By Gene Balas, CFA®
Many media pundits have been quick to say we’re on a path to 1970s-style stagflation. While clearly we’re experiencing the impact of high inflation in many aspects of everyday life (not just in government statistics), I would very much question the assumption that economic stagnation is on the immediate horizon.
Not only is the U.S. economy still experiencing strong growth, but it is growing strongly relative to its overall long-term potential growth rate. What do I mean by that? The current long-term potential growth rate of our economy is quite a bit less than it was during the 1970s—meaning that less growth now has a greater impact than greater growth would have had back in the 1970s.
To better understand this concept, let’s first look at what our economy’s potential growth rate is (i.e., how fast it needs to grow for people to become better off), without being too slow that we have a recession, or too fast that we have even more inflation. This will depend on how many more people are in the labor force each year, and how much more per hour they’re producing. As a mathematical formula, this would be represented as: more