Inflation Concerns Take Center Stage, but Stagflation Comparisons Just Wrong
Forbes released their latest Forbes Advisor-Ipsos Consumer Confidence survey this past week. Nearly two thirds of the roughly 1,000 respondents expect the rate of inflation to increase, with 31% expecting it to stay the same. Roughly 50% of survey respondents anticipate that their monthly bills and regular expenses will increase, while 45% think they will remain about the same. But only 23% of respondents expect their wages to increase, while two thirds believe their wages will remain the same.
The Forbes consumer confidence survey is just one of a few often quoted in the media. The Conference Board’s Consumer Confidence Index and the University of Michigan’s Index of Consumer Sentiment are the two that generally get cited and relied upon by economists the most.
The University of Michigan’s final January numbers will be out on the 28th of this month, but they have released preliminary data from their latest Index of Consumer Sentiment. They’re showing a decline to 68.8 from December’s metric of 70.6. Keep in mind that the index reading for January 2021 stood at 79.0.
Meanwhile, the Conference Board will be releasing their new data later this week. This metric had been on the upswing the last two months. In December, their Consumer Confidence Index climbed to 115.8 (from an upwardly revised November reading of 111.9). However, it will almost certainly move downward as these other polling metrics have.
The last week of economic news certainly holds clues. The most obvious driver of this wave of gloom has been the latest data on inflation—the consumer price index hit 7.0% for December—its highest level since the stagflation economy of 1982. And, indeed, suddenly the market is awash in stories about stagflation concerns. Suddenly CNN is running with, “If Prices Keep Rising, a Nightmare Scenario for US Economy is a Real Possibility.” That nightmare scenario, stagflation, is loosely defined as inflation taking place while the greater economy is in contraction mode. Of course, the economic stagnation part of the argument is the part that many of the latest gloomy analyses seem to be light on.
Of course, if you read the most recent headlines about December retail sales, you would assume that the sector is beginning to slump. After all, “Retail sales dropped 1.9% in December as higher prices caused consumers to curb spending,” is a fairly dismal headline. There is only one problem here. On an annual basis, retail sales for December were up a whopping 19.3%. The -1.9% number was monthly change. It’s not that this isn’t an important number, but alone and out-of-context, it certainly doesn’t tell the bigger story. For example, in this case, the headline even helped to drive the analysis. No doubt some consumers in this high inflation environment did curb spending. But what has been left out of this analysis is that an even stronger case could be made that the reason for a slight downtick was that consumers got an early start on holiday shopping—October and November numbers were through the roof. The reality is that Omicron, inflation and supply chain issues concerns, as well as an early spending spree by consumers, combined to notch December sales down slightly from November levels… but what gets lost is that even with this occurring… the numbers are gangbusters. For the previous 20 years before the pandemic, the US averaged annual retail sales growth of 3.9%. These weren’t just up 17.0% over 2020 totals, these were up 19.7% over 2019 tallies (our last “normal year”).
A mild slowing of activity from November to December is a concern, but 17.0% annual growth certainly doesn’t paint a picture of a contracting economy. Of course, the other big problem that would be playing out if we really were in a stagflation economy would be the issue of job growth.
Though the latest job numbers indicated a drop to 3.9% unemployment; they also suggested only 199,000 jobs were created in December 2021. Again, prior to the wild employment swings of the pandemic, a +200K job month was generally considered pretty good—not exceptional, but certainly positive. However, measured against the rest of 2021, these are the weakest numbers of the year.
On that point alone, taken into context, these should not be “sky is falling” numbers. Remember, the unemployment rate and new jobs numbers each month come from two distinct surveys that the Bureau of Labor Statistics does. The unemployment rate comes from their monthly Current Population Survey that samples about 60,000 households. Likewise, the monthly jobs numbers come from a scientific sampling of thousands of surveys done with employers. They involve large sample sizes but are not perfect. Which is why the initial monthly metrics are referred to as preliminary numbers upon their release and are typically revised at least twice thereafter. Sometimes those revisions can end up being significant. For example, this month’s survey indicated a greater reduction in unemployment than 199,000 new jobs single-handedly would have driven. Meanwhile, record levels of employee resignations in November would seem to suggest that workers were quitting their jobs to land in new positions that would have been greater than the 199,000 reported. Lastly, private payroll company ADP releases their own monthly statistics—their job growth for December was four times the official Labor Department tally at over 800,000 new positions.
What’s it all mean? It means December tallies were likely artificially low and January job numbers will probably bridge much of the gap. The Labor Department and ADP numbers tend to track well together over time, though disparities this great have been relatively few. Regardless, we expect the BLS January numbers will be quite robust. Regardless, a month with 200,000 jobs created historically was a month of decent job creation—it is in the monthly comparisons where we lose our compass.
Of course, one other measurement we could look at would be wage growth. In a stagflation environment, job growth would be flat or negative as would wages. Wage growth is occurring (up 4.5% annually for December 2021). The last time we saw wage growth of at least 4.5% was in March 2002. The only problem is that even this level of aggressive wage growth is not currently keeping pace with inflation… which means in real dollars, most of us are going backwards.
Obviously, the point is this—inflation remains a real concern. Inflation is an immensely powerful force; enough so that US consumer confidence was lower in November 2021 (due to inflation) than it was in May 2020 (when the world was still potentially facing the threat of a global depression due to the pandemic). The good news is it didn’t substantially impact consumer behavior during the holiday season—with annual growth hitting its highest level in decades. But it would be foolish to anticipate such a contrast between consumer confidence and actual consumer spending behavior would last for long. The same holds true for business confidence and sentiment. Eventually poor sentiment translates into reduced investment, hiring and growth. Eventually.
Which is why I found it interesting that this week I saw far more coverage on stories speculating stagflation than perhaps the one story most pertinent to this question—this one from the economists at Goldman Sachs: Federal Reserve will Increase interest Rates Ten Times Before 2025. Their take is that the Fed will make their first move by summer. I suspect that if inflation creeps up further—especially if the job numbers remain strong—that they may act even sooner.
See you next week!
Garrick
