanks to previous emergency pandemic stimulus. The U.S. economy has slowed somewhat in response to tighter monetary policy, but employers have been mostly reluctant to implement significant layoffs with the fresh and painful memory of the 2020-2021 pandemic reopening when consumer demand rebounded sharply but employers had a hard time finding workers to satisfy demand. So-called “labor hoarding” has become a significant attribute of the current economic cycle, which has contributed to the relative strength in the labor market, consumption, and the economy in general.

Market Perspectives

A Triple Whammy Tightening and Entering the Danger Zone

In a previous inflation missive, I commented on powdered milk and toothpaste. The former being an example of a sacrifice families made in the past in response to soaring prices and the latter an analogy. Like trying to put toothpaste back into a tube that’s been squeezed, inflation is difficult to rein in once it takes hold. This sentiment rings true today, with the global economy experiencing severe inflation. To put it another way, the toothpaste is out of the tube and authorities are trying to get it back in so that we all don’t have to resort to drinking powdered milk.

Making Sense of the Inflation Tug-Of-War

Midway through 2021, we shared our outlook on inflation, forecasting that the surge in prices was most likely temporary. Equipped with more time, data, and analysis, we are now reconsidering this idea of transitory inflation. In the table below, we present a useful framework to help identify and distinguish various short- and long-term inflation trends, and to help understand their future impacts on inflation in 2022 and beyond.