When new gross domestic product figures last month showed US economic growth slowed from recent gangbuster levels, many people diagnosed the economy as having a really ugly sickness: stagflation.
Symptoms of stagflation include (but are not limited to), stagnating economic growth combined with rising inflation. So March’s ugly inflation report, which showed an unexpected jump in the pace of price increases, and the lackluster GDP report, made the diagnosis seem like a no-brainer.
Even JPMorgan Chase CEO Jamie Dimon said last month the US economy “looks more like the 1970s than we’ve seen before,” and that stagflation is a growing risk.
But Federal Reserve Chair Jerome Powell said any positive stagflation tests were false positives. “I don’t see the stag or the ‘flation,” he told reporters at a press conference earlier this month after Fed officials voted to leave interest rates unchanged.
“I was around for stagflation. It was 10% unemployment. It was high single-digits inflation and very slow growth,” he added, referring to stagflation in the 1970s after a spike in oil prices during the Arab oil embargo.
I, being a Gen Zer, can’t speak to that period firsthand. But I agree with Powell nonetheless — the US economy is not experiencing stagflation. It may, however, be experiencing a different, far less serious condition: slackflation.
What is slackflation?
If you’ve never heard that term before, there’s a good reason — I just coined it myself.
Slackflation is a condition that’s bothersome enough that you’d text your mom about it and she’d tell you to go to urgent care. Then, you ignore her advice and either it goes away on its own or it gets a lot worse.
To use more economic lingo, slackflation is when inflation is sticky — but not out of control— and there’s slack in the economy (nothing to do with the messaging app that has an incredible collection of emojis).
Economic slack, a term I unfortunately cannot take any credit for, broadly describes a situation where the economy isn’t performing as well as it could be. The most widely recognized symptom of economic slack is a rising unemployment rate.
That’s happening in the US per the latest jobs report. But it’s not nearly at levels that would be cause for concern — the unemployment rate went up just a tenth of a percentage point in April to 3.9% from 3.8% in March. But that could change in the near future.
One potentially worrisome sign is the pace of monthly job gains, which slowed to 175,000 last month from 315,000 in March. But many economists agree with Chicago Fed President Austan Goolsbee, who referred to April’s gains as “very solid.”
On top of that, applications for first-time unemployment benefits rose to the highest level since August last week.
But on the inflation front, April Consumer Price Index data released Wednesday showed a tiny bit of improvement, with the pace of both annual and monthly price increases slowing slightly.
Month-to-month movements in the nation’s inflation rate aren’t all that meaningful to Fed officials, though. As the adage in finance goes, the trend is your friend. And the trend with inflation is not really friendly right now.
After months of big improvements, it’s looking like progress may be stalling in getting to the Fed’s 2% inflation target. But, still, the inflation we’re experiencing now is nothing compared to that seen in the 1970s and 1980s.
So, what’s up with all the stagflation chatter?
Diane Swonk, chief economist at KPMG, summed it up nicely to me.
Unlike Powell, “the majority of the labor force wasn’t born” when stagflation was rampant in the US economy, and therefore “there is no muscle memory of it in their lifetimes.”
At the same time, millennials who dominate the workforce are “unable to achieve a lot of other milestones that are very important to people.” Chief among those, she said, is purchasing a home — which many Americans have delayed indefinitely with record-high home prices and painfully high mortgage rates.
“So, no, it’s not the 1970s, but it’s understandable why people are still upset.”
