Economics & Research Blog
Stagflation is Here: It Will Be Nasty; and Some Random Rants
By Dr. Joe Webb
Published: July 5, 2008
While we're not technically in a recession, and most likely won't be. Instead, we're in a situation that is worse and can drag out for months if not years. The ISM reports, manufacturing and non-manufacturing alike, showed flat business with a decline in employment, and yet higher rises in the prices of materials. The unemployment rate remained at 5.5%, still at full employment, but the wages being paid workers are not rising fast enough to pay for increased costs of everyday goods.
Remember, stagflation is high inflation with slow growth. That growth is so slow it's painful. Watching grass grow is more exciting. Fixing stagflation requires Volcker-like determination, which is unlikely to come from the present Fed leadership. Look for a still weaker US dollar, and start working $200 and $250 oil into your planning scenarios. If you have not already. Last week, the European Central Bank raised rates: they have the right idea. In the meantime, we're importing more inflation every day, unnecessarily.
One would think that the economy would be booming with the stimulus of easy money. What's happened instead is that fixed income investments now pay a below-inflation yield, meaning that saving money ensures that one loses money. If you have a healthy business with a legitimate rock-solid positive outlook, now is a good time to borrow money and pay it back with cheaper dollars, sticking the banks with the inflation risk. Not many businesses, or consumers, are in that kind of situation, but it is a scenario worth considering if all of the aspects are aligned correctly. As for me, I hate debt and have never really used it, so it's easy for me to offer borrowing advice to others.
While everyone is focused on oil prices, these are still not record highs, as we have discussed at various times. It's the adjustment to the most recent prices that is a real problem. When energy was less expensive, other goods and services filled in that spending; now that other spending is being nudged or forced out. Starbucks is the latest "victim," but it could be that the fad of Starbucks was just waiting to a reason to end. People have to go to work, so they will spend on energy, and high-end Starbucks products become a treat instead of a necessity. While Starbucks is closing 600 poor-performing outlets, it's still important to note that they are opening 200 new ones.
As an aside, the IRS finally raised its deduction for business mileage after July 1 from $0.505 to $0.585. That's only a 15% increase; maybe their accountants need to get out from behind their desks and pump some gas a little more often.
There is one thing that I still find rather amusing, and that's the oft-heard comment that "oil is important because energy costs are in everything." Of course energy costs are in everything. But so are labor, taxes, real estate/space, finance, legal compliance, and numerous other categories. Just like there is nothing, not even intellectual property, that cannot be created without energy, nor can any product be created without labor, space, equipment, and numerous other categories. Just think of what is required to produce intellectual property today: computers, communications, office or other space, labor, and other categories.
This chart, for example, shows that in 2008, the average American family worked 64 days to pay for food and transportation, while it worked 113 days to pay its federal and state taxes. I suspect that the taxes on energy were not even included in the transportation calculation. Housing and household operations was 60 days. Taxes, of course, are in every product that we buy. In terms of GDP, energy is about 7%, health spending is 14%, and taxes are about 19% on the Federal level. Taxes and health spending are in every price that we pay for goods, and energy is still a smaller component than they are. It is impossible to find a general category of economic production that is not in any product's price. Energy is in everything, but so is everything else. Most of the energy cost in economic history has been as a replacement of labor cost, such as use of equipment rather than muscle and sweat. Better to use a jackhammer than a sledgehammer. Using a sledgehammer would save energy, but the worker's productivity and the worker's wage would decrease significantly. What higher energy costs do is eliminate the tasks where there is no economic return to their use or where a better return can be had elsewhere.
During periods of stagflation, when one sector such as energy is rising in price significantly, the common approach is to look at other areas for efficiency to counterbalance them. In a stagflation situation, those other areas are generally rising in prices as well, so it requires a significant step back and reorganization to permanently adjust. That is, rapid energy cost increases outweigh the benefits of simple alternatives. The printing industry still has untapped benefits of non-production information systems implementation to achieve, and these benefits are hard to create without investment and retructuring of jobs. Generally, the backroom processes and management information systems are still inefficient in printing companies in relation to the attention the shop floor gets.
Those efficiencies will be sorely needed if we have more months like May. As our monthly report details, commercial printing shipments were down -3.5% compared to May 2007. That's in current dollars, not even adjusting for inflation. I instant messaged with an industry publisher that the numbers were gruesome enough without adjusting for inflation. He suggested I just leave them the way they are and not make them worse. I couldn't help myself: it was -7.4% adjusting for inflation. We're watching the employment of the creative sectors carefully for signs of what this Fall's printing shipments will be like. We'll know more this week. Employment in advertising and design looked like it was starting to break down last month, which is not a good sign. This month's report audio commentary reviewed all of our forecasts. We also updated our GDP model of print volume: the statistical relationship is relatively weak, and it's still negative: as GDP rises, print declines.
I've often written how the media report about the economy in terms of what happens in their business. Basically, we're in a depression because the newspaper and big publishing businesses are doing rather poorly. The same folks were "new economy" cheerleaders in the late 1990s as their ad pages swelled with internet start-up advertising. This opinion piece sums it up quite well. When my neighbor loses a job it's a recession; when I lose my job, it's a depression.
In last week's column, I highlighted our Industry Snapshot on the Economics & Research page. We've since added more data categories. Be sure to check it often.