Dallas Fed analysis explains puzzle of strong US economy

Authors say US has enjoyed favourable supply-side conditions that others missed out on

Federal Reserve

Analysis by economists at the Federal Reserve Bank of Dallas seeks to explain why the US economy has been so strong, despite sharply tighter monetary policy and slowdowns elsewhere.

Enrique Martínez García and Braden Strackman look for evidence in the balance of supply and demand. They calculate the correlation of real GDP growth and core inflation for the US, Mexico, advanced economies excluding the US, and the world excluding the US.

They find that at the start of the pandemic, GDP growth and core inflation were positively correlated around the world. This was due to lockdowns and other policies to Covid-19 reducing demand more than supply. But as supply chain disruptions worsened, these factors dampened the demand stimulus of fiscal and monetary policy, reducing the correlation.

The US diverges from the rest of the world in the recent period, from the start of 2023. The correlation for the US is negative in this period, indicating supply effects are dominant, whereas the rest of the world is in positive territory.

The authors suggest the US has benefitted from a greater easing of supply bottlenecks, combined with above-trend immigration, which has boosted the labour force. This has left the Federal Reserve with a greater chance of achieving a “soft landing” than many other central banks.

“From this perspective, recent US economic strength has less to do with oil/commodity prices or with monetary policy transmission and more with favourable supply-side conditions,” the authors say.

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