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U.S. economy: Many signs point to a strong summer

Fiscal relief and stimulus measures will lead to strong economic growth in 2021. The U.S. economy started this year with momentum. In addition to the fiscal stimulus measures, the U.S. vaccination program has evolved very well and is likely to have increased confidence that the pandemic will gradually subside in the current year. The very expansionary fiscal policy and the gradual easing of the containment measures will massively stimulate private consumption this year. In addition, many households accumulated savings last year which will be partly used for private consumption this year.  I am optimistic for the U.S. economy and expect a GDP growth rate of around eight percent this year (the consensus is somewhat lower at around 7 percent). Inflation will increase this year to almost four percent, but will decrease again in 2022 to around two percent. In the medium-term, I expect somewhat higher inflation rates than in the pre-pandemic period of time.

In the United States, economic output rose by 1.6 percent in the first quarter of the current year (annualized 6.4 percent). The recovery continued after the pandemic-related slump in the first half of 2020 was thus stronger again after weaker growth in the final quarter of 2020. New corona infections, which had already been rising since the fall, peaked in mid-January. Infection control measures were somewhat stricter than in late summer and continued to weigh on personal services in particular.

The US economy started the second quarter with even more momentum. Industrial production and retail sales continued to rise. Purchasing managers’ indices continued their upward trend above the expansion threshold of 50 index points, and consumer sentiment also brightened. These developments were mainly due to the aid and stimulus packages adopted at the end of December and in mid-March totaling more than two and a half trillion US dollars. This sum includes, among other things, one-time payments to low- and middle-income persons of $2,000 and an increase in unemployment benefits of $300 a week until September (however, some states opted out of this program in recent weeks). In addition, the vaccination program has evolved very well by international standards and has contributed to a gradual waning of the pandemic. The various containment measures are gradually being relaxed and have even been lifted to a large extent in some states.

The very expansionary fiscal policy and the gradual easing of containment measures are massively stimulating private consumption in the current year. In addition, households have massively expanded their savings rate on average since the outbreak of the pandemic. This year and next, the savings rate should gradually return to normal and further stimulate private consumption. These factors should lead to extremely strong economic growth in the summer half-year, driven primarily by private consumption. In the wake of this development, the situation on the labor market will also improve significantly. In May, the unemployment rate was only 5,8 percent down from 14.7 percent in April 2020. However, the official unemployment rate continues to underestimate the actual extent of unemployment by probably more two percentage points.

Against a background of strong consumer demand, business investment will also continue to increase markedly. Although corporate financing conditions are less favorable than last year, they continue to support the propensity of companies to invest.

Monetary policy will remain expansionary – partly because the central bank’s revised monetary policy strategy will allow a moderate overshooting of the inflation rate above the average inflation target of two percent. In the current year, the inflation rate is likely to rise to over three percent in some months; however, this is also due to temporary factors such as higher oil prices compared with last spring. Currently, I am less worried about short-term inflation than some other commentators. But one should certainly not deny that inflation risks have increased and one should not take for granted that inflation rates will rapidly slow down to around two percent again. One should also stress that the Federal Reserve bases its decisions mainly on the Personal Consumption Expenditures Price Index (published by the Bureau of Economic Analysis) and not on the Consumer Price Index (published by the Bureau of Labor Statistics). The Personal Consumption Expenditures (PCE) Price Index tends to be somewhat lower than the Consumer Price Index (CPI) and I do not think that the PCE will rise significantly above three percent this year. Having said that, I expect somewhat higher inflation rates for both types of indices in the medium-term than in the years before the pandemic. I think that the Federal Reserve will already start to slowly adjust its policy in the course of the second half of the year (so I think it will happen somewhat earlier than other commentators expect).

All in all, the U.S. economy will probably expand by 7.9 percent in the current year (in May, I had predicted an only slightly higher growth rate of 8.1 percent). For 2022, my current forecast indicates a growth rate of 3.6 percent. 

Email: info@eagle-economist.com

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How-to Guide: Becoming a Digital Nomad

Have you ever thought about pulling up your roots and setting sail on your own adventure? Do you want to find a way to prioritize experiences and relationships over material things and owning land or a house that would just cement you in one location? This guest post by Lance Cody-Valdez (the creator of free-lance-now.com) shares some things to think about before you turn the world into your office.

Digital nomads live these kinds of lives. They use online work and technologies to earn an income while traveling, sightseeing, and spending time with the ones they love the most, instead of being chained to one desk or one city. There is plenty of research to suggest that this kind of lifestyle improves creativity. These creative people don’t want to be saddled with the burden of the traditional office environment, instead opting for the open road.

How do you make money?

The life of the digital nomad may not require a mortgage, but you still need to fund travel, computer costs, internet expenses, and sustenance. There are countless ways for digital nomads to make money, including publishing an eBook and marketing it online (creating a passive income stream for you) and joining sites like Fiverr to do odd jobs for people in need.

Another interesting way to make money would be to start your own freelance business. Depending on your skillset, you can set up a freelance practice to do myriad things, like blogging, tax preparation, editing, or offering resume writing services. It’s easy to create a profile on an online job board, where potential clients can read reviews, weigh your average delivery time, and determine the cost before hiring you.

How do you find the right working spot?

When you’re living the nomadic lifestyle, you don’t have one specific work location, but you still need access to the internet to do your work. So, where do you go? Coffee shops, libraries, and even bars offer internet access. Choose a place where you know you will be comfortable enough to get your work done, and then close your laptop and explore!

One option would be to find a coworking space. This is essentially a place you can go to work “with” people — or, in other words, in the same physical space as others, even though you are doing different work or working for different companies. These places offer a comfortable environment to put in a few hours of work and allow folks to share ideas, community, conversation, and costs.

How do you afford it?

Speaking of costs, it’s probably one of the biggest questions about embracing the digital nomad lifestyle: How do you afford to pack your bags, move away, and keep moving? The first step toward saving up for this kind of lifestyle is to determine how much you’re spending now — and how much you can cut. Once you ditch the mortgage or rent payment and hit the road, that will be one big expense you can do away with — but you should also take a look at your discretionary spending and start putting more money toward your future.

When it comes time to start traveling, don’t discount the usefulness of travel websites that can get you good deals on lodging. Stay in hostels or book a stay at an Airbnb. You should also learn how to cook, as homemade meals are much less expensive (as well as more nutritious!)

As a digital nomad, you’ll be able to earn an income from any location you choose. Instead of working in a traditional office, put these tips into practice today!

Lance Cody-Valdez is the creator of free-lance-now.com, which helps others to use freelancing to escape the 9 to 5 daily grind. Lance worked in corporate marketing before, but decided to quit his job the following day and used his meager savings to stay afloat as he built a career as a freelance writer and content marketer.

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The Spanish Economy: Pandemic leaves deep scars

In the past years, Spain has been in a difficult economic situation. The pandemic made the economic and social problems even worse. The pandemic leaves deep scars on the Spanish economy. Despite various remaining problems, there is hope for new dynamism. However, I am not too optimistic as to the long-term growth perspectives of the Spanish economy. After an economic contraction of almost 11 percent in 2020, I expect an economic expansion of around 6 percent in 2021 followed by a growth rate of around 7 percent in 2022.

The coronavirus pandemic caused a health crisis and a severe recession in Spain. Many people died from the virus. Gross domestic product dropped by 10.8 percent in 2020 and the situation on the labor market is difficult.

In spring 2020, Spain was severely hit by the Covid-19 pandemic and imposed a strict lockdown. As elsewhere, travel, tourism, hospitality, entertainment and many other sectors of the economy were hard hit. As expected, a fast recovery started during the spring of 2020. However, a fast increase in Covid-19 cases in the fall of 2020 again led to various strict measures to contain the pandemic during the winter. Many of these measures have been gradually removed in the course of the spring, but several measures remain in effect.

Several vaccines are now available and the beginning of the summer also helps bring infection rates down. However, it is not known at the moment whether virus mutations will make the situation worse again. For instance, some available vaccines might not be fully effective against these mutations.

After the Spanish economy had expanded by 17.1 percent in the third quarter of 2020 (after drops of 5.4 percent in the first quarter and 17.8 percent in the second quarter), output stagnated in the fourth quarter of 2020 and moderately contracted in the first quarter of 2021 (-0.5 percent). While private investment moderately increased by 1.0 percent, private consumption decreased 1.0 percent. There was a rise in public spending (+1.3 percent), which prevented a higher contraction of economic activity.

Since the start of the pandemic, my main worries have not been related to the short-term, but to developments in the medium- and long-term. There will probably be a solid recovery over the summer 2021. The rebound will be supported by an increase in tourism exports (more tourists will visit Spain). Currently, one can expect that a fair amount of (mostly vaccinated) tourists will visit the country, although the numbers seen before the pandemic will obviously not yet been achieved. In the fall and winter, the economic recovery will continue, but slow down.

Expansionary fiscal and monetary policies will support the gradual recovery of the economy and the labor market. But the situation will continue to be difficult for many people. Monetary policy of the European Central Bank will continue to be expansionary. In addition, Spain will receive considerable financial support from the recovery fund of the European Union. Many effects of the associated public expenditures will be relevant for the medium term, but there might also be some smaller short-run impacts, especially in 2022. The funds are planned to be used, among others, for infrastructure projects such as high-speed trains, “green” energy, and projects surrounding the “digital economy”. In the years to come, the further accumulation of public debt might be a burden and the government should aim at gradually achieving a balanced budget to bring the debt-to-GDP ratio down again in the medium term.

For the second quarter of 2021, I expect a relatively modest economic growth rate, which will be followed by a stronger expansion in the third quarter. The recovery will then continue in the fall and the winter but slow down to around 1 percent per quarter. For the whole year 2021, I see an economic expansion of around 6 percent followed by a growth rate of around 7 percent in 2022. Inflation will gradually increase towards two percent (the target of the ECB). The situation on the labor market will also improve, but remain difficult for many people. Obviously, such forecasts are associated with a high degree of uncertainty.

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What caught my eye: what is inflation, status vs. argument, what is Bidenomics, and much more…

What is inflation? A primer by the ECB:

https://www.euro-area-statistics.org/digital-publication/statistics-insights-inflation/bloc-1.html?lang=en

Why are so-called SPACs (special purpose acquisition company) booming?:

“Status Trumps Argument” by Robin Hanson:

“The ghost of Smoot-Hawley tells why America isn’t too big to avoid retaliation” by Kris Mitchener, Kevin O’Rourke, Kirsten Wandschneider:

https://voxeu.org/article/ghost-smoot-hawley-tells-why-america-isn-t-too-big-avoid-retaliation

The Comparative Constitutions Project:

https://comparativeconstitutionsproject.org/download-data/

What is Bidenomics? by Martin Sandbu:

https://www.ft.com/content/fb817909-625b-4c0c-a190-78e691f32af9

An interesting conference: “Law and Economics: History, Institutions, Public Policies”:

18th Annual STOREP (Online) Conference – 17-18 June 2021

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Quote of the week – Winston Churchill

“All the great things are simple, and many can be expressed in a single word: freedom, justice, honor, duty, mercy, hope.”

Winston Churchill

The last quotes were from Christina Romer, Esther Duflo, Peter Drucker, Frank Knight, Joan Robinson, Robert Mundell, Alfred Marschall, Janet Yellen, Ludwig von Mises, Thorstein Veblen, Deirdre N. McCloskey, Paul Samuelson, Elinor Ostrom, Robert Solow, Joan Robinson, and Friedrich A. Hayek.

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Book recommendations: artificial intelligence, consumer sentiments, and what is inflation?

Kate Crawford is a senior principal researcher at Microsoft Research and analyzes artificial intelligence and its social and political implications. A great book!

Interesting and well-written text by Paul Donovan on inflation:

In his very interesting book, Richard Curtin (who has directed the consumer sentiment survey of the University of Michigan for several decades) argues that consumers form expectations in a complex way using conscious and nonconscious processes. Passion and reason are combined with public and private information to form the basis for the decisions and expectations of consumers.

A really good book: You can download it from Cambridge University Press or from amazon:

The economist Jan Eeckhout argues that over the past decades, a low number of companies have reaped most of the rewards of technological progress, increased their profits, while wages on average only grew at moderate rates. A provocative book, one does not have to agree with everything to find it very interesting:

You can download it from Princeton University Press or from amazon:

Robert Shiller’s book on “narrative economics” was published in 2019 and argued that economics should more often investigate narratives that drive the economy. He suggested that such narratives can be analyzed in a similar way as contagious diseases (this was before the coronavirus pandemic). In the book, he argues that economic facts are also driven by feelings. These feelings are in turn influenced by “economic narratives”, for instance, stories on how the economy works.

Highly recommended! It can be ordered at Princeton University Press or amazon:

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The German economy: the recovery has begun

Economic output in Germany contracted by 1.8 percent in the first quarter of 2021. This was primarily due to higher Corona case numbers and stricter containment measures. As a result, there was a sharp decline in private consumption and business investment. In early summer, the pandemic was contained for the time being; the vaccination program, which got off to a rather slow start at the beginning of the year, got off to a better start in the spring and the pandemic situation eased. The various lockdown measures can gradually be relaxed. As a result, the economy should now pick up significantly in the summer. In the second quarter of 2021, economic growth is probably still only expected to be modest.

In the second half of the year, strong growth in GDP can then be expected. Exports have been recovering since the summer of 2020 and will continue to grow with solid rates. Expansionary fiscal and monetary policies further support the recovery. For 2021 as a whole, I currently expect only a growth rate of 3.5 percent. In 2022, I currently expect a growth rate of 3.8 percent (for 2022, I am somewhat less optimistic for the German economy than other forecasters).

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What caught my eye: are people more or less productive working from home, inflation expectations, the Greening of the financial system, and much more…

Why some people are less productive working from home, interesting!

https://www.fastcompany.com/90635872/new-research-explains-why-some-people-are-less-productive-working-from-home

“What are inflation expectations? Why do they matter?” by Tyler Powell and David Wessel:

“How to solve the puzzle of missing productivity growth” by Erik Brynjolfsson, Seth G. Benzell, and Daniel Rock:

“Corporate zombification: post-pandemic risks in the euro area” by Tobias Helmersson, Luca Mingarelli, Benjamin Mosk, Allegra Pietsch, Beatrice Ravanetti, Tamarah Shakir and Jonas Wendelborn:

https://www.ecb.europa.eu/pub/financial-stability/fsr/special/html/ecb.fsrart202105_01~f9b060744e.en.html

“There are reasons to worry about US inflation” by Martin Wolf:

https://www.ft.com/content/5d2aef18-e9c4-486a-8323-c5fc6addf5f7

“The Green Swan Conference” organized by the Bank for International Settlements, Bank of France, International Monetary Fund and Network for Greening the Financial System:

https://www.bis.org/events/green_swan_2021/overview.htm

The Network for Greening the Financial System:

https://www.ngfs.net/en

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Email: info@eagle-economist.com

Quote of the week – Christina Romer

“The most effective way to shake an economy out of a terrible downturn when we’re at the zero lower bound is an aggressive change in policy that makes people wake up, say ‘this is a new day’ and change their expectations.”

Christina Romer

The last quotes were from Esther Duflo, Peter Drucker, Frank Knight, Joan Robinson, Robert Mundell, Alfred Marschall, Janet Yellen, Ludwig von Mises, Thorstein Veblen, Deirdre N. McCloskey, Paul Samuelson, Elinor Ostrom, Robert Solow, Joan Robinson, and Friedrich A. Hayek.

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Email: info@eagle-economist.com

Book recommendations: the profit paradox, how do people form their expectations on macroeconomic issues, and narrative economics

In his very interesting book, Richard Curtin (who has directed the consumer sentiment survey of the University of Michigan for several decades) argues that consumers form expectations in a complex way using conscious and nonconscious processes. Passion and reason are combined with public and private information to form the basis for the decisions and expectations of consumers.

A really good book: You can download it from Cambridge University Press or from amazon:

The economist Jan Eeckhout argues that over the past decades, a low number of companies have reaped most of the rewards of technological progress, increased their profits, while wages on average only grew at moderate rates. A provocative book, one does not have to agree with everything to find it very interesting:

You can download it from Princeton University Press or from amazon:

Robert Shiller’s book on “narrative economics” was published in 2019 and argued that economics should more often investigate narratives that drive the economy. He suggested that such narratives can be analyzed in a similar way as contagious diseases (this was before the coronavirus pandemic). In the book, he argues that economic facts are also driven by feelings. These feelings are in turn influenced by “economic narratives”, for instance, stories on how the economy works.

Highly recommended! It can be ordered at Princeton University Press or amazon:

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Some of my blog posts and economic forecasts are first reserved to my paying subscribers. After two weeks, all articles are publicly available. If you would like to get instantaneous access, you can subscribe for 5 US dollars per month (or the equivalent amount in your currency). You can unsubscribe at any time:

Email: info@eagle-economist.com

Inflation – is it coming or not?

In many countries, inflation increased in the spring – especially in April. In the United States, it even rose to 4.2 percent compared with April 2020. While there is no need to panic, one should nevertheless be aware of potential inflation risks.

A large part of the currently higher inflation rates is attributable to temporary factors such as higher oil prices compared with last year. Another part probably has to do with temporary supply chain problems, especially for semiconductors. For example, this delayed car production and has probably contributed indirectly to the fact that prices for used cars have risen sharply in the United States.

Nevertheless, there is also a residual that suggests that we are seeing the beginning of – still moderate – price increases across the board, in the United States but also in a number of other countries. This does not necessarily mean anything bad at all. On the contrary, it is normal for prices to rise during an economic recovery – a rapid economic recovery would be very desirable in order to limit the economic damage after the pandemic and, for example, to minimize the social damage in the form of prolonged unemployment. For this reason, I have always been someone who has supported quite generous fiscal packages. Nevertheless, it is also extremely important to identify possible inflation risks early enough and to keep an eye on them. In some cases among policy-advisors, this is still not done enough.

So, to a certain extent, somewhat higher inflation is a good sign, because it indicates an economic upswing. It is quite possible that in the past inflation was somewhat too low – just as economic development in many countries – such as the USA – was subdued. Nevertheless, caution is also warranted. Some seem to downplay the potential problems of too high inflation in the future. This is a mistake in my opinion. Precisely in order not to jeopardize the economic recovery and to rightly point out that inflation in spring 2021 is in part only temporarily quite high, central banks should signal that they take price increases seriously – especially in the United States. This would strengthen the credibility of central banks and allow them to aim for sufficiently high inflation in the future without jeopardizing the economic upswing. One kind of worst-case scenario is if inflation were higher than expected even in the summer and then the central banks – for instance, the Fed in the U.S – had to rush to initiate a significantly less expansionary monetary policy.

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