Adrien Pichoud

Chief Economist & Senior Portfolio Manager

When asked about the risk of Stagflation for the US economy last week, Jerome Powell answered that he doesn’t “see the Stag or the Flation actually”. Yet, this question finds some ground in the latest economic data released in the US. Indeed, they have generally been disappointing regarding economic activity, and stronger-than-expected regarding inflationary pressures. 
Is it enough to revive fears of a stagflationary scenario where growth would slow down below trend and eventually turn negative, while inflation would remain uncomfortably high? 
We review below the recent US economic data and assess the risk of seeing the so far prevailing scenario of soft (or no) landing and slowing inflation being taken wrong-footed.


Stagflation fears were first reignited by the release of GDP data that pictured a softer growth than expected during the first quarter (+1.6%), along with a stronger than expected increase in price levels (+3.1%). However, the disappointment in growth was mostly caused by weak inventory growth and a deterioration in the trade balance, while private domestic demand held firm and grew at an above-3% pace for the third consecutive quarter. Indeed, business investment continues to grow, even if at a moderate pace, as highlighted by the mild rise of Durable Goods Orders in March. 
In the meantime, household consumption remains on a firm expansion trend that was also pictured by above-expectation Retail Sales and Personal Spending data in March. The continuing rise in Personal Income keeps powering the main driver of the US economy, consumer spending, supported by the resilience of the labor market. Indeed, the Unemployment Rate (3.9% in April) and new Jobless Claims are still close to historical lows and ensure that the key driver of households’ spending behaviors remains positively oriented for the time being.
However, a few worrying signals have also appeared recently on the momentum of these dynamics. Strikingly, consumer confidence has dropped in April, with the sentiment on the labor market edging lower. The pace of monthly Non-Farm Payrolls creations has declined to a 6-month low in April (175k), while the Unemployment Rate ticked up to a 2-year high. The number of New Job Openings and of workers leaving voluntarily their job (Quits Rate) also declined to post-pandemic lows, pointing to a continuation in the normalization of what has been a very tight labor market over the past three years. In parallel, business activity surveys have also proved to be on the soft side recently: both the ISM Manufacturing and the ISM Services declined to “contraction” levels, while some regional indicators (Chicago PMI, Empire Manufacturing) have been below expectations in April and reversed the positive momentum of the previous months. The NFIB confidence index of Small Businesses declined to an 11-year-low.
This synchronized deterioration in households and business confidence indices is therefore a legitimate source of concern for the US economic outlook in the months ahead. While current activity data still point to solid economic activity, weakening sentiment could eventually translate into weaker consumption and investment spending, finally materializing the recession risk that haunted markets for most of 2023 before being dissipated by stubbornly strong activity data. Jerome Powell is certainly right in seeing no stagnation of the activity for the time being, but markets are entitled to be concerned and to attach a rising probability to the risk of a significant growth slowdown for the second half of the year.


In parallel, data related to inflation have consistently 
been above expectations recently. CPI and PCE inflation indicators both came out above consensus for March, as it had been the case since the beginning of the year. Headline inflation is picking up, while the less volatile “core” inflation fails to slowdown as anticipated and remains at a level too high compared to the Fed’s target (“core” CPI at 3.8% YoY, “core” PCE at 2.8%, vs Fed’s target at 2.0%). The “Prices Paid” component of business confidence surveys is rising again, as are households’ inflation expectations. Gauges of wage evolution such as the Employment Cost Index or Unit Labor Cost have been strong over Q1, reflecting no tangible sign of an easing in upward pressures on wages yet, even if Hourly Wage Growth continued to moderate gradually in April.
Inflation and its main underlying driver, wage growth, remain too high in the US for the time being. The disinflationary trend at play since mid-2022 has stalled since the end 
of last year and some indicators even suggest a recent pickup that would go against the Fed’s scenario of a gradual easing in inflationary pressures throughout 2024. The 
rise in oil and gasoline prices since the beginning of the year may have played a role, but some underlying inflation dynamics also appears to be stickier-than-hoped so far. After the succession of shocks in the past four years, the inflation outlook remains highly uncertain. The jury is still out on whether a “return to normal” is just taking longer to materialize than expected, or if this succession of shocks combined with structural shifts in global supply chains have fundamentally altered inflation dynamics in the US.

Syz_Flash_ 2024-05-06_01


Our take:

  • Data released in the past few weeks have clearly challenged the scenario of “resilient growth and slowing inflation” that financial markets had embraced since the end of 2023.
  • For the time being, the loss of growth momentum appears to be contained and can still be squared with long-held expectations of economic slowdown after an unprecedented cycle of monetary policy tightening. But such slowdown also raises the risks of a more pronounced deterioration in the months ahead.
  • A growth slowdown should in any case dampen inflationary pressures that have been mostly driven
    by strong final demand lately. In that sense, the likely trend for inflation continues to be toward a lower pace. However, the risk of potential supply shocks keeping inflation too high cannot be ruled out neither.
  • While it is certainly too soon to speak of Stagflation for the US economy, as stated by Jerome Powell, recent developments have brought back this potential risk in the mind of investors. Let’s hope that the Fed’s Chairman will still be able to say that he doesn’t see neither stagnation nor inflation in the second half of the year.



This marketing document has been issued by Bank Syz Ltd. It is not intended for distribution to, publication, provision or use by individuals or legal entities that are citizens of or reside in a state, country or jurisdiction in which applicable laws and regulations prohibit its distribution, publication, provision or use. It is not directed to any person or entity to whom it would be illegal to send such marketing material. This document is intended for informational purposes only and should not be construed as an offer, solicitation or recommendation for the subscription, purchase, sale or safekeeping of any security or financial instrument or for the engagement in any other transaction, as the provision of any investment advice or service, or as a contractual document. Nothing in this document constitutes an investment, legal, tax or accounting advice or a representation that any investment or strategy is suitable or appropriate for an investor's particular and individual circumstances, nor does it constitute a personalized investment advice for any investor. This document reflects the information, opinions and comments of Bank Syz Ltd. as of the date of its publication, which are subject to change without notice. The opinions and comments of the authors in this document reflect their current views and may not coincide with those of other Syz Group entities or third parties, which may have reached different conclusions. The market valuations, terms and calculations contained herein are estimates only. The information provided comes from sources deemed reliable, but Bank Syz Ltd. does not guarantee its completeness, accuracy, reliability and actuality. Past performance gives no indication of nor guarantees current or future results. Bank Syz Ltd. accepts no liability for any loss arising from the use of this document.

Read More

Straight from the Desk

Syz the moment

Live feeds, charts, breaking stories, all day long.

Thinking out loud

Sign up for our weekly email highlighting the most popular posts.

Follow us

Thinking out loud

Investing with intelligence

Our latest research, commentary and market outlooks