Analyzing the U.S. Economy Post-Pandemic

Chief Economist Eugenio Alemán and Economist Giampiero Fuentes note that while they expect economic growth to slow, they do not foresee a recession in 2024.

To read the full article, see the Investment Strategy Quarterly publication linked below.

We are normally reluctant to use trendy phrases to explain either our good and/or bad calls regarding the U.S. economy. However, saying that ‘this time is different’ is more than fitting today to understand what has happened to the U.S. economy since the recovery from the COVID-19 pandemic. U.S. economic growth surprised friends and foes during 2023 as both the post-pandemic normalization process continued and the Federal Reserve’s (Fed) attempt to bring down the surge in inflation contributed to the asynchronous performance of the U.S. economy.

During a typical economic cycle, as the economy hits the peak of the cycle, the Fed increases interest rates to slow economic activity to avoid inflation becoming a problem down the road. That is, at the peak of the cycle, resources are fully utilized and thus any further pressure on the utilization of these resources typically puts upward pressure on the price of these resources. However, this is not what happened at the end of the pandemic. The truth is that prices started to increase for several reasons, but none related to the actual workings of a typical economic cycle.

Navigating the perfect storm

First, the total collapse of global production during the pandemic reduced the supply of goods while at the same time supply chain issues made the remaining goods very scarce and the acquisition of them extremely expensive. This meant that the increase in the price of the goods was not due to high economic growth but more to the inability to acquire goods cheaply and in a timely fashion. Second, the decline in the labor force participation rate due to the fear of contagion plus all the extra help given by the federal government meant that firms needed to entice workers to return to the labor force through increases in salaries/wages, especially in the service sector of the economy. This also contributed to a further increase in the cost of production and thus in the price of goods and services.