American economic picture clouded by inflationary dangers

US Letter: Housing and labour shortages add to uncertainty even as GDP roars ahead

Arriving in Cleveland airport recently after a quick flight from Washington, I joined what has become a new part of the travel experience in the US – the car rental queue. It snaked through the gleaming purpose-built facility, lines of customers waited for hours to collect pre-booked cars. “Here’s hoping,” said a traveller from Atlanta. “The last time I rented a car they had run out when I got to the top of the line.”

The squeeze on the rental car industry is just one manifestation of the pressures on the US economy as it emerges from the pandemic.

Last year’s lockdown prompted car hire companies to reduce their fleets. A year later demand for cars is surging as Americans take to the road. Rental vehicles now typically cost hundreds of dollars a day.

The rise in rental prices is part of a broader inflationary picture that has economists worried.

Figures this week showed that consumer prices rose 5.4 per cent in June – higher than expected and the most in 13 years. The year-on-year figure was coming from a low base, given that the US was in the throes of an economic shutdown last year. But the pattern of monthly rising prices is causing concern.

In particular, the core CPI – which strips out the more volatile energy and food prices – rose 4.5 per cent last month. Among the industries experiencing price hikes are hotels, air fares and the used-car market, partly as a result of a shortage of new vehicles as a result of a bottleneck in the semiconductor chain.

Housing shortage

Housing is the other big-ticket item that is facing major supply-and-demand issues. As in Ireland and other developed nations across the world, house prices have surged while the number of properties on the market has fallen. The median house price in the US hit an all-time high in May, though there are signs that the market is beginning to calm somewhat.

Asked about the US's rising housing costs this week, treasury secretary Janet Yellen said she worried about affordability but that the market did not carry the same risks as 2008, when giving excessive credit to risky borrowers contributed to the problem.

“It’s a very different phenomenon but I do worry about affordability and the pressures higher housing prices will create for families that are first-time homebuyers,” she said.

Elsewhere the US economy is showing signs of strain even as GDP roars ahead. Labour shortages are becoming a headache for businesses. The queues at the Cleveland car rental site, for example, were exacerbated by a lack of staff.

Just a handful of diligent staff were working to process hundreds of customers. Across the country, particularly in holiday destinations, "Help wanted" signs abound in restaurants and retailers. The continuing US travel ban on most visitors from Europe is adding to the problem, as businesses that depend on seasonal J1 student workers from Ireland and elsewhere struggle to fill positions.

Biden policies

The demand for labour has an upside for workers – many companies are now offering chunkier pay checks and better terms and conditions, a trend that many hope will be a permanent feature of the US labour force post-pandemic.

But the demand for labour has also put pressure on US president Joe Biden, whose expansionary economic policy and decision to provide generous pandemic payments to Americans has come under scrutiny. The Biden administration has defended its policies, arguing that one of the reasons that some Americans, particularly women, are reluctant to go back to work is because of childcare demands as schools remain closed in some areas.

All eyes are now on the Federal Reserve. Testifying in Congress this week, Fed chairman Jay Powell conceded that inflation was "well above target" though reiterated his expectation that it would be a temporary phenomenon.

“This is a shock going through the system associated with reopening of the economy, and it has driven inflation well above 2 per cent. And of course we’re not comfortable with that,” he said. But he added that it would be wrong to over-react to pandemic-related one-off price increases.

During the hearings, Powell suggested that the Fed was not yet considering a rise in interest rates, and would continue discussions this month on reducing its asset purchases programme as expected.

As the Fed holds its fire for now, the next few months will be a big test for the US economy as the country leaves behind the worst days of the pandemic.