Open Thread December 6 2023 Vice President Harris

Oh, and unit labor costs are up only 1.6 percent over the past year, another indicator that inflation is coming under control.

Another report showed that unfilled job openings are down. Last year many economists were arguing that the high level of vacancies meant that we needed high unemployment to control inflation. That gap has now largely disappeared, one of many signs that the economy is healing from the disruptions brought on by the Covid pandemic. And this process of healing explains why we’ve been able to get inflation down without a recession or a surge in unemployment.

 

Nonetheless, many Americans continue to have very negative views of the economy. Some of this may reflect the fact that while inflation has come way down, prices are still high compared with the recent past. This effect may wear off over time; as I wrote not long ago, there has to be some statute of limitations on how far back people look for their sense of what things should cost. One interesting recent analysis suggests that it takes around two years for lower inflation to be reflected in consumer sentiment, in which case Americans might be feeling better about the economy in time for next year’s elections.

On the other hand, inflation has been a global phenomenon, but the huge gap between favorable economic indicators and grim public perceptions is unique to the United States, where people believe many bad things about the economy that simply aren’t true.

I can report from experience that talking about these issues with people on the right is basically impossible. Point out that most workers’ earnings have significantly outpaced inflation since the eve of the pandemic, and they’ll say you’re a member of the elite who has no idea what things really cost. Point out that Americans are more likely than not to express positive views about their family’s own financial situation and that strong consumer spending belies claims that families are suffering, and they’ll say you’re a snob telling people how to feel. It’s a no-win situation. …

… for risk-averse investors seeking stable long-term returns, it’s precisely when yields are low that problems arise. That began to happen more than a decade ago. In a 2013 column, I pointed out that a risk-averse newly retired couple with a $1 million nest egg invested in fixed-income holdings at the time could easily exhaust their holdings within one decade, because their stream of income would be quite low. They would probably improve their prospects, I suggested, if they shifted some investments into the stock market.

And, indeed, market returns over the last decade show that assessment was on the mark. The S&P 500, a benchmark for the U.S. stock market, returned nearly 12 percent, annualized, while the investment-grade bond market returned only 1.5 percent.

But investing in stocks entails risk. Retirees would have had to have enough resources — both financial and emotional — to withstand gut-wrenching declines. 

…  investing only in fixed income isn’t ideal, even for retirees, with the possible exception of those with an expected life span of only a few more years and limited resources. For one thing, even when interest rates are high, inflation will eat away at least some of the income.

“You want to be careful that you don’t succumb to ‘money illusion,’” said Joel Dickson, global head of advice methodology at Vanguard. “You can think that you’re doing fine,” he said, but your spending power will decline as prices rise.

The stock market tends to outpace inflation over extended periods, and (it is said)  a “total return” approach probably made sense for most people, even retirees. This means keeping a well-diversified portfolio of stocks in addition to bonds.

Remember there are trade-offs in investing. There’s no one perfect answer for everyone. Yes, higher rates are a boon if you need to lock in income. But the total return from holdings that include stocks is likely to outperform pure fixed-income investments, if you have the time and the stomach to withstand major market downturns.