Episode summary
Lower Leg of K-Shaped Economy Faces 'Great Deal of Pressure,' Says ECRI's Lakshman Achuthan
Bloomberg Surveillance
· · 5 min · Guests: Lakshman Achuthan
Summary
Lakshman Achuthan argues that the economy is looking better on the surface because growth is firming and inflation is not reaccelerating, which gives the Fed room to be easier on a cyclical basis. He says the forward-looking data show a rare combination: cyclical growth improving at the same time as a large structural investment boom, a setup he says has not been seen very often in 25 years.
But Achuthan says that strength is masking a sharp split in household finances. In his view, the top 10% of households own or spend over half of consumer spending because asset prices have inflated, while everyone else remains exposed to goods and services inflation and has little ability to accumulate assets. He says the “lower leg” of the K-shaped economy is under “a great deal of pressure.”
He also says the Fed is boxed in because policy is being supported by a wealth effect that could weaken quickly if markets wobble. Achuthan rejects the idea that the central bank needs to ease because of broad job losses, but he says the burden on lower-income families is real and persistent.
Key takeaways
- Achuthan says the Fed has room to ease because growth is okay and inflation is not “running away.”
- He argues the current setup is unusual: forward-looking cyclical growth is improving alongside a structural investment boom.
- He says the top 10% of households drive more than half of consumer spending because asset inflation is supporting their wealth.
- He warns the lower leg of the K-shaped economy is under “a great deal of pressure” because many families cannot accumulate assets.
- He says the Fed is boxed in because a market downturn could quickly weaken the wealth effect supporting spending.
Notable quotes
“Growth and inflation growth is okay. Inflation is not a problem writ large”
“we've got a very rare situation of cyclicals, growth firming in the forward data and a massive structural investment boom”
“the top 10% of of people with asset people in this economy own or spend over 50%”
“under a great deal of pressure. The Fed's in a box, right”
“you should accumulate assets. Now, I don't know how you do that if you're in the lower leg of that”
How the episode opens
Keeping it simple, which is always a good idea because it's pretty complicated, is to look at the direction the vector of these two cycles. Growth and inflation growth is okay. Inflation is not a problem writ large.
Okay. I see problems underneath for for lower income families, but there's no inflation running away. So there's a green light to be easier on a cyclical basis on that score.
And and if there was easier policy on that score around the inflation cycle not being a problem, that's pretty good news. It's kind of you're moving towards Goldilocks, right. Growth without inflation.
If if the Fed was like, hey, we're easing cause there's a ton of job losses, that's a different story. But we don't see that right here. So the markets, you know, we were just two weeks ago, arguably 100% chance of a rate cut here in December.
Now we're down to about a 25% chance of a rate cut here. Is that just a function of Fed folks rhetoric or because we haven't seen much data one way or the other, maybe today? Yeah.
Yeah. Look, we never went in for this driving in the fog stuff, right? Okay.
Because we see what's going on with our forward looking data, which is not just reliant on what the Fed or what the government says. And we've got a very rare situation of cyclicals, growth firming in the forward data and a massive structural investment boom which you're seeing. You guys are talking about it every other day or every day practically, which we haven't seen and we haven't we don't see that combination of a cyclical to the upside of growth and this structural lift on growth.
Very often it's been 25 years. Now, these stories, these booms can end badly, right?
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- k-shaped economy
- us labor market
- fed rate cuts
- jobs report
- income inequality
Companies and tickers mentioned
- ECRI
- Oxford Economics
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Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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