Economist expects continued U.S. growth but cites challenges

Lindsey Piegza, chief economist at Stifel Financial, expects the U.S. economy to keep growing in the months ahead. But she strongly advocated a return to price stability and raised other risks during a keynote at the Bank Holding Company Association’s Fall Seminar in Minneapolis last week..Citing resilient consumer spending, a stable job market, positive investment flows and “a massive increase in productivity thanks to the adoption and expansion of technology,” Piegza said the economy should continue to see “positive, stable growth” that ranges from 2 percent to 2.5 percent.“If, of course, there’s a near-term resolution to the [Iran] conflict – that’s a big caveat,” she said. That conflict is one of several global variables adding complexity to a U.S. monetary and fiscal landscape that was complicated before combat operations began in February, Piegza said. She also cited tariff unpredictability, the risk of “further Russian aggression or Ukraine destroying Russia’s refining capacity, deteriorating relations with China threatening our access to rare-earth materials or a second international health crisis.”Struggling with price stability While gas prices have declined somewhat from their peak in May, Piegza reiterated their broad effect on the consumer economy, noting “that for every $1 increase in pump prices, that can divert over $1 billion in spending elsewhere.” Unlike gasoline, diesel prices continued to rise through September. More troubling perhaps is that price shocks from the Iran conflict are on top of “years of engrained price pressures and inflation that were not controlled by the Fed post-COVID,” Piegza said. “This is a Fed that has been persistently tolerant of above-target inflation for years. Allowing those price pressures to become engrained will eventually choke off upside potential for the economy,” she said.Of the Fed’s rate hike in September, Piegza said “I would’ve liked to have seen a showing of 50 basis points, a significant move higher – a nod and a commitment to whatever it takes.” She added that the Fed made a policy error by not tightening more in the initial 2022-2023 cycle.“We’re still struggling, years later, to reinstate price stability. The notion of a soft landing has not yet been achieved.”Piegza echoed the consensus view that there will be one more rate hike this year and said she sees potential for a third increase early in 2027.“It’s going to take more than two rate hikes to get us back down to price stability,” she said.Stagflationary riskPiegza rates the risk of recession below 20 percent but said it remains “very real,” particularly if the Iran conflict drags on. She also warned that stagflation may pose a greater challenge than recession alone. If inflation remains above the Fed’s target while economic activity slows, monetary policy becomes more difficult to calibrate. Piegza argued that years of elevated inflation, rising energy costs and mounting fiscal pressures – including the national debt surpassing $40 trillion – could further constrain the economy’s growth potential.“We’re consistently running $2-trillion deficits, deficit-to-GDP of 6 percent – that’s double the historic norm,” she said. “A bloated and growing government balance sheet, increased market volatility … all this uncertainty under the fiscal realm as well as international conflict – let’s just say these are far from ideal conditions.”