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Home , Economic data, Economic recovery, Stimulus (economics)

Outlook on the JUL 2021

Summary • As growth accelerates, worry over US has moved to the forefront. Lazard’s equity and fixed income teams alike believe that recent higher inflation levels will not last. • Our equity teams expect inflation on average to be marginally above the ’s 2% target for the next two to three years but do not expect it to rise more or last longer. With the US still in , our analysts are closely watching job The focus on inflation comes as the tide has turned decisively against growth. COVID-19 in the United States, and it is accompanied by a particular • In its economic impact, the COVID-19 pandemic has been akin to focus on the potential for a full reopening to drive growth. Yet, we a natural disaster, and our fixed income team expects volatility in believe it is worth sounding a note of caution. The United States is inflation, other economic , and the path to recovery. still in a recession. Some 7.5 million people who had jobs in February • After many rating downgrades in the past 16 months, 2020 are no longer working, about the same number as during our analysts continue to believe in a bifurcated recovery, which favors an investing approach built on bottom-up security the depths of the global . So, while it is important to selection and focused on lending to viable borrowers. consider the various risks to the economy, including inflation, the biggest risk of all is an anemic recovery that could lead to years of disappointing growth akin to the . In the United States, massive fiscal stimulus combined with a largely US Equity successful vaccination campaign has raised questions for investors Inflation was the talk of the town in the second quarter. Most in three areas. First, at what rate will jobs return and when will the economists expected inflation to rise, but few foresaw a Consumer labor market tighten? Second, how will excess savings and changing Inflation (CPI) reading of 5.0% in May, the highest rate in consumption patterns drive the economic recovery? And third, what almost 15 years. Two months of higher-than-expected inflation added path will inflation and interest rates take in the short-to-medium term, fuel to concerns that the United States is on the precipice of a secular and how will this change asset allocations? shift in the inflation paradigm. Almost all economists agree that some proportion of inflation is COVID-19 Update transient; the disagreement among them is how much. Our base In the second quarter, 26% of all US adults received at least one shot case view is that inflation is likely to exceed 2% for the next two to of the COVID-19 vaccine, bringing the total proportion of Americans three years, at least. However, we think this marginally above-target who have received one dose or more to 53.3% and the fully vaccinated inflation is unlikely to accelerate or to last. Even if our base case view is to 45.1%. Along with acquired immunity from those who were correct, however, we believe investors should be concerned about the already infected, this means the US population already has significant potential for higher long-term interest rates and how rising bond yields immunity to COVID-19. Yet, the pace of daily vaccinations has in general could change the environment for savings and . declined from over 4 million doses per day in April 2021 to just over 1 million in June 2021, and lingering vaccine hesitancy meant that

RD12134 2 the United States missed President Joseph Biden’s target of having (Exhibit 2). A major portion of the jobs lost were low income. Before 70% of adults vaccinated by 4 July. At the current pace, the country the pandemic, median pay for a US worker was $60,000 and the will only vaccinate 70% of adults by the middle of the third quarter. 25th percentile of earnings was $27,000 per year. Since the pandemic By comparison, the European Union (EU) has rapidly accelerated began, jobs that pay more than $60,000 per year have increased vaccinations and likely will surpass the United States in the proportion 2.4%, while jobs that pay less than $27,000 have declined 23.6%. of the population that has been vaccinated as soon as the third quarter Jobs with salaries between $27,000 and $60,000 are down 2.4%. (Exhibit 1). While some of these low wage jobs might be gone for good, the vast majority should return as the service sector fully reopens.

Exhibit 1 EU Vaccinations Will Soon Surpass US Efforts Exhibit 2 Population Vaccinated with at Least One Dose “True” US Stands at About 8.6%, for Now

(% of Total Population) (%) 80 25 Unemployment Rate Adjusted Unemployment Rate 20 60 Absentee Worker Adjustment UK 15 40 US 10 20 EU 5

0 Dec Feb Apr Jun 0 2020 2021 2021 2021 2007 2009 2011 2013 2015 2017 2019 2021

As of 20 June 2021 As of May 2021 Source: Our World in Data Official unemployment rate accounts for people who are out of work and looking for a job. In April and May 2020, US Bureau of Labor classified workers that reported being employed, but not at work as “employed.” Had they been classified as unemployed, the unemployment rate would have been 4.8 ppts higher in April and 3 ppts higher in May; this decreased to <0.5 ppt for August–October; the adjusted Still, the benefits of the US vaccination program have been staggering. unemployment rate treats the fall in labor market participation as unemployed as a proportion of total working age people. Daily cases have decreased from more than 200,000 in January to Source: Department of Labor, Haver Analytics fewer than 15,000 in June; over the same time period, the most important metric, deaths, has decreased from more than 4,000 per day to fewer than 300. Most states have rescinded mask mandates and lifted coronavirus-related regulations, spurring a rapid increase in Despite the overall weakness of the labor market, there are good reasons demand for services such as restaurants, cinemas, and domestic travel. to think the recovery will accelerate sharply in the coming months. First, labor supply should surge in September as children return to Changing patterns of consumption are fueling recoveries across in-person school and unemployment insurance benefits expire. Second, sectors. However, the economic recovery from the pandemic it is easier to lay off workers in a downturn than to hire in a recovery. entails many unknown unknowns. Investors and businesses are Employers incur search costs to find workers, as they have to take time understandably worried about the risks they can see. But, as evidenced to sift through applications while also trying to keep up with surging by jobs data so far, the recovery will not be smooth, and it will not post-COVID demand. The idea that employers could, from the depths have easily predictable effects on the economy or on financial markets. of a recession, hire everyone back who had lost jobs in the space of a few months was always a fantasy that did not account for hiring friction. Reopening: Jobs Indeed, the number of job openings outstripped hiring by almost 400,000 positions in May. While some are keen to chalk this up to The beginning of the second quarter was marked by widespread generous unemployment insurance, which is most likely a factor on the anticipation of gaining 1 million or more new jobs per month. Yet, margins, we believe that the dislocation created by the pandemic, lack job creation fell far short of expectations throughout the quarter even of child care and in-person schooling, and the closing of hundreds of while data was encouraging. With more than 7 million people still thousands of small businesses across the country are more important out of work relative to February 2020 and 3.5 million more people factors in the gap between vacancies and hiring. Finally, it’s reasonable to who dropped out of the labor market altogether, it is premature believe that the recovery will accelerate because jobs are already returning to think about tightening labor markets, in our view. If job gains as vaccinations continue and American consumers flock back to the continue at the pace of May 2021, it would take almost 15 months service sector (Exhibits 3 and 4). for in the United States to return to pre-pandemic levels. While headline unemployment has dropped to 5.8%, The United States is in a strange place, then: Consumption has when adding in people that have dropped out of the labor force rebounded to pre-COVID-19 levels, the median American household for economic reasons, the unemployment rate is more like 8.6% has more savings now than at any point in decades, job growth is 3

continuing at a rapid pace, and still, millions of people are looking Exhibit 3 for jobs, and many of those people are the ones who arguably need Labor Distortions Are Another Transitory Inflation Force them the most—low-income workers. What it all adds up to is Non-Farm People Unemployed, Job Openings, and Hires (Thousands) that consumers’ balance sheets are well-positioned to fuel higher 25,000 consumption for the rest of the year (Exhibit 5) even as US fiscal stimulus diminishes, thanks to child tax and household savings 20,000 that exceed pre-pandemic run rates by over $2.1 trillion. Unemployed 15,000 Reopening: Inflation 10,000 The clearest evidence for transient inflation comes from the specific Hires makeup of price increases. Some 55% of the 5% increase in the CPI 5,000 in May came from used and new cars, hotels, and transportation— Job Openings even though the cumulative weight of these components is only 3%. 0 2007 2009 2011 2013 2015 2017 2019 2021 There are market-specific explanations to all these changes, as well as

As of April 2021 base effects because of the economic situation one year ago during Source: Bureau of Labor Statistics the pandemic. These factors likely will not worry the Fed, and as businesses scramble to expand supply, equilibrium should return. Take lumber, for example. The price of lumber increased to a Exhibit 4 record $1,600 per thousand board feet in May. Yet, the price had Higher Vaccinations Are Correlated with Job Growth already decreased almost 50% by late June as supply and demand Change in Employment January 2021 to May 2021 and Vaccination Rates of US adapted. We anticipate ongoing supply-chain challenges in lumber, States semiconductors, and other businesses to create short-term inflationary (Percentage Point Change in Employment) pressure and disruptions over the next two years before subsiding 3 when supply-chain kinks are resolved (Exhibit 6).

2 CA Exhibit 6 NY Inflation Is Currently Driven by Transient Factors 1 Consumer Price — Key Drivers

(% Change YoY) 0 10 TX FL Used Cars and Trucks Transportation Services -1 Food All Items 30 40 50 60 70 80 5 Vaccination Rates (%)

As of June 2021 0 Vaccination data reflect percentage of all adults over 18 with at least one dose of Pfizer, Moderna, or Johnson & Johnson vaccines. The circle size denotes the size of the state’s population. Source: Bureau of Labor Statistics, Center for Disease Control -5 2019 2020 2021

As of May 2021 Source: Federal Reserve Exhibit 5 Excess Household Savings Should Sustain Rapid Growth Cumulative Implied “Excess” Personal Savings On the other hand, increases in rent and wages, two of the most ($B) reliable sources of longer-term inflation, remain muted. Despite 2,400 widespread anecdotes of wage increases, nominal wage gains in 2021 have already been wiped out by inflation. While reports increasingly 1,800 point to businesses offering higher wages to attract workers, much of 1,200 the increase in average real wages comes down to two factors. First, as consumers return to restaurants, tips have increased, which appears 600 in real wage data; but increases in tips are not the same as increases in wages and should not be considered so, in our view. Second, as lower- 0 Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr wage workers lost or left their jobs, the average wage increased due to ‘20 ‘20 ‘20 ‘20 ‘20 ‘20 ‘20 ‘20 ‘20 ‘20 ‘21 ‘21 ‘21 ‘21 the change in the mix of wages. As of May 2021 Source: Bureau of Economic Analysis, Federal Reserve St. Louis, Haver Analytics 4

Thus, we are less confident in the prospects for rapid wage increases until the United States has fully exited the recession. Wage increases Exhibit 8 Direct Payments Will Extend Through 2021 are certainly plausible in the short-to-medium term, not least because 24 states plus the District of Columbia are raising the minimum wage Timeline of Fiscal Stimulus in 2021 this year. But market wage rates will not increase sustainably until the Q1: Direct Q1–Q3: Unemployment Q4: Infrastructure gap between supply and demand for labor evens out. Stimulus Payments Insurance December COVID-19 relief: Up to $300 per week for Potentially up to The reality is that the core Personal Consumption Expenditure index $600 per person unemployed workers $2 trillion over a decade on infrastructure (PCE), the Fed’s preferred inflation measure, has been less than 3% for almost 30 years, and even as the market’s inflation expectations rise, they are still in line with the Fed’s target of 2% on average Q1 Q2 2021 Q3 Q4 (Exhibit 7). The implication to us of the trends so far is that month- to-month increases in inflation may well have peaked already, with Q1: Direct Stimulus Payments Q3–Q4: Child Tax Credits supply-side issues resolving and productive capacity increasing through American Rescue Plan: Up to $3,600 per child, the rest of the year. If this is the case, inflation will likely average 3% $1,400 per person depending on age, for 2021 this year. Meanwhile, the Fed projects that US real GDP growth will As of June 2021 reach a staggering 7% in 2021 and 4.8% in 2022. Fiscal and monetary Source: American Rescue Plan, Biden Proposal for American Jobs Plan, CNBC, White policies will continue to be important factors in whether these two House May 2021 predictions come to pass.

hike in late 2022 as well as the start of tapering in early 2022. These Exhibit 7 changes fit with strengthening economic data and rising inflation. US Inflation Expectations Have Risen Sharply While the US steepened meaningfully from August 2020 Difference Between Nominal 5-Year Treasury Yield and 5-Year TIPS (%) to the end of the first quarter 2021, it has since flattened marginally 3 (Exhibit 9). One reason is that inflation anxiety cooled late in the second quarter, especially after the Federal Open Market Committee said that the economic outlook is stronger than it previously expected 2 and that normalization might therefore start earlier than it had assumed. This signaled that the Fed is less willing to allow the economy to overheat and seems to have assuaged inflation 1 concerns without tighter policy.

0 Exhibit 9 2016 2017 2018 2019 2020 2021 The US Yield Curve Is Beginning to Price Rate Normalization As of 11 June 2021 Source: Federal Reserve Economic Data (FRED) US Yield Curve (%) 3 31 March 2021

Expansionary Fiscal and Monetary Policies 2 over the last 15 months has been more expansionary than 18 June 2021 at any point since World War II. Although the rest of the year will 1 see far less direct fiscal policy action, we are not concerned that this will hurt the economy for one simple reason: the tremendous excess 4 August 2020 savings that US households have built up—$2 trillion above and 0 beyond typical savings levels. The surplus savings, along with child 1M 2M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y tax credits that commence on 15 July and job growth, should provide As of 18 June 2021 sufficient momentum for the private sector to propel the US recovery. Source: Bloomberg And as Washington deliberates the Biden infrastructure proposal, longer-term fiscal stimulus seems likely to begin in the fourth quarter this year (Exhibit 8).1 Investment Implications Turning to monetary policy, the Federal Reserve finally began to talk We expect inflation to remain above the Fed’s 2% target for the about talking about tapering its asset purchase programs in June. The next two-to-three years without meaningfully exceeding the target Fed also brought forward its “dot-plot” projections for rate hikes from for any extended period. If the Fed achieves the goal set forth in its 2024 to 2023—and we would not discount the possibility of a rate Flexible Average Inflation Targeting policy, this would likely imply that long-term interest rates should rise meaningfully toward a range 5 of 2.5%–3.0%, assuming inflation is sustained between 2.0%-2.5%. The preceding Outlook reflects the views and analysis of Lazard’s US Over this two-to-three-year time period, we also see the potential for a Equity teams. The following Outlook reflects the views and analysis of doubling of the 10-year Treasury bond yield from 1.5% at the end of Lazard’s US Fixed Income team. the second quarter, which would imply capital losses on that bond of 10%–15%. US Fixed Income While it may be tempting for investors to exit fixed income assets, the Always on the radar, inflation moved to front and center for fixed reality is that, first, very few have that flexibility. More importantly, income investors during the second quarter. Risk asset performance optimizing portfolio asset allocation requires having sources of income remained generally positive, but high inflation measurements, and diversification. Developed market sovereign diversifies risk, especially in May, reignited the debate in the bond markets over how but at a meaningful cost to income as real interest rates across most high inflation would go—and for how long. developed sovereign debt markets are negative. We believe investors Both the S&P 500 and the NASDAQ Composite indices reached should seek other options in the credit sector, including corporate all-time highs, and credit spreads continued to grind tighter over the debt, select securitized assets (avoiding extension risk in mortgage- quarter. However, in May, when headline CPI jumped to 5%, the backed securities), and emerging markets debt. These instruments are core CPI, which excludes volatile food and energy , hit 3.8%, its typically shorter-duration and can offer some yield pickup, albeit less highest level since 1992. than in the past. Equity markets are also likely to be roiled by the realization that Steep Climb Back to Normalcy inflation is going to match and even surpass the Fed’s 2% target for a While it was no surprise that inflation climbed as the world economy period of time. In particular, stocks driven by cash flow expectations started to recover and vaccine rollouts gained steam, the magnitude of far in the future are likely to be challenged by higher discount rates, the recent rise in US inflation was startling to some observers. In fact, which make it costly for investors to wait many years to realize cash the signs of rising inflation have become clear in the bond markets flow from their . Beneficiaries in this environment are over the past months: In May, the five-year breakeven inflation rate likely to include companies that generate high returns on capital in rose to more than 2.7%, its highest level since the global financial the near term and hence are less susceptible to discount-rate concerns. crisis, and the five-year real US Treasury yield fell below -1.90%, its These higher quality companies are likely to perform better than less lowest since the 1980s. Commodity prices have steadily increased, profitable peers. We also expect stocks driven by improving returns on and upward pressure on wages has surfaced recently. Nonetheless, the capital to perform well, especially those with the most leverage to the Federal Reserve has maintained that the increase in inflation will be ongoing cyclical recovery. “transitory.” Summary We believe that the pandemic was the market equivalent of a major natural disaster and what we are seeing now in the United States As growth accelerates in the United States, worry over higher inflation primarily reflects a steep climb back to normalcy. It is our contention has moved to the forefront for investors. Still, the recession brought that inflation is rapidly approaching its peak as year-over-year on by the pandemic has not officially ended, and the job losses that comparisons begin to look less startling. Nonetheless, we acknowledge resulted remain a big concern. So, in addition to inflation, we are that longer-term US risk-free rates are likely too low relative to closely watching employment data to gauge the likely trajectory of fundamentals, and we look for the US 10-year Treasury yield to rise US growth beyond the current rebound. High household savings and from its current 1.50% toward 2% in the near-to-intermediate term as supportive fiscal and monetary policies bode well for the economy. the global economy continues to recover. While our forecast for somewhat higher inflation of 2%–3% over The United States still has approximately 10 million fewer jobs than two to three years is not a sensationalist one that grabs headlines, before the pandemic, and the bulk of inflation so far has come from it is still meaningful for investment decisions and returns. We do the Flexible Price Consumer Price Index, a component of the CPI not expect the inflation story to unfold in a linear fashion, nor do that tends to be very responsive to supply trends, tracking prices of we expect financial markets to price in the new inflation levels right new and used vehicles, gasoline, and many food products that tend away. Volatility is likely as investors adapt to an environment that to fluctuate. The rate, or level, has risen to differs from the preceding disinflationary decade. Given the recent 75% from a low of 63% in April 2020, showing that supply is coming high visibility of Federal Reserve Board governors, we also expect that back online, and these price jumps should moderate as production investors may be caught by surprise at times by different statements increases. on inflation risk and possible policy responses. Throughout this period, we believe taking a long-term view and focusing on portfolio In contrast, prices that tend to stick, such as recreation, education, positioning can prepare investors for the different investing backdrop and medical services, have hardly budged. Furthermore, both CPI to come. and the Fed’s preferred inflation measurement, the core Personal Consumption Expenditure index, tend to be lagging indicators, not leading ones. In our opinion, recovering from a massive pandemic that shut down the global economy will entail supply chain and labor market bottlenecks as demand picks up, causing volatility in data as well as the reopening of the economy itself, but these should ultimately normalize. 6

What would it take to create enduring inflation? We believe that Yields on German bunds, another traditional safe haven in the inflation would become systemic only if supply could not meet sovereign bond markets, are still deeply negative. Yields on 10-year demand and there were no simple or obvious way to rebalance. This Japanese Government Bonds, another flight-to-quality asset, are near does not seem to be the situation. The US economy appears far from zero. So, as the most liquid, globally accessible “disaster insurance” overheated: Although capacity utilization has risen from its lows in the market with a positive nominal yield, the US 10-year Treasury during the pandemic, it is still below the 45-year average of 79% should continue to have a low yield as well—even just based on (Exhibit 10). current domestic risks to the economy, in our view (Exhibit 11). Although Treasury yields have risen from last year’s pandemic-driven lows, they are still low relative to US fundamental growth trends. Exhibit 10 US Production Remains Below Its Long-Term Average Thus, we think the 10-year Treasury yield will likely move higher from current levels toward 2%, but not much higher, especially Capacity Utilization: Total Index if other developed market government yields remain negative or (%) around zero. 100

90 Exhibit 11 Continued Low Yields on Government Bonds Signal Investors’ Concern over Risks 80 (%) 4 US 10-Year T-Note Yield (TPI) - YTM 70 3

60 1981 1991 2001 2011 2021 2

As of 30 June 2021 Germany 10-Year Yield (TPI) - YTM Source: Federal Reserve Economic Data (FRED) 1

0 Japan 10-Year Yield (TPI) - YTM Some observers have cited the potential for US fiscal stimulus to -1 2017 2018 2019 2020 2021 ignite sustained inflation, but we view the current fiscal stimulus as emergency relief funds. These funds may have cost 30% of GDP, but As of 30 June 2021 Source: FactSet they were added to the system not to create new revenue but rather to replace lost revenue as jobs disappeared and businesses struggled. In one sign that this is not “hot ” creating a flood of demand, savings rates remain historically high at over 12% of disposable Some have pointed to the outcome of the latest Fed meeting in income as of the latest reading in May. June as an indication that the Fed itself is worried about inflation, which could lead to policy rate increases. However, we believe that, That said, we do acknowledge that how the government unwinds if anything, the Fed’s communications after the meeting should federal aid will be critical. Generous unemployment support, such placate these worries, and subsequent market activity supports this as enhanced federal unemployment benefits, makes it difficult to view. Essentially, through its post-meeting statements, the Fed discern the true demand for employment. However, if federal aid has started to prepare the market for a plan to dial back current drops in July and September as planned and more people get back monetary support, aiming to avoid another market disruption like to work, we feel that the Fed could be more relaxed about inflation the taper tantrum in 2013. The Fed’s median dot projection, or as the tightness in the labor market is alleviated. Nonetheless, non- rate forecast, released in June indicated that Fed officials expect the productive, debt-fueled spending would pose the risk of not only fed funds rate to reach 0.60% by the end of 2023, implying two enduring inflation, but also , a condition marked by 25-bps rate hikes—up from zero in the Fed’s March forecast for the price inflation, suboptimal employment, and sluggish demand and same timeframe. However, we do not anticipate rate hikes in the growth. near future because tapering of the Fed’s $120 billion per month purchases of Treasuries and mortgage-backed securities would The Mystery of Rising Inflation and Low almost certainly come first. In the days after Fed Chairman Jerome Rates Powell’s press conference in June, the US 10-year Treasury yield, as well as 5-year and 10-year breakeven inflation rates, actually moved Higher inflation is typically associated with higher nominal risk- lower, and the US yield curve flattened. In fact, the US 10-year free rates. However, we believe that current 10-year Treasury yields yield and breakeven rates have been trending lower over the past few are less an indicator of the country’s economic health than of the months (Exhibit 12). This implies that the market’s collective view market’s assessment of global tail risks and investors’ desire for a on the prospect of longer-term inflation actually fell on the margin “safe haven,” or portfolio insurance, against these risks. after the Fed’s meeting. 7

Exhibit 12 Exhibit 14 Longer-Term Inflation Expectations Are Trending Lower The Velocity of M2 Has Plunged During the Pandemic The Difference between the 10-Year US Treasury Yield and the 10-Year TIPS Yield Ratio of Nominal Quarterly GDP to Quarterly Average of M2 Money Stock The US 10-Year Breakeven Inflation Rate (%) 2.5 2.6

2.0 2.4

1. 5 2.2

1. 0 1961 1971 1981 1991 2001 2011 2021 2.0 Dec 20 Jan 21 Feb 21 Mar 21 Apr 21 May 21 Jun 21 As of 30 June 2021 As of 30 June 2021 Source: Federal Reserve Economic Data (FRED) Source: Federal Reserve Economic Data (FRED)

Finally, the aging of the US population, with people naturally leaving the workforce and spending less money on average in their retirement Exhibit 13 years, acts as a long-term disinflationary force. US Public Debt as a Percentage of GDP Soars During the COVID-19 Pandemic Summary Federal Debt: Total Public Debt as Percent of (%) 140 From an economic standpoint, the impact of the COVID-19 pandemic has been akin to that of a natural disaster; it caused almost 105 a complete shutdown of the economy. As the reopening progresses, we expect volatility in data and in the path to recovery. In our view,

70 the recent rise in near-term headline inflation stems mainly from base effects and will likely not be sustainable when the artificially low, pandemic-driven levels are no longer the basis for comparison. 35 Nonetheless, we continue to believe in the prospect for a bifurcated recovery that would favor an investment process built upon bottom-up 0 security selection. As evident by the high number of negative credit 1971 1981 1991 2001 2011 2021 rating transitions over the past year, investors need to focus on lending As of 30 June 2021 to viable borrowers over a long term. Thus, investors should scrutinize Source: Federal Reserve Economic Data (FRED) whom they are lending to and the terms and conditions under which they are lending. In our view, they should consider mitigating liquidity risk by focusing on key security investment characteristics that have Important longer-term trends are also not conducive to inflation. historically been reliable in determining institutional end client Total US public debt as a percentage of GDP was more than 127% demand. Specifically, we believe investors should focus on securities based on the Fed’s latest measurement for the first quarter this year and borrowers that provide key attributes, such as: (Exhibit 13). This metric increased from approximately 30% in the 1970s to 60% in the years leading up to the global financial crisis, • serving an essential economic or financial function before exploding to current levels during the pandemic. The amount • issuing under standardized terms and conditions of GDP generated per dollar of debt has fallen from about 0.75 in the 1970s to about 0.40 after the financial crisis, implying that as the • offering in institutional markets in institutional lot sizes public debt-to-GDP ratio increases, debt has less ability to increase • having established transition markets that are able to absorb ratings GDP. downgrades Moreover, although M2 money supply has increased 30% since • qualifying for inclusion in major market indices the start of the pandemic, the velocity, or frequency at which it is used in transactions in the economy, has been falling. Velocity rose to more than 2 in the 1990s from roughly 1.7–1.9, but has since dropped, accelerating to the downside after both the financial crisis and the pandemic to hit an all-time low of about 1.12 as of late May (Exhibit 14). Outlook on the United States

This content represents the views of the author(s), and its conclusions may vary from those held elsewhere within Lazard Asset Management. Lazard is committed to giving our investment professionals the autonomy to develop their own investment views, which are informed by a robust exchange of ideas throughout the firm.

Notes 1 Infrastructure investment is likely to take place over a period of 10 years and is expected to have less short-term inflationary impact than the successive COVID-19 relief packages.

Important Information Originally published on 7 July 2021. Revised and republished on 8 July 2021. This document reflects the views of Lazard Asset Management LLC or its affiliates (“Lazard”) based upon information believed to be reliable as of the publication date. There is no guarantee that any forecast or opinion will be realized. This document is provided by Lazard Asset Management LLC or its affiliates (“Lazard”) for informational purposes only. Nothing herein constitutes investment advice or a recommendation relating to any security, commodity, derivative, investment management service, or investment product. Investments in securities, derivatives, and commodities involve risk, will fluctuate in price, and may result in losses. Certain assets held in Lazard’s investment portfolios, in particular alternative investment portfolios, can involve high degrees of risk and volatility when compared to other assets. Similarly, certain assets held in Lazard’s investment portfolios may in less liquid or efficient markets, which can affect investment performance. Past performance does not guarantee future results. The views expressed herein are subject to change, and may differ from the views of other Lazard investment professionals. This document is intended only for persons residing in jurisdictions where its distribution or availability is consistent with local laws and Lazard’s local regulatory authorizations. Please visit www.lazardassetmanagement.com/globaldisclosure for the specific Lazard entities that have issued this document and the scope of their authorized activities.