consumer’s wallet today, down from about 6% in 1980. Indeed, gasoline is only about 2% of the U.S. Meanwhile, the consumer’s wallet has continued growing alongside, such that consumption is a lot less energy intensive today than it was then. In fact, through a 1970s lens, oil has been stable for decades. And in the case of the latter, new oil-supply-shock absorbers have been introduced since then: namely OPEC and the rise of the U.S. In the case of the former, currencies that have been unpegged from a gold standard cannot then be unpegged again. Over the course of that decade, oil prices went from about $2 to $32, and it’s difficult to see that 16-fold gain in oil prices happening again, given the unique shocks that drove it then, from the end of Bretton Woods to the Iranian Revolution (see Figure 3). Third, we can’t talk about the 1970s without mentioning how influential oil prices were, and how unlikely it is for those influences to repeat themselves. Source: International Monetary Fund, data as of July 31, 2021 But today’s supply chain bottlenecks, the result of an unusual two-year surge in goods demand, do not foreshadow a systemic unwind of the structure of the global economy, in our view, or of modern consumption patterns (think Millennials’ love of “experiences”).įigure 2: It’s hard to see world trade going back to the 1970s This deflationary impact of globalization on goods, decade after decade, has allowed consumption to be increasingly oriented around services – until very recently, as the pandemic has temporarily disrupted the consumption of a variety of services. These events allowed huge quantities of new supply to enter the global economy, from goods to labor, both flattening the supply curve and pushing it to the right. Each time, world trade inflected higher, dwarfing GDP growth (see Figure 2). The development of the global supply chain had two pivotal moments: first, when Deng Xiaopeng opened up China’s economy in 1979, and second, when China joined the WTO in 2001. Second, supply and consumption patterns have changed dramatically since the 1970s and are unlikely to reverse course. So, while demand is certainly exceptional today (as we described in our previous commentary, Halloween and Christmas for Markets, these 1970s-era drivers were one-time phenomena. Separately, another source of new disposable income, female participation in the labor force, had its greatest gain in the 1970s. That age group is an important driver of growth and inflation because, on average, they make several critical first-time purchases, buying their first car, having their first child and buying their first house, often on credit. In the United States, the share of new workers, as measured by the 15-34 year age group, peaked in 1980 alongside inflation. Three Key Reasons This Isn’t the 1970s for the Economyįirst, organic demand growth in terms of new disposable income is not going back to the 1970s. Yet, despite these similarities, there are three main reasons why economies aren’t going back to the 1970s. Still, maybe 2021 is less different than before, as there are some apparent similarities? We’ve witnessed the end of a long war (Vietnam in the 1970s versus Afghanistan in 2021), we’re in a supply chain crisis (the 1970s was a decade known for shortages) and in the midst of a cold war (substitute the Soviet Union for China).
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