- by New Deal democrat
Forecasting has always been hard, and moreso since the supply chain issues of 2021-22 made reading the interest rate signals from the long leading indicators muddled. But at least the short leading indicators were intact.
But now we have the additional wrench in the works in the form of a mafia-style blowout being the operative behavior from the US Administration. If sowing chaos were a winning economic move, banana republics everywhere would be wealthy. There’s a good reason why they’re not, and that’s because chaos and corruption make it impossible for producers to foresee the results of their economic actions.
I see no reason to disagree with the idea that the net result of T—-p’s chaotic imposition of tariffs, plus the $Trillions in deficits that will be run up in short order by the recent tax and spending bill will ignite stagflation - although we can’t see the finer details yet.
But are there a few shadows on the wall that are becoming evident from last week’s consumer and producer inflation reports?
To start, as I wrote last week, both housing spending and motor vehicle purchases have declined in recent months:
The longer trend in real spending on motor vehicles has been flat since the turn of the year.
A similar dynamic turns up when we compare real spending on durable goods vs. nondurable goods:
The former have trended sideways since last December, while the latter have continued to increase. This is a typical historical progression a year or so before recessions.
Let’s turn to the inflation reports now.
From the end of World War 2 until the turn of the Millennium, a YoY% increase in the producer prices for finished goods higher than consumer price increases was a realizable sign of an oncoming recession, the only significant exception being the deep slowdown of 1966:
This was the era dominated by the goods-producing sector of the economy. If producers could not pass on their increased costs to consumers, they would have to cut production and/or employment, which had the effect of causing a recession.
That hasn’t been the case since the beginning of the “China shock” at the turn of the Millenium:
Producer goods cost increases in excess of consumer price increases have been a nearly constraint feature during expansions for most of the past 25 years, although typically real GDP YoY (black) turned down several quarters after the surge in producer goods prices. Note that at present, even with the poor PPI report for last month, on a YoY basis consumer prices have still increased more.
This is likely partly due to the adoption of “just in time” inventory management, which meant that there were less inventory overhangs that needed to be cleared that in the past, and also partly due to the relative fading of the goods producing sector vs. services in the US economy.
But what of the PPI for services? We only have about 15 years of data, and few trends are evident:
There is some slight evidence that the PPI for services *may* slightly lead the CPI, and also some slight evidence from 2016, 2019, and 2021 that when PPI for services has increased more than CPI, real GDP has slowed down within a quarter or two.
If PPI continues to rise vs. CPI, I would expect to see a further slowdown, possibly showing up in the services sector more than during expansions in the past.
