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He Then Offered, "I don't see the 'stag' or the 'flation'"

CAMS Weekly View from the Corner - Week ending 5/31/24


June 3, 2024


Within various editions over the previous couple of years we have, on occasion, mentioned a downstream potential for stagflation. 

 

When offered it was always a very brief snippet thrown in as a potential downstream conclusion within the multitude of topics covered.  To be clear we have never offered it as an outright expectation but rather as a potential issue with how the socioeconomic backdrop was unfolding.

 

Stagflation is an ugly economic landscape where price inflation is high and stubbornly entrenched while economic growth is stagnant.  In addition the labor market is weak as depicted by a high or rising unemployment rate. 

 

Are we in stagflation now?  No.  Are various economic landscapes converging that are hinting at stagflation?  Yes.  Does this mean we will, with certainty, devolve to a stagflation environment?  No. 

 

A significant part of our responsibility in guiding and managing assets is to stay abreast of the socioeconomic landscape both at a high level as well as drilled down to X detail.  In this process, while immersed in the details, questions surface constantly and naturally broaden out to a high level view when considering the various details.   

 

The questions that surface lead to framing up potential downstream socioeconomic storylines which are monitored for validity as time unfolds.  The key to this process is to be open minded to various potentials while not being attached to any one outcome as though it is a guarantee. 

 

Through the above lens is how and why we occasionally threw in a potential for downstream stagflation in light of how the many details were converging. 

 

The on-going concern is various details continue to converge toward a stagflation environment.  It is important to realize that any unfolding or potentially unfolding environment is a process

 

The kneejerk action is to look at this moment in time while aligning it with the definition of X economic environment and labeling it accordingly.  This is fine for a momentary assessment but offers little in terms of what may be coming down the timeline.

 

At the most recent Federal Reserve interest rate setting meeting Chairman Powell held the customary press conference.  The stagflation topic was touched upon during the Q&A of which we share below.

 

Claire Jones, Financial Times.  And the Q1 GDP print has led to some—some to start mentioning the term “stagflation” with respect to the U.S. economy. Do you or anyone else on the FOMC think this is now a risk?

 

CHAIR POWELL

But that would be—that would be our forecast. That wouldn’t be stagflation. That would still be to a very healthy level of growth. And, of course, with inflation, you know, our—we will return inflation to 2 percent, and that won’t be—so I don’t see the “stag” or the “flation,” actually. [Laughter]

(Transcript of Chair Powell’s Press Conference May 1, 2024 https://tinyurl.com/45hk7n37) 

 

For his part Chairman Powell offered with confidence that we are nowhere near stagflation while bringing laughter from the gathered press corp. as he emphasized no part of the word is present – not the “stag” or the “flation.”

 

For our part we do not share the Chairman’s confidence as we certainly do have and have had the “flation” while the “stag” is encroaching.  Again, we are not there now but the encroachment is offering increased levels of concern regardless of the Chairman’s confidence to the contrary.

 

The initial release for 1st quarter Gross Domestic Product (GDP) came in at a lower than expected growth rate of 1.6%. 

 

This past week the expected second estimate for the 1st quarter GDP was released which reflected a revision lower from the initial 1.6% down to 1.3%.  The lower revision resulted in large part from a downward revision to consumer spending.

 

Drilling down a bit into the everyday consumer/wage earner we have shared in previous editions how wage growth rates, when adjusted for price inflation, have been very weak during this price inflation era. 

 

Credit card usage has increased at an unsustainable rate during this timeframe offering they are being used to offset the lack of healthy inflation adjusted wages. 

 

This is not a thriving type of economic message from the masses – or said differently, there is some “stag” emanating from their collective storyline.

 

Interestingly on this subset topic, recently released delinquency rates on credit card payments are continuing to escalate higher as strain is building on this front.  This is a logical follow-on when debt usage growth rates run at unsustainable levels.

 

Retail Sales

 

With weaker consumer spending playing a notable role in the aforementioned downward revision of the already weak 1st quarter GDP it is timely to look at retail sales for some perspective.

 

When in non-inflationary times adjusting retail sales for price inflation is typically not a central focus. 

 

During inflationary eras, such as we have been in recent years, it becomes important to consistently adjust the cumulative sales levels for price inflation. 

 

This because the inflated prices give a false sense of how strong the retail sales backdrop actually is.  If price inflation is running 4-6-8% levels, as range examples, we could see a whopping growth rate of say 9% for retail sales and falsely conclude the consumer is bathing in excess wealth that they are moving into purchase decisions. 

 

When adjusting that “whopping” number for price inflation, in inflation eras, it can give a much more sobering view.  The more sobering view is applicable for broad retail sales in our current price inflation era.


The above chart dates back to January 2021 which was the general launch point of this price inflation era.  Each bar in the above chart represents the year-over-year growth rate of retails sales adjusted for price inflation using CPI as the inflation measure.

 

Our red rectangle highlights that as we have moved further along the timeline of this era “strong retail sales” data has looked quite weak when price increases are accounted for in the retail numbers.  The majority of the time since January 2021 has seen flat or negative retail sales growth rates when said growth rates are adjusted for the increase in prices.

 

Relative to this metric there is a lot of “stag” emanating from the above chart.

 

We thought it timely to address stagflation as a topic rather than offered as a passing thought such as in various editions in recent years.  More measures continue to converge toward such an environment which offers concern and increased monitoring.  

 

To be clear we are not there currently but we are concerned that a process is unfolding that will lead us into stagflation.  Let’s hope our concerns are misguided and the converging signs will move in opposite directions in coming weeks and months.


I wish you well…


Ken Reinhart


Director, Market Research & Portfolio Analysis

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