U.S. could be facing stagflation as jobs market cracks, inflation remains sticky, warns BofA's Hartnett

Published Fri, Mar 15 20249:52 AM EDTUpdated Fri, Mar 15 202410:49 AM EDT

Stubbornly high inflation and a wobbly jobs market are combining to pose an ominous threat to the U.S. economy, Bank of America's chief market strategist, Michael Hartnett, warned. The result is a narrative of "macro shifting from Q4/Q1 'Goldilocks' to Q1/Q2 'Stagflation,'" Hartnett said in his weekly "Flow Show" note to clients dated Thursday. Stagflation refers to low economic growth and high inflation, a condition that hammered the U.S. economy in the 1970s and occasionally has popped up over the years but hasn't lasted long, particularly because inflation had been so low for so long. However, recent data has indicated that higher prices may be more durable than many economists and Federal Reserve officials had figured. Data this week on the consumer and producer price indexes surprised to the upside, and a New York Fed survey showed longer-term inflation expectations are on the rise. As Hartnett indicated, the U.S. closed 2023 with the labor market looking strong and GDP posting a solid 3.2% gain. However, gross domestic product growth is tracking at just a 2.3% pace in the first quarter, according to the Atlanta Fed. On the jobs market, while nonfarm payrolls have risen strongly , household employment actually is down by about 900,000 since November and full-time jobs have declined by nearly 1.8 million. The unemployment rate has risen to 3.9%, still low but half a percentage point higher than in April 2023. The stagflation specter has had investing implications, Hartnett said. "New bout of stagflation means outperformance of gold, commodities, crypto, cash, a big steepening of the yield curve, and a very contrarian equity barbell of resources & defensives," he said. That's also why oil is now "handily outpacing" the Nasdaq and its high-flying tech companies in year-to-date-returns, Hartnett added. Along with the stagflation commentary, Hartnett also ran down the current U.S. fiscal situation, with its surging budget deficit — tracking toward $2 trillion this fiscal year — and elevated debt. The Fed is "implicitly ... tolerating higher inflation" as way to inflate the debt away, a condition that means "weaker policy credibility = weaker currency … why crypto & gold [are] at all-time highs." However, Fed officials repeatedly have insisted that monetary policy is not influenced by the fiscal situation.