The economy is supposedly partying like its 1999. Why it doesn't feel that way.
There was an interesting article in the Washington Post lamenting the perception of the economy and how to address it. It references a Tik Tok video that’s been going around which shows someone complaining about inflation after buying a $16 value meal at McDonalds. Author / Hall Monitor Taylor Lorenz points out this was only one order at one McDonalds, and if you look at the price of Big Macs prior to the inflationary liftoff, the meme is misleading. Arguing with memes / Tik Toks is more or less a fool’s errand, and the Administration can’t really have the White House Office of Digital Strategy trot out a Vox writer to lecture the Tik Tok Generation on Seasonally Adjusted Big Mac pricing.
The Administration is flummoxed on the messaging issue, however. Treasury Secretary Janet L. Yellen said on CNBC, “I’m aware of that, and I think it’s our job to explain to Americans what President Biden has done to improve the economy.” It is one of the things negatively affecting Biden’s polling. Regardless of the messaging, the economic numbers on GDP and jobs appear to be strong, but people are generally unhappy. How come?
My guess is that this is partially explained by general misconceptions about what inflation is. I think a lot of people conflate “inflation returning to normal” with “prices returning to normal.” If inflation falls, that $16 McDonalds meal isn’t going back to $12. It just means that next year it might be $16.75 as opposed to $17. The price increases of the past two years are baked in the cake and not going anywhere.
Another possibility is that the 4.9% GDP growth number is a really just one good economic number out of bunch of meh ones. GDP is a barometer of economic growth, however it doesn’t capture everything. The 2.1% growth rate in Q2 is more or less the long-term trend for GDP growth, and Q3 is associated with outstanding economies like the late 1990s. We did have a high GDP print coming off of lockdown, but that should be have a big asterisk next to it.
Regardless, the 4.9% spike wasn’t coming off of a recession, and given the economic backdrop feels like an outlier. Here is the growth of the economy over the last few quarters:
That chart would indicate things are going swimmingly. But you can’t look at that number in a vacuum. Yes, the labor market seems tight, but that depends on the sector. The labor market is tight for skilled labor, and leisure / hospitality. It isn’t tight for tech workers, bankers, or professionals. GDP and jobs capture a big part of the economy but not all of it.
One alternative to the GDP / Jobs approach is the Chicago Fed National Activity Index. The CFNAI is a meta-index of some 85 different economic indicators which gauges whether the economy is growing above or below trend, with an index to measure the magnitude. It looks at consumer spending and the jobs report, along with things like industrial production, ISM surveys, housing starts, and inventory levels. It is a meta-index that is meant to capture the overall economy. It basically asks the question “Is the economy growing on historical trends?
The long-term historical trend for GDP growth has generally been between 2% and 2.5%, however according to the latest Fed projections, it sees long-term GDP growth between 1.7% and 2%.
So, let’s take a look at the latest CFNAI numbers over the past 6 months.
The July, August and September numbers (+0.18, -0.15, and -.02) sum up to just about 0, which means the US economy was growing almost precisely on trend, which is around 2%. This comports with the ISM data, which shows manufacturing in a mild contraction and the service economy in a mild expansion. Note what October 23 looks like - big slowdown. Which is exactly what you would expect to see after 525 basis points in tightening.
So what happened in Q3? Basically, personal consumption rose 1% compared to the second, and if you annualize that number, you are going to get a big GDP growth number, given that consumption accounts for about 70% of the economy.
That said, if you look at the results of some of the big retailers who reported earnings last week, it doesn’t give much indication that the economy is growing at a rip-roaring pace. For example, Wal Mart reported comp sales rose 5% and but revenues were flat on a sequential basis. Home Depot reported comparable sales were down 3.1% on a year-over-year basis and revenues fell 12% on a quarterly basis. Macy’s reported comps down 7% and a QOQ revenue decline of 4.8%. Note that it isn’t all gloom and doom, experiential spending is up, however there are seasonality issues there, along with the rebound from COVID which is making the YOY comparisons difficult as well. The consumer remains resilient, however spending is moving from discretionary goods to non-discretionary goods and cracks in this consumption story are beginning to appear.
The other thing to keep in mind is that the consumer price index is not a cost-of-living index. The CPI may be declining if you strip out everything people actually buy but that doesn’t reflect reality: Dr. Cowbell sums it up succinctly:
The thing is shelter and auto are big expenses for people, and the average car payment is now $725 and the average rent is $1,372. Rising prices combined with rising rates are doing a number on people. Credit card delinquencies are increasing which is a leading indicator of a stretched consumer. The 4.9% Q3 GDP number might end up getting revised downward but even if it doesn’t, there doesn’t appear to be any evidence of similar growth happening now. According to the latest PMI, companies are shedding jobs. The retailer conference calls were generally negative to neutral on the consumer. Q3 is looking like the last hurrah of an economy about to succumb to 525 basis points in tightening.