The US economy has reached a watershed. For the first time since the pandemic, labor demand and labor supply are in perfect balance, with both now standing at 172 million workers.
Labor supply has been running short of labor demand. Meaning the economy has been supply-constrained.
The distinction between demand-constrained and supply-constrained is crucial because it is the constraint on the economy – the lower of demand and supply – that drives economic output.
In a normal demand-constrained economy therefore, a demand recession causes a GDP recession. In a supply-constrained economy however, it takes a supply recession to cause a GDP recession. This explains why the abnormally supply-constrained US economy cheated a GDP recession when demand went into recession through 2023-24. The growth in the constraint – labor supply – kept output growing.
Now though, the US economy is at a watershed that puts it in ‘double jeopardy’. Given that labor demand and labor supply are in perfect balance, a drop in either would cause output to contract.
Put another way, both demand and supply must expand. To counter this double jeopardy, the Fed must run the economy hot.
Politics affect upon macro-economics.
The president wants to run the economy hot, as midterm elections approach
Trump administration officials are predicting an economic boom that will lift Republican prospects in the November congressional elections.
The administration aims to run the economy hot, counting on a rare trifecta to boost growth in 2026: generous tax refunds and investment incentives, Federal Reserve interest rate cuts and the pruning of regulations that corporate groups call burdensome. Productivity gains from wider deployment of artificial intelligence will keep inflation at bay, officials said.
The “run it hot” theory posits that artificial intelligence tools are about to do to 2020s what the internet did to the 1990s — which is to say, unleash productivity across industries, allowing businesses to grow briskly and stocks to surge, all while consumer prices stay relatively stable. The magic of that moment was made possible, in part, by the rapid adoption of networked computers. (Yes, there were a lot of other macroeconomic factors going on — the end of the Cold War, a massive deregulation effort, increasingly globalized trade — but bear with me.)
the top 20% of earners account for a staggering 59% of consumer spending. Yes, this is the K-shaped economy, where the rich are doing better and better while the poor are doing worse and worse. The rich have become so rich, in fact, that their spending alone can make it appear as if the entire economy is great, even as the majority of people are finding that suddenly the costs of basic staples like housing and food are getting harder and harder to bear and dollar stores warn that more and more people are going without.
That is unimportant as the stock market will be driven higher.
the US economy of the mid-2020s is being propped up by two big forces: rich people spending money and companies plowing hundreds of billions into AI.
Will AI investment pan out?
How long before the K-shaped world ignites societal dissatisfaction and revolt?