According to long-run projections, the Chinese economy will overtake the US economy in nominal terms by 2030. See what our charts shown plus equity, labour market and Covid-19 data.
S&P 500, SA compared to NSA
In the following analysis, the S&P 500 has been transformed into a monthly series with 1940 as a start date. We use the X-11 method to do a seasonal adjustment. While surprising that the stock market is displaying a seasonal pattern at all, the method does give us a seasonally adjusted series for the S&P 500. Afterwards, the slice analysis has been used to overlay each year since 1940 and then apply a cross-section to calculate the yearly average.
As one can see, the S&P 500 displays a relatively strong seasonal pattern and tends to move sideways and even decline between June and October.
The Covid-19 pandemic continues to be the biggest threat to the global economic recovery and also poses significant macroeconomic uncertainties. Until recently, the Federal Reserve published two Nowcast models to track economic activity in real time - the Atlanta and the New York Fed model. Both models were devised before the pandemic struck and use more conventional macroeconomic data that was severely lagging behind last year.
Moreover, one can see that uncertainty is still large. The Atlanta Fed GDP forecast for Q3 has declined from more than 6% a few months ago to just a little over 1% right now. Meanwhile, the New York Fed Nowcast model has been discontinued altogether because the macroeconomic uncertainty and the volatility of the underlying data is so large that it poses problems to the model.
US labor market
US labor market dynamics continue to be unusual.
The number of open jobs is still at about 11 million and therefore exceeds the number of unemployed: the unemployment to job opening ratio is thus below 1 again. The unemployment gap defined as the unemployment rate minus the natural rate is also going to close by the end of the year, indicating that we might not be that far from full employment.
The strong labor market has also led to a very high labor turnover, close to 4 million, as employees are looking for better employment opportunities.
No Wage-price spiral
Using our rolling regression, we have calculated the passthrough effect from unit labor costs to the PCE price index for the US. As one can see, the passthrough effect was extremely high in the 1970s when it was widely argued that there was a wage-price spiral. In recent years, the coefficient has dropped to zero though and the rolling R2 is approaching zero as well, suggesting that wages cannot explain PCE price dynamics and that no passthrough effect can be detected right now.
Long-run GDP forecast
According to long-run projections, the Chinese economy will overtake the US economy in nominal terms by 2030. However, these kinds of long run projections are very prone to substantial forecast errors. More specifically, it fails to take into account that China will most likely experience a relatively sharp decline in growth rates in the coming years as the housing market will cool off or maybe even crash. Furthermore, the US is currently experiencing an economic boom combined with higher inflation rates, thus 4% nominal GDP growth going forward after 2024 might be somewhat too low. Furthermore, China is heading towards a demographic catastrophe and its society is likely going to age before the country has reached the group of high-income economies.