- by New Deal democrat
Today I want to step back from the daily data and give you my Big Picture overview of the economy, particularly because Friday’s inflation report has materially changed an important component.
To begin with, as I have been saying off and on for months, the economy has been essentially flat, and may have tipped into a “mini-recession” during the government shutdown last autumn. Here are important components of real income (light and dark blue) and real spending (red and orange) for the past two years (note: all graphs below are normed to 100 as of last August with the exception of YoY graphs):
All of these were essentially flat for the last 5 months of 2025, and all are as of their most current reading below last August’s.
In addition to real income less government transfers (blue), nonfarm payrolls (red) and industrial production less utilities (purple) are also close to flat since last August. Indeed, payrolls have been flat for almost a full year:
In fact, the only two metrics that the NBER uses to declare recessions which are materially higher than last August are real manufacturing and trade sales (gold) and total industrial production including utilities (blue):
In the above graph I also show capital goods new orders (red), which have been rising sharply more or less consistently since late 2024. Both capital goods orders and utility production are likely closely tied to the construction of AI data centers, which are broken out specifically in the graph below from Wolf Street:
Downstream of that construction boom has (until the Iran war) been a boom in the stock market (blue, left scale) and strong personal spending on services (red, right scale):
At least until the Iran war this spending has more than overcome the lackluster growth in jobs, income, other manufacturing production, and spending on goods.
But as indicated above, Friday’s inflation report has darkened the picture. Let me show that in a number of YoY graphs.
First, here are average nonsupervisory hourly earnings (blue) vs. inflation (red). The first two graphs below show the pre-pandemic historical view:
Except for the 1980s and 1990s, the onset of recessions was associated with a sharp increase in inflation that surpassed wage growth. In the 1980s and 1990s, as wages were depressed by the tsunami of Boomers and women entering the workforce (which meant that two-earner household income nevertheless increased) a relative sharp further increase in inflation vs. wages typically was a feature of the onset of recessions.
The post-pandemic record shows a similar surge in inflation in 2022, but government stimulus checks and the rapid disinflation of late 2022 kept the economy from falling into recession. March’s spike in inflation has brought us within 0.1% of real wages turning down YoY again - with no government stimulus nor, at this point, any likely prospect of rapid disinflation:
Finally, here is aggregate nonsupervisory payrolls (dark blue) vs. inflation (red). As above, the first two graphs show the pre-pandemic historical view:
In absolute terms, as I have indicated many times, real aggregate nonsupervisory payrolls have always peaked several months before the onset of recessions. On a YoY basis, in 5 of the last 7 recessions, YoY inflation has topped YoY aggregate payrolls several months into the recession, while on 2 occasions the corssover happened before the onset of the recession.
Now here is the post-pandemic view:
Even in 2022, aggregate payrolls increased more than inflation, with the closest approach being a 1.1% difference in December 2022. As of last Friday, a new low of 0.8% was made. The crossover point could easily happen within the next several months.
To put the capstone on this analysis, the surge in consumer inflation could be the proverbial straw that finally breaks the camel’s back, taking an economy that was just barely expanding and putting it into contraction.