The last time the U.S. saw stagflation was in the 1970s…

The term refers to a period of high inflation, high unemployment, and low economic growth.

Back in the 1970s, inflation was in the high single digits and economic growth was much weaker. At one point, unemployment topped 8%.

The entire period was known as the “decade of inflation.” The average inflation rate for the whole 10 years was nearly 7%.

That’s more than double what it is today.

And while “real” GDP growth slowed down to a bit below 2%, that’s still outpacing inflation.

Remember, real GDP growth accounts for inflation. That means GDP growth outpaced inflation by 1.6 percentage points.

We don’t expect that weak economic growth to last for long, though.

The U.S. is investing heavily in different sectors of the economy that will help boost growth…

Artificial intelligence continues to be one such area… Its market is expected to exceed $1.8 trillion by 2030.

And semiconductor and infrastructure companies have received billions of dollars in federal funding. That’s slowly starting to translate into economic growth.

Of course, there’s a possibility that with this growth comes more inflation… But because the Fed is holding firm on interest rates, we don’t see a scenario where inflation rises back to what it was in the 1970s.

For now, though, we agree with Powell. We don’t see the stagflation that many folks are worried about. We think the Fed is actually doing a good job of making sure inflation stays under control.

The economy seems like it’s heading to ‘just right’ levels…

In other words, it’s a Goldilocks” economy. It’s not too hot. And it’s not too cold.

In fact, inflation is stickier because of our healthy growth. So long as GDP growth rebounds a bit and doesn’t get too hot, and inflation stays around where it has been, we aren’t heading for stagflation.

That is not to say the economy is perfect. There are pockets of the economy that aren’t as strong… such as the low-end consumer.

With stickier inflation, consumer staple companies haven’t been as strong as the rest of the market. But the overall economy and employment are not seeing the same issues.

The economy is still strong… and the Fed won’t let it get strong enough to spur higher inflation. While economists are worried, this is the exact type of “goldilocks” economy that can drive the stock market higher.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research

To see our best macro insights, become an FA Alpha and get access to FA Alpha Pulse.