text: ECONOMIC WARNING INTSUMMajor banks downgrade US 2022 GDP after BBB diesFollowing a split between the Biden administration and Senator Joe Manchin (D-WV), Build Back Better legislation is sitting idle. Media reports this week said that Manchin and Biden would ultimately find a solution, but so far Manchin said that he can’t vote for a bill that would increase inflation and the national debt. In response, Goldman Sachs continued their downward revisions to 2022 GDP growth, from 4.2% to 3.8%. Morgan Stanley lowered their expectations from 4.9% to 4.6%. (Analyst Comment: Big banks and investment firms have been lowering their 2022 GDP growth expectations for the past couple months, suggesting greater economic weakness than they previously thought. – M.S.)Larry Summers issues recession warningFormer Treasury Secretary Larry Summers warned that the inflationary environment within the United States could lead to a recession in 2022. He called for the Fed to make a “significant change in their tone,” or risk making critical errors in policy decisions leading to a financial recession. “I’m really not sure what’s going to come after this current episode,” but “secular stagnations are a real risk looking out a few years.” Summers also mentioned that requests for a wage increase will go unanswered for many Americans, regardless of where the economy stands. (AC: Summers was among the first to warn of coming inflation last year, despite the clear trend of disinflation last summer. The Fed maintains that inflation will run at 2.6% by the end of next year. Unless the Fed changes how inflation is calculated, this is unlikely. “Smart money” has been warning of secular stagnation or stagflation – high inflation and low economic growth – since at least 2017. In their most recent note to clients, JPMorgan also notes the risk of a “boom-bust” recession. – M.S. )El-Erian on wage inflationBiden’s minimum wage hike to $15 for federal employees begins on 01 January 2022. The Department of Labor suggests that over 507,000 businesses will be affected by the mandate. There is a possibility that workers will be laid off to offset the rate increase. Concerns over the wage increase have also spread to consumers, fearing that if businesses aren’t able to absorb the increase in wages and the same companies are unable to lay off employees, that prices will increase and essentially defeat the entire purpose of the mandate. Economist Mohamed El-Erian is concerned that cost of living adjustments to employee wages can link wage increases to inflation. During Q1 2021, the consumer price index (CPI) increased to surpass the average hourly earnings of American workers for the first time since 2012. The CPI has now risen almost 2% faster than average hourly earnings, an effect that will likely worsen if wages increase to compensate for inflation. Essentially, El-Erian says that if wages increase to make up for inflation’s climb, inflation will only get worse. – T.W.OECD warns of continued inflation