As economies around the world navigate an uneven period of Covid recovery and monetary policy adjustment, one of the bright spots across the globe has been the continued resilience in services. While this is not entirely surprising given the backdrop of lockdowns, goods overconsumption and supply chain bottlenecks of the recent past, the fact remains that services have been a beacon of light in otherwise uncertain environment of sagging residential and business fixed investment given the sharp rise in interest rates both in the United States and abroad. While this phenomenon is intuitive given the relatively low cost of services versus larger ticket, goods consumption, this trend is likely to continue for an artificially longer period of time given the massive amount of stimulus deployed by Federal and state government agencies, both in the form of direct payments and expanded benefits, and the accumulated excess savings on consumer balance sheets that resulted, estimated to be over $1 trillion. Of course, this is the quandary Federal Reserve policymakers find themselves in today.
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