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The Elbert Files: Economic optimism


“We are certainly in uncharted waters,” economist James Paulsen wrote in a recent newsletter that explores topics ranging from inflation to economic policy, employment to productivity, and millennials to downtowns.

Aging baby boomers are being pushed aside” as the main drivers of the U.S. economy, Paulsen wrote. They are being replaced by millennials, who now have an average age of 30 and are “finally getting married, forming households and driving the home-buying binge.” 

Younger generations are also “playing an increasingly prominent role in the stock market’s trading volume,” as they drive it in new directions – think Reddit and meme stocks, along with  Bitcoin, the economist added.

Although Paulsen does not mention a connection between millennials and the rebirth of central cities, that’s happened in Des Moines, where young workers have moved downtown in droves in recent years. 

He noted that “central cities across the country were shut down during the pandemic, and most are still more closed than open” as many people continue to work remotely. 

But, he added, whatever happens, downtowns will eventually reopen, and “some sense of normalcy will finally return,” boosting optimism and confidence and providing a shot in the arm “in a manner never experienced in past recoveries.” 

A sense of optimism is evident throughout his “Paulsen’s Perspective” newsletter published online on Oct. 12 by the Minneapolis-based Leuthold Group. 

Paulsen’s main headline is “Growing into itself,” implying that several features of the current economy are on the move. 

In addition to “Youth Growing Into Leadership” and “Downtowns Re-populating Into Recovery,” the newsletter explores:

Productivity. Paulsen produces a chart that shows productivity rising during the decades after World War II, followed by a decline until the late 1990s when technology advances created another peak, followed by another decline after the 2007-09 Great Recession. 

In more recent years, Paulsen notes, technology innovations are again on the rise with advances tied to environmental concerns and medicine, including COVID vaccines. The new technologies, he suggests, will fuel new gains in productivity that can push the current economic recovery to new levels. 

Labor imbalances. Disconnects in labor markets are increasingly obvious in the wake of the COVID pandemic, with labor statistics suggesting “at least five million workers [have] gone missing,” Paulsen wrote.

The missing workers include many who were sidelined by the pandemic. Some retired early. Others were parents who were unable to work because they were needed at home to help children with remote learning. Still others, aided by “the massive extension of unemployment benefits,” took the opportunity to step back and take a fresh look at their careers and plot alternative futures. 

“Most of the factors holding back the labor supply, at present, will likely soon ease,” Paulsen wrote. 

As idled workers return to the labor force, he added, “the fresh infusion of labor supply … may have a favorable fallout” and not only boost the economic recovery, but tamp down growing inflation concerns.

Inflation. The primary risk facing the current economic recovery is inflation, Paulsen wrote. 

But, he added, “several forces support an eventual return to more moderate inflation,” including the return of sidelined workers and productivity increases from technological innovations. 

Economic policy. During the last decade or so, Paulsen wrote, many believe there has been “overuse and abuse of monetary and fiscal policies,” and that has resulted in increased concern about unintended consequences, like inflation. 

The economist produced a chart that shows COVID-induced increases in the money supply are greater than increases during World War I and World War II and substantially more than occurred during the 2007-09 Great Recession.

But, he added, those expansionist policies have now turned constrictive, indicating “officials are moving toward a more responsible and less overwhelming approach.”

The bottom line, Paulsen said, is “investors should anticipate that the character of the economy and its corollary bull market will likely unfold in a very different manner than markets of the past.”

Uncertain, yes. But not necessarily bad. 

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