Monday, June 4, 2018

May stagflation report: The hits just keep coming for the economy and consumers

Starting this month The Daily Economist is going to go forth with a monthly Stagflation Report since it appears the data over the last several reporting periods has validated America's return to the economic environment of the 1970's.

Stagflation as defined by economist and British politician Ian Macleod (a relative of economic Alisdair Macleod) in a speech to Parliament in 1965 is that of rising inflation coupled with slowing or declining growth and high employment.

So let's take a look at where these three categories stand here on June 4.

Rising Inflation:

To use the CPI models modified several times by the Bush and Clinton administrations would be meaningless since they represent political motivations rather than actual economic data.  Thus we need to rely upon the great work of John Williams over at ShadowStats to get the full picture of how inflation was modeled during the Stagflationary times of the 1970's.

As you can see from the above chart, inflation has taken a very sharp rise up ever since the Fed began to monetize the economy following the 2008 Financial Crisis.  But it has been over the past year that real price inflation has moved back over 10% annually, and it is one of the primary reasons why the Fed is stuck between a rock and a hard place in having to raise interest rates to counter rising inflation even while also trying to protect the stock markets from collapse.

Stagnant or Declining GDP:
U.S. economic growth slowed slightly more than initially thought in the first quarter amid downward revisions to inventory investment and consumer spending, but income tax cuts are likely to boost activity this year. 
Gross domestic product increased at a 2.2 percent annual rate, the Commerce Department said in its second estimate of first-quarter GDP on Wednesday, instead of the previously reported 2.3 percent pace. The economy grew at a 2.9 percent rate in the fourth quarter. - CNBC
The U.S. has not seen a single quarter of +4% GDP since 2005 using the Bureau of Economic Analysis (BEA) report, but when you once again go over to ShadowStats and look through the lens of the models used in 1980, the U.S. has not even had a positive GDP print going back to 2005.

Of course what makes this GDP growth even worse is that one must look at the equation of GDP minus Inflation, and for the month ending May this comes out to a -9% actual growth rate.

In the end GDP growth has risen a tiny bit since Donald Trump came into office, but the monetary expansions of the past 10 years are now starting to cause price inflation to turn upwards at an alarming rate.  And when you couple this in with the fact that wages have not even been close to keeping up with real inflation, the U.S. is faced with the same dilemma that Paul Volker had in 1979-81 where he ended up having to raise interest rates to 21% simply to halt the inflation monster that was threatening to crush the economy entirely.


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