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Pac-West Economist: Economy ‘Hot Until It Is Not’

Pac-West Economist: Economy ‘Hot Until It Is Not’
April 08
00:40 2022

The economic outlook is “hot until it is not,” Christopher Thornberg of Beacon Economics told the Pacific-West Fastener Association.

The “long run still matters,” Thornberg said. “The economy is back, labor supply is short and the outlook is hot until it is not.”

A major factor in the economy is “the narrative,” but the economic narrative may not be accurate. “Beware of the narrative,” Thornberg cautioned.

Thornberg said natural disasters – such as the Covid-19 pandemic – “have little long-run economic impact.”  The pandemic recession was “deep and short.”

The economy is back and even “overheated,” which can lead to cyclical risks, Thornberg said.

We are seeing 2005 again,” Thornberg suggested.  Government and bond markets “are in la-la land.”  

In 2005 it was the private sector that was going wild.  With the pandemic, it was the government spending wildly.

There are no “new normals” from the pandemic, Thornberg declared.

The pandemic did stifle spending temporarily, which has been followed by a 25% spending increase on durable goods.  “Retail is steady and industrial is insanely tight,” Thornberg said.  And the automobile inventory is “zero.”  New home permits are up.

Now Americans are “overeating” with spending.

Inflation is based on demand, Thornberg said.

Thornberg recalled that in 2019 people were asking when home prices are going to fall.  Instead of falling, real estate prices have jumped yet higher.

Inventories are a problem because there hasn’t been an increase in capacity.

“Unions feel empowered right now,” Thornberg said.

A significant change in the U.S. economy is the demographic change because the percentage of people in the workforce. During 2020 three million people dropped out of the labor market.

“They retired,” Thornberg said of Baby Boomers.   

He cited MGM Resorts with 50,000 employees having 5,000 job openings as an example of the shortage of labor.

Thus employers need to “step up your game” to keep employees.  Also look for ways to make current jobs more efficient “to get more out of current employees.”

The government spent $2.1 trillion on the pandemic and “when you throw this much money into the economy” you get inflation, Thornberg said.

“What are fasteners going to cost in three years?”  Thornberg asked.  He predicted 20% more inflation in the next two or three years.  “This is going to get ugly.”

On the contrary, “gas prices aren’t that high” in comparison to 2012.

What is your best investment now? Thornberg responded: “Refinance your house.”

“Every generation has to learn the hard way that there is no such thing as a free lunch,” Thornberg observed.

“When will interest rates reflect reality?” Thornberg asked.  “A sugar crash has to come.”

“Don’t get far from your bunker,” Thornberg advised Pac-West. Current conditions are “not sustainable.  Stay constrained.  And be ready to pick up the pieces.”

He expects interest rates will “cool off” in 2023.

Thornberg said he six months ago that “they are overdoing it, watch out.” And now he says, “They overdid it.”

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