The recession is here. Will stagflation follow?

With a horrendous Q2 GDP figure released on Thursday, the US is officially in recession. The path to a soft landing for the US economy is practically closed. The US economy contracted 0.9% in the second quarter, on top of a 1.6% contraction in the first quarter of 2022. The effects of disruptive pandemic policies such as lockdowns, in addition to fiscal, monetary and regulatory policies, are ideologically driven, not grounded. economic principles are bearing their ugly results.

Inflation continues to rise, reaching levels not seen in two generations. BUT Census Bureau The survey, conducted between June 29 and July 11, shows that 48 million U.S. consumers are having a “somewhat difficult” time with household spending, 43 million are reporting a “very difficult” time, and 58 million are having a “somewhat difficult” time.[y]make ends meet. Not surprisingly, Walmart, whose entire business is based on offering retail essentials at rock-bottom prices, announced a profit cut earlier this week. When rising prices force consumers to adjust their consumption patterns so drastically that the business suffers Walmart, the outlook is very bleak.

The news comes in relation to recent releases of the University of Michigan consumer surveys, in which composite indices, current economic conditions and consumer expectations sub-indices are in line with previous recessions. The third of these, consumer expectations, is at its lowest level since May 1980. The consumer sentiment indicator, hit hard by pandemic mitigation measures, has changed inversely with the rise in the general price level since March 2021.

CPI y/y compared to UMich Consumer Sentiment Index, 5 years (2017 – 2022)

(Source: Bloomberg Finance, L.P.)

Despite persistent attempts to link the rise in the general price level to Putin’s invasion of Ukraine in February 2022, it is clear that prices generally began to rise in early 2021. The chart below shows the five-year trend of gasoline (white), retail electricity ( yellow), meat, poultry and fish (purple), used cars and trucks (turquoise), and veterinary services (orange). The trend in these disparate groups and services clearly shows that the overall price level began to rise over a year ago, at the beginning of 2021. Keep in mind when looking at this chart that the Fed was still calling inflation “temporary” until November 2021.

Average price of gasoline in the US; CPI for meat, poultry and fish; CPI retail electricity; CPI for used cars and trucks; Veterinary services CPI, 5 years (2017–present)

(Source: Bloomberg Finance, L.P.)

We’ve had two consecutive quarters of negative GDP growth, but what’s going on inside? What about industrial production? Mining has been strong. But many sectors stubbornly remain below pre-pandemic levels, and the post-pandemic recovery appears to have stalled. Production has fallen for two consecutive months, and vehicle parts and vehicle assembly are below 2020 levels. Currently, industrial production has been declining for two consecutive months, with few clear prospects for improvement. Rising costs create resistance here, just as they do in consumption—yes, inflation hurts both producers and consumers.

Also contributing to the growing slowdown are delivery problems, which have been making headlines for nearly a year now. Conditions have improved, but remain high, as shown by the shipping prices for a 40-foot container on these reference Pacific (white) and Atlantic (orange) shipping routes.

WCI Estimated Freight Rates per 40ft Crate, Shanghai to Los Angeles and Rotterdam to New York, 5 years (2017-present)

(Source: Bloomberg Finance, L.P.)

For more than a year, employment figures have been a mysterious omen, but now they are clearing up. By historical standards, initial jobless claims remain low, with the U.S. unemployment rate at 3.6 percent. But over the past two months, labor markets have softened. Initial claims have been rising, recently hitting an eight-month high. At the same time, the number of open vacancies has decreased.

The U.S. workforce is now three million fewer than it was before the pandemic. The labor force participation rate is more than 1 percent lower than in January 2020. Pandemic mitigation policies have forced several million Americans into early retirement, and school closures have pushed women out of the labor market en masse, to levels not seen since the early 1970s. On top of that, increased unemployment benefits and federal stimulus checks boosted savings accounts by $4 trillion in two years. Nearly 70 percent of jobless claimants say they earn more than they do at work.

BLS vacancies compared to Total U.S. Unemployed, 5 years (2017–present)

(Source: Bloomberg Finance, L.P.)

The Federal Reserve was supposed to start raising rates in 2021 when prices started to rise. Instead, he seemed to be busy doing fieldwork and reporting on the possibilities of applying monetary policy in the service of climate change, equity, and other knick-knacks. So America is in recession. Currently a slight decline, but a decline nonetheless.

In an interview with Bloomberg Radio earlier this year, I was asked what I thought about the likelihood of stagflation. I commented then (January 2022) that although “[in]”inflation” part of the ugliest wallet in the economy has clearly taken place, “deer[nation]element was not there. Six months later, an ugly picture is in the spotlight: rising inflation, slowing growth, and a labor market that looks set to deteriorate. Given the backlog associated with employment, it is no longer excluded that there may be stagflation ahead.

Peter S. Earl

Peter S. Earl

Peter S. Earl is an economist and writer who joined AIER in 2018. Prior to that, he spent over 20 years as a trader and analyst for a number of securities firms and hedge funds in the New York metropolitan area, and also ran a gambling business. and cryptocurrency consulting.

His research focuses on financial markets, cryptocurrencies, monetary policy issues, game economics, and economic measurement issues. He has been quoted by the Wall Street Journal, Bloomberg, Reuters, CNBC, Grant’s Interest Rate Observer, NPR, and many other media and publications.

Pete holds an M.A. in Applied Economics from American University, an M.B.A. (Finance), and a B.A. in Engineering from the US Military Academy at West Point. Follow him on Twitter.

Selected publications

“General Institutional Considerations on Blockchain and New Applications”, co-written with David M. Waugh in The Emerald Guide to Crypto Assets: Investment Opportunities and Challenges (expected), edited by Baker, Benedetti, Nickbakht and Smith (2022)

“Operation Warp Speed” co-written with Edvar Escalante in Pandemics and freedom (pending), edited by Raymond J. March and Ryan M. Yonk (2022)

“Virtual Weimar: Hyperinflation in Diablo III” in The Invisible Hand in Virtual Worlds: The Economic Order of Video Gamesedited by Matthew McCaffrey (2021)

“The Fickle Science of Locks” Co-authored with Philip W. Magness, Wall Street Journal (December 2021)

“How does a well-functioning gold standard work?” Co-authored with William J. Luther, SSRN (November 2021)

“Populist Prophets, Public Prophets: Pied Piper Lucre, Then and Now” in financial history (summer 2021)

“Boston’s Forgotten Lockdowns” in American conservative (November 2020)

“Private Governance and the Rules of the Flat World” in Creighton Interdisciplinary Leadership Journal (June 2019)

“The idea of ​​a ‘Federal Job Guarantee’ is expensive, misguided, and growing popular with Democrats” in Investor’s Daily Business Journal (December 2018)

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