Menacing economic storm clouds looming on the horizon threaten America's growth. Wages are rising at the highest peak in decades. Prices for goods and services are spiking. As a result, inflation is marching upward, triggering a risk of a wage-price spiral that will cripple the economy.
During the double-digit inflation of the 1970's, wages and prices chased each other. Spiraling inflation eroded the standard of living for workers. Employees demanded higher wages to offset inflation's erosion of their purchasing power. Businesses, in turn, jacked up prices to cover the increased wages.
This never ending cycle of wage-price pressure fueled a 12% inflation rate in 1974. Once started, wage-price spirals are like trying to brake a speeding locomotive. The inflation rate zoomed to 14.5% in 1980. Companies' profits slumped and consumer spending plunged, stalling economic growth.
After years of dithering, the Federal Reserve finally acted in 1979 when Paul Vocker took the reins. He ended the days of easy money by rapidly hiking interest rates. The prime lending rate kept climbing until it hit 21%. Volcker's tough medicine stabilized prices, but triggered two recessions.
There are eerie similarities between that inflationary crisis and today's economic environment. Most economists and stock market promoters shun any comparison because they fear the stock market will crater. They have a boatload of reasons why this period of swollen inflation will be different.
As the inflationary storms brewed last year, economists, stock analysts and the Federal Reserve Bank dismissed surging prices as a transitory hiccup. They predicted the supply side would soon catch up with the post-pandemic spending spree, restoring price equilibrium. They were appallingly wrong.
Despite warnings from a few bank CEO's, the Fed stubbornly dug in its heels on increasing interest rates to temper inflation. When the Fed finally changed direction, it was too late. Fed Chairman Jerome Powell has signaled three interest rate hikes this year. The threat of a fourth is a real possibility.
The Fed's inaction is hard to fathom. The data has been streaming in from the Bureau of Labor Statistics (BLS), the Department of Commerce and the Federal Reserve's 12 district banks. (Note: Data used in this blog comes from those three sources.) The indicators were clear but Powell demurred.
Since last year, the economy has been on a treadmill of higher wages and higher prices. Private sector wages increased 4.1% in November the largest jump since September of 2001 when wages spiked 5%. Both figures are 12-month rolling averages. Fourth quarter gains were 4% as wages keep rising.
In 1974, wages skyrocketed 6%, contributing to a double-digit inflationary rate. The U.S. may soon hit that number because every day brings news of more companies hiking wages to attract workers and then hiking prices. Inflation in November hit 7% and forecasts are for higher rates ahead.
The top line inflation number doesn't tell the whole story. Food prices were up 5% in November. Energy costs escalated 29.3% on a 12-month rolling average. In the 1970's, runaway oil prices were one of the key drivers of inflation. Few will concede the connection today.
The Fed's key inflation gauge, Personal Consumption Expenditures Price Index or PCE Price Index, soared by 5.8% for the year. That topped the previous period's increase of 5.7%, becoming the fastest inflation since 1982. This is exactly what happened in the 1970's. Denial doesn't change facts.
Workers are hard to find, adding to wage pressure. Thousands either left their jobs or were furloughed or terminated in the pandemic. A large number have decided to remain on the sidelines. Others rejoined their firms, then left for higher paying jobs. The share of workers leaving their jobs has risen to 3%.
The labor participation rate--an estimate of the economy's workforce--stands at 61.9%, which is 1.5 percentage points lower than the level in February, 2020. It means there are less people working or actively looking for a job. There are currently nearly 11 million job openings in the U.S.
An estimated 10 million workers are missing, compared to the pre-pandemic numbers. President Biden points to the 3.9% unemployment rate as proof the job market is robust. However, that figure does not include millions of discouraged workers and those marginally attached to the workforce.
The wage-price spiral deniers point to the fourth-quarter 6.9% growth in the country's Gross Domestic Product, the broadest measure of the nation's production of goods and services, as proof of a healthy economy. However, most of the growth owed to businesses restocking depleted inventory.
That means the GDP uptick was not the result of increased consumer spending. Excluding the inventory effects, the nation's output grew at a puny 1.9% in the fourth quarter. That is a worrying sign for economic growth this year. It portends only modest gains in growth for this year.
All the data paints an ominous economic landscape. Inflation continues unabated. Wages are billowing to catch up in a job market that has more openings than qualified workers. Inflation and wages moving in tandem will feed the vicious inflationary cycle that will force the Fed to keep boosting interest rates.
Because the Fed sat on its hands for too long, the danger is an overcorrection. As the Fed tinkers with rates, the cost of borrowing, credit card debt, car financing, home mortgages and home equity loans spike. In the face of the onslaught, consumer spending will retreat, making a recession more likely.
The Fed is standing on a precarious precipice. With the mid-terms lurking, it may be difficult for the Fed to remain independent and do what's best for the long term, instead of caving to political pressure. If the Fed crawfishes on its announced rate hike schedule, inflation will get worse.
No comments:
Post a Comment