Macro & Market Musings are weekly insights on Growth, Inflation, Policy and Looking Ahead from Annex Wealth Management’s Chief Economist, Brian Jacobsen. Brian, a frequent contributor on CNBC and Fox Business News, hosts regular updates on the economy and markets. Check our events page for Brian’s next live event.
Growth: The Productivity Payoff
Faster productivity growth can lead to both faster wage and profit growth with little inflationary pressure. Big tech companies are investing an incredible amount of money in data centers and chips. What will the payoff be and when will it happen? Even if the productivity payoff from artificial intelligence investment won’t be felt for years, US labor productivity growth has already improved over the last two years. That’s a rational reason for optimism.
Inflation: Back In Fashion
Inflation fears never went away, but they are coming back in style lately. The Fed is more worried about inflation than growth. The prices component of the Institute of Supply Management’s Service index took an uncomfortably large leap higher in December. Treasury yields have risen along with inflation fears. It may take a few months of tamer inflation data to have inflation fears go back out of style. Until then, yields are likely to be as volatile as the weather is wild this time of year.
Policy: Calling A Different Play?
The Fed Minutes showed a divided committee. Some are penciling in assumptions about what tariff policy might look like. Others are waiting to see what is actually proposed before passing judgment. Five years ago the Fed analyzed what the right response to a change in tariffs would be. Back then they agreed they should cut rates to offset any growth drag since any inflationary impulse would likely be short-lived. This time, because growth is a bit stronger and inflation is higher than back then, some Fed officials seem to want to call a different play.
Looking ahead: Don’t Count On The Unusual
The year 2024 was an unusual year for many reasons. From a markets perspective, large beat small, growth beat value, market cap weighted beat equally weighted, and stocks beat bonds by amounts that rarely happen. The numbers weren’t unprecedented, but they were unusual. They’re called unusual for a reason, which is why we don’t expect a repeat performance.
