After years of turbulence, new tools are needed to track global economy

Following a global pandemic, a supply chain crunch, an energy crisis and the devastating effects of war in Eastern Europe, assessing the global economy requires new tools, says Chris Dillon, an investment specialist in the Multi-Asset Division at T. Rowe Price.

Dillon said unprecedented action by central banks to rescue a floundering global economy has rewritten the rules of financial analysis.

“We’ve had to put some extra metrics on our radar for evaluating what we would call global pandemic recovery,” he said in the latest episode of the Soundbites podcast. “We’ve had to add to our toolkit.”

Dillon said economists and analysts continue to use data that have been helpful for decades, such as manufacturing data and purchasers’ indexes, as well as inflation, wage, earning and margin analytics.

“Those are all things that we still look at on an ongoing basis,” he said. “But let me fast forward to how the pandemic put some extra metrics on our radar for evaluating what we would call global pandemic recovery.”

Among the new calculations are:

• the Atlanta Fed’s GDP Now, which offers a real-time estimate of economic growth
• the New York Fed’s Global Supply Chain Pressure Index, which looks at manufacturing and transportation disruptions, and
• the Atlanta Fed’s Sticky-Price CPI measure, which classifies products and services as either flexible or “sticky” (slow to change) based on the frequency of their price adjustment.

Dillon said these metrics have been enormously helpful since the Great Recession.

For example, he said the Atlanta Fed GDP Now indicated in early 2020 that the U.S. economy was looking down the barrel of a 53% drop in value. The warning sparked a fiscal and monetary response that alleviated the threat. By October 2020, after the start of massive stimulus spending, the forecast was 37% to the positive.

Dillon said it’s important to give policymakers credit for averting economic disaster when the pandemic gripped the world.

Among financial professionals who recognized the accomplishment, many have forgotten, he said.

“Memories are short,” he said, “and now there are many complaints in the developed western world about policy makers being behind on inflation. But let’s give policymakers credit for what they did in the spring of 2020.”

As for what the numbers are showing him now, he’s optimistic the U.S. will avoid recession due to its robust service-oriented economy and growing energy independence.

“We’re seeing some data that is showing resilience in the U.S. economy. It’s different in Europe, and that has everything to do with the energy crisis that’s playing out there,” he said. “I’d say it’s greater than a 50% chance that the U.S. avoids recession, while Europe is certainly headed into recession within the next three months from our team’s perspective.”

Investing dynamics are also changing, he said. His team’s calculation of the ideal split between equities and fixed income is reverting to traditional values.

In the recent period of high inflation and low interest rates, the percentage of equities needed in a portfolio in order to ensure a 6% to 8% rate of return was as high was 85% — a condition that led investment professionals to talk about TINA, or “There Is No Alternative” to equities.

Updated calculations show the ideal split has returned to 60:40 territory.

“So, a lot has changed,” Dillon said. “My advice now would be to stay invested, stay diversified, say goodbye to TINA, and say hello again to your 60:40.”

**

This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.