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Today's Market WrapUp 04.30.2008 Mon Tue Wed Thu Fri Puplava Archive
The advanced estimate from the Bureau of Economic Analysis showed Q1 real GDP coming in at a 0.60% annualized rate, slightly higher than the 0.58% annualized rate seen in Q4 2007. With real GDP still in expansionary territory, the U.S. economy has not entered an “official” recession, which is defined as two consecutive quarters of negative real GDP growth. Not so fast! Nominal GDP is adjusted by the GDP deflator to measure real GDP growth with the inflation component removed to measure the increase in economic output and not an increase in the level of prices. However, one must take a metric ton, not a grain of salt, when looking at the GDP deflator. The GDP deflator has been consistently below the stated inflation rate as measured by the headline CPI numbers, with a lower GDP deflator leading to a higher real GDP number. Call my a cynic but I can’t help but notice the CONVENIENT deviation between the headline CPI inflation rate and the GDP deflator during periods of economic weakness. Remember, a lower GDP deflator leads to a higher real GDP number. Well, it just so happens that the deviation between headline CPI and the GDP deflator often peaks during economic recessions so that the reported real GDP numbers are higher than what they would be if nominal GDP were to be deflated by the headline CPI. Currently, the spread between the year-over-year (YOY) percent change in headline CPI and the GDP deflator are at their highest levels since the recession that began in 1990. If nominal GDP were deflated by the headline CPI number we would have two consecutive quarters of negative real GDP growth, an OFFICIAL recession as is widely defined. Figure 1
Figure 2
We are currently unofficially in an officially defined recession using headline CPI, though real GDP growth would look even more dismal if one were to use the pre-Clinton era CPI, the CPI calculated before adjustments made under the Clinton administration. The pre-Clinton CPI inflation rate is currently growing at over 7% YOY and the CPI rate using the methodologies in place in 1980 shows inflation at nearly 12%. Figure 3
Figure 4
Harper’s Magazine had an excellent article written by Kevin Phillips highlighting all the governmental changes made to how the CPI is calculated in an article entitled, “Hard numbers: The economy is worse than you know.” (Image Source: Barry Rithotlz, The Big Picture)
Let me stipulate: The deception arose gradually, at no stage stemming from any concerted or cynical scheme. There was no grand conspiracy, just accumulating opportunisms. The political blame for the slow, piecemeal distortion is bipartisan — both Democratic and Republican administrations had a hand in the abetting of political dishonesty, reckless debt and a casino-like financial sector. To see how, we must revisit 40 years of economic and statistical dissembling. How Inflation is KILLING the Blue-Collar Worker The methodology changes to how the CPI is calculated have not only masked the true level of inflation but also the deteriorating prosperity level for the lower end wage earner with the decline in the purchasing power of the dollar. No longer can the average American family live on a single income alone due to the severe purchasing power loss of the dollar. The decline in the dollar has led to the necessity of the dual-income family with the male workforce making up a smaller percentage of the total workforce as woman enter the workforce to compensate for rising prices. Figure 5
I’d like to insert a quote below from Jens O. Parsson’s book, “Dying of Money: Lessons of the Great German & American Inflations.” “Everyone loves an early inflation. The effects at the beginning of inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays. That is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the latter effects, but the latter effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits (emphasis added), and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of all traditional remedies. Everyone pays and no one benefits. That is the full cycle of every inflation.” Of the inflationary effects highlighted above, I’d like to hone in on faltering prosperity, in particular, the plight of the blue-collar and minimum wage worker. Those least able to benefit from inflation are those whose income levels leave them with few discretionary dollars to compensate with higher goods inflation and the ability to take advantage of asset inflation. Those who had little in discretionary income after paying for essential items were not able to take part in the massive run up in the stock market in the 1990s. Moreover, they missed the opportunity to see their homes double, triple, and even quadruple in price over the last 15 years as they were predominantly renters, though their rents certainly increased! Perhaps the ultimate decline in prosperity since the start of this decade is for the minimum wage earner whose income has remained flat despite a sharp rise in the price level of goods, though this wasn’t always the case. For example, in the late 1950s to early 1980s the rate of change in the federal minimum wage was advancing at a faster pace than the inflation rate as measured by the CPI, causing severe wage inflation in the 1970s. However, this is no longer the case as the minimum wage has remained stagnant despite rising price levels, leading to the greatest growth gap between the two in over the last 60 years. This is seen below with both series normalized to 100 in 1950, showing the growth in both series over time relative to their levels in 1950. Figure 6
The disparity between the growth of the consumer price level and the minimum wage this decade is leading to a major decline in the level of prosperity for minimum wage earners who are being destroyed by higher food and energy prices to levels beyond even the stagflation period of the 1970s. Never before has the minimum wage earner had to work so long just to pay for one simple gallon of gasoline. For example, it now takes 38 minutes just to pay for one gallon of regular gasoline at the federal minimum wage rate. This is 50% longer than what the minimum wage earner had to work at the height of the energy crisis in 1981 when it took 25 minutes to be able to afford one gallon of gas. Moreover, the current hourly requirement is more than 240% higher than the 11 minutes needed back in 1999, a sharp deterioration in prosperity. Figure 7
Not only has the minimum wage earner been crushed by rising food and energy prices, but they have also been greatly hurt by the home asset inflation of this decade. Not only were home prices inflated, but so too were rental rates. The YOY rental inflation rate jumped to over 15% in the middle of 2002 and nearly 18% in the first quarter of 2006 after the housing burst led to more rental demand. Figure 8
What has been even more troubling than the inflation rental rate is how damaging it has been on the minimum wage earner who now has to work over 130 hours just to cover the median monthly rent. This corresponds to 83% of their total income using four forty-hour work weeks per month. After covering the costs for rent, energy, and food, how much is left for anything else? These people are just barely surviving! Figure 9
Figure 10
With such a dire plight facing lower-end wage earners, it is no wonder retail sales are starting to give as the average consumer buckles under spiraling costs and a decline in the purchasing power of the dollar. As conditions worsen consumers search for bargains as a way to cut costs and squeeze every last penny out of the dollars they earn. For this reason the YOY sales rate for Wal-Mart rises relative to the overall retail sales rate, which coincides with unemployment insurance claims. Figure 11
Clearly the economic picture has deteriorated for the average American Consumer. Anyone claiming that the U.S. is currently not in a recession is in pure denial as we are already unofficially in an official recession. The announcement of an official recession is irrelevant at this point as the deteriorating economy will make it abundantly clear to all, regardless of what inflation measure is used to deflate nominal GDP. The consumer is under severe stress and a plummeting labor market will only weigh further on consumption as retail sales are strongly correlated with changes in employment. As the picture continues to darken expect more calls on Washington to come to the rescue despite the current “stimulus” package. In fact, we might have more checks coming to us from the government before the economy turns around. Whatever the solution, history has shown that expansion in the monetary supply IS NOT the solution as it only leads to a temporary fix at the expense of long term prosperity, with the lower end wage earners paying the steepest price. Today’s Markets At the close, the S&P 500 ended with a loss of 5.35 points to finish at 1385.59, with the DJIA ending lower by 11.81 to close at 12,820.13. On the NASDAQ, prices also moved lower for a loss of 13.30 points finishing at 2412.80, while the 10 Year Bond moved lower on the yield, with yields edging down by 6.6 basis points to finish at 3.759%. Chris Puplava Copyright © 2008 All rights reserved.
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