What is Stagflation? Is it something we have to worry about?

DO WE REALLY HAVE TO BE WORRIED? 🤔 

In the first quarter of 2024, GDP in the United States grew at an annual rate of 1.6%, almost 1% slower than expected. At the same time, inflation remained higher than anticipated, with consumer prices (excluding energy and food) increasing at an annual rate of 3.7%, up from 2% in the fourth quarter of 2023.

But you ‘gotta like look at the data in detail….

The economy in Q1 was pretty strong, actually. The reading was lower but that was because imports outpaced exports (OF COURSE, US DOLLAR IS SOARING/FLYING…why? That’s for another newsletter LOL). You also have a change in inventories from the previous quarter, where a lot of companies got rid of inventories from the prior year that were built up, so they didn’t order new stuff, hence less productivity. Also, government spending slowed down after all the stimulus and stuff that hit last year and the year before.

How should we connect the dots? Is the US economy still booming or slowly starting to weaken? Or should we be concerned about a period of slow growth and high inflation?

If you look “under the hood” of in our GDP, the economy was in fact strong beginning of the year. The core of our economy is consumer spending, it’s the gas the fuels our gigantic economy. Consumer spending may be under some pressure, but its not declining or trending downwards so much to cause worry. Consumers are still spending, and that helps keep the economy going. Yeah we bitch and moan about Big Macs, gas prices, cost of air fare, and all that, but we still buy shit and spend money.

It’s this spending that’s keeping the job market strong.

In the first quarter of 2024, there were 1.4 job vacancies for every unemployed worker, and the unemployment rate was below 4%. Now that’s a strong job market which is leading to wage growth. Wages increased last quarter at rates much higher than what the FED wants with its 2% inflation target. So, you can see, the case that the economy is stronger than the headline GDP numbers say.

How can financial conditions be so chill, consumer spending so strong and the labor market so strong when the federal funds rate has been above 5% for the past 12 months, coming from zero less than 2 years before?

If you dive deep into the data, it’s not that confusing actually….

The Fed began raising rates 25 months ago. In 2021, the economy was adding around 600,000 net new jobs each month, that fell to 400,000 in 2022, and even further, to around 225,000, in 2023. Likewise, underlying inflation has fallen from around 5.5% in early 2022 to around 3% today.

But while a federal funds rate of 5.3% is sufficient to cool the economy, it is probably (IMHO) not high enough to cool prices down. We all know the FED (Powell aka “the boss”) says they will have to keep interest rates higher for longer.

While current rates are not high enough (not restrictive enough) to push inflation down back to the Fed’s target, but they may be too high and “create cracks” in the economy. The soft landing/goldilocks buzz is based on not having these “cracks” happen. Credit-card delinquencies for low-income borrowers are elevated and rising, and annual growth in core capital goods orders is near 0%.

So, there you can see, the economy hasn’t landed yet, the data in Q1 of this year, shows consumer is still spending at a rate that doesn’t show a weakening economy. So this is why the Fed has to keep rates like this for longer. God forbid, they hike rates but I don’t hear anything out there that could cause them to do that. It’s just that the consumer had been so strong in spending, the current high rates aren’t bringing that spending down quite as fast as the FED wants it.

As the most recent jobs report demonstrates, our economy added 272,000 jobs, beating the 188,000 estimate, while the unemployment rate ticks up from 3.9% to 4%. What this really means is that the economy is still strong, with good job growth, but the surprising factor is unemployment, albeit a small tick, moved up only 0.1% to 4%. And this latest report doesn’t help the with rate cuts, but rather higher for longer as inflation isn’t coming down enough for the FED to act sooner, rather than later in rate cuts.

The problem isn’t stagflation, the problem is that keeping rates this high for longer, may slow down spending, which in turn can quite quickly bring about job losses (C-R-A-C-K!). The worry is that the unemployment rate may start going up, and when job losses start happening, it can be very difficult to stop that train. Like a runaway train, you cut the brakes it starts moving, but to stop it, its gonna take much longer time (like a crack once it starts LOL). That’s more of a worry than this stagflation talk, in my opinion.

AND THAT’S A WRAP

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AlexisAndDean.