The Great Stagnation of 2011

Econophile's picture

I go away for a few days and come back to a slug of not encouraging economic news.

The really big news was related to industrial production and manufacturing which was either down or stagnant, depending on the index you look at.

The two reports that were negative were the Empire State Fed and the Philadelphia Fed manufacturing reports which both reported substantial drops in economic activity:

As you can see, Philadelphia dropped 7.7% (the first drop since September) and NY dropped 7.8% (the first drop since November). The weakness was in new orders and inventory accumulation, things that you don't want to see decline. Separately the inventory-to-sales ratio increased 0.8%, a small but negative indicator.

The index of industrial production as announced by the Fed was flat in May, up 0.1%, but the year-over-year trend was still declining:

It is true that all production is aimed at consumer consumption but looking at consumption alone is not as good an indicator of real organic economic growth as is the production side of the economy. The reason being that production usually leads consumption out of an economic slump, not the other way around. The Fed's and the Administration's attempts at monetary and fiscal stimulus haven't worked because of their misplaced emphasis on consumption. They don't examine the issue of why people aren't consuming. As readers of The Daily Capitalist know, the keys to new economic growth are savings, debt reduction, and the liquidation of malinvested projects.

People aren't going to spend until they feel they are economically secure and there aren't a lot of reasons right now for them to feel secure. And the data shows it.

Retail sales for May came out slightly negative (-0.2%), but that is a bit misleading. Here is the chart:

As you can see, the trend has been flat-to-negative since January, 2011. For several reasons economists like to strip out auto sales, a big ticket item that may skew the data. Doing that, ex. autos, retail sales were up 0.3%. Again the data is confusing because the ex. auto data still includes gasoline sales which were up 22.3% YoY. Gains were seen in health care, building materials, miscellaneous retailers, and non-store (Internet) retailers.

Then there is price inflation.

The PPI and CPI reports also came in last week. Starting at the producer level, the PPI increase moderated to a 0.2% gain (core, ex. energy and food, up 0.2%). But the year-over-year trend was still up 7.0% in May (ex. energy and food, up 2.1%). The PPI has been declining since January, 2011, but the rate of increase is still high:

On the consumer side, the May CPI also was up 0.2%, slightly less than in April, but still a strong upward trend as shown in this YoY chart (up 3.2% YoY):

Ex. energy and food, it was up 0.3% for the month, and 1.5% YoY. Apparel, shelter, new vehicles, and recreation were all up, but energy and gasoline were down along with airline fares, tobacco, and personal care. This price inflation may seem mild to the casual observer, but it is the trendline that is important.

Interestingly, someone revived the Misery Index, or at least I just discovered it. The Misery Index was created back in the 1970s and is described thusly:

It is simply the unemployment rate added to the inflation rate. It is assumed that both a higher rate of unemployment and a worsening of inflation both create economic and social costs for a country. A combination of rising inflation and more people out of work implies a deterioration in economic performance and a rise in the misery index.

The Index is now at 12.16. To put this in perspective, it was at its highest, 20.76 during the Carter Administration, and hasn't been this high since 1983 (it declined after Reagan was elected). Its lowest points were 3.53 during the Eisenhower Administration (1953) and again during the Clinton years, 6.05 in 1998.

This has resulted in a decline in consumer confidence. The Gallup Economic Confidence Index declined 9 points in the past two weeks (ending June 12):

The Reuters/Univ. of Michigan consumer sentiment poll reflected a similar decline.

I will leave you with one more bit of data, perhaps the most important, from the National Federation of Independent Business (NFIB) who regularly put out data from the member surveys. Their ??Small Business Optimism Index declined again, for the third straight month:

“Corporate profits may be at a record high, but businesses on Main Street are still scraping by,” said NFIB chief economist Bill Dunkelberg. ...


For the third month running, several key economic indicators continued their downward tumble. Job market indicators continued to deteriorate, anticipating very weak job creation and a higher unemployment rate. Capital spending plans and inventory investment plans all weakened and remain at recession levels. Inflation continues to rise, a notable business concern for owners who are raising their own prices at the fastest pace seen in years. And driving the economic uncertainty, one in four owners still report weak sales as their top business problem (followed by taxes and regulations and red tape, only 3 percent cite financing).

The most important thing among these data was the lack of capital spending:

Capital spending remains historically low in spite of very low interest rates and all sorts of expensing incentives. Fifty percent of firms reported making capital expenditures over the past six months, and the percent of owners planning capital outlays in the next 3 to 6 months fell 1 point to 20 percent, a recession level reading.

What does all this mean? It means that the foundry of job creation for one-half of the new jobs created in America, small businesses, are stalling out again because of all the factors discussed above. Also, I wouldn't expect a lot of job growth from the multinationals as not even a declining dollar can offset the cooling off of demand from money-stimulated countries like China, India, and Brazil.

It means that consumers aren't going to save our economy from stagnation. It means that stagnation will continue along with inflation. And it will be fun to watch all the naysayers who don't think you can have an economic slowdown and inflation at the same time.

It also means that my forecast of the likelihood of QE3 is still valid.

This article originally appeared in The Daily Capitalist.

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Mr. Lucky's picture
I grew up during Johnson, Nixon, Ford, and Carter.  What is coming will be a pin prick compared to those years.
bid the soldiers shoot's picture

A pin prick through your eye into your brain.

A loaf of bread, a jug of wine and thou beside me during the Ford years.

The wilderness is coming right up.

pavman's picture

I disagree with this article.  I'm economically secure, yet I'm cheap, so I'm not spending money because I don't want to.  Although, on occasion, I do buy dips and sell tops. Shhhhh.

Kayman's picture

America can't mimick Japan. Japan had savings.

Rome during Caligula maybe. Bread, circuses and debauchery.


QQQBall's picture

Also, Japan was stagnating during a glonal expansion.

Slap That Taco's picture

 Caligula also had his horse made a senator, and fought a war against the god Neptune, bringing a huge "fortune" of seashells back to Rome.



mayhem_korner's picture

I'd take a horse over certain senators these days...

cognus's picture


Seems the question we all dance around:  Will USA mimic Japan, or 'european' model? re: the latter my bias would simply be the UK... we have an "Anglo American Establishment" [to quote Quigley] half of which has been in unsteady decline since WWII. The path of least resistance is for the rebellious child to finally occupy grandad's wheelchair.  Nonetheless, my question right now is the other choice:  an American version of Japan's ugly decade+

Have high-yield bonds [corp] done relatively well in Japan's lost decade?  In our current market/s, the oppressed huddled masses have access [at the moment] to not only domestic securities but world...  If 'money' is going to be created and QE'd and rolled-over ad-infinitum with little inflationary effect, why would already-relatively-high corp note yields spike ever higher?

It seems we are staring at a double-barreled gun with differing rounds/barrels...   Will we tread the Japanese path or the european?... my bias would simply be the UK which went way over their heads at end of WWII and has been in steady decline ever since, with a corresponding rise in Police State regulation & enforcement. 

pasttense's picture

"People aren't going to spend until they feel they are economically secure and there aren't a lot of reasons right now for them to feel secure."

While this may be true for the well-off that the OP lives near, it's not for the mass of Americans. They are already living paycheck to paycheck. Only an increase in their income will cause them to spend more.

pavman's picture

I disagree with this article.  I'm economically secure, yet I'm cheap, so I'm not spending money because I don't want to.  Although, on occasion, I do buy dips and sell tops. Shhhhh, don't tell BarryO, he might take it away!  Oh wait, QE3 DOA....come bargain stocks, come.

SpiritBlade's picture

Dont be distracted by the war. As they continue to set the stage for WWIII we need to dump any paper gold and buy physical gold and silver.

Let the real stampede begin. They will attempt to flash crash silver before it continues its meteoric rise. Cant be done. The dollar is dying keep buying PHYSICAL silver and gold and hold it. Go long on metals.


Buck Johnson's picture

They sure are getting ready for WWIII, thats the only thing they got to null and void much of the debt the US have.

Robslob's picture

So if stock market deflation is what is required then who or what is holding UP the stock market and more importantly...why?

If it falls then Ben can save the day...if it does not then how can QE in any form be justified?

Looks like Ben & Co need Greece to default to create Euro havoc and hopefully create a demand for US Treasuries...but that so far, has not happened?


css1971's picture

The US needs a couple of years of wage inflation. Big wage inflation.

Print paper for the unemployed. Boost the minimum wage 50%. Cut the base rate for income tax, increase the pay threshold.



Diamond Jim's picture

asset levitation.......

T-roll's picture

 I expect stocks and commodities to decline over the summer as this is necessary in order for Ben to announce his next stimulus.  Inflation will subside and "deflation" will become the hot topic.  We all know that Ben hates delfation and once it starts to rear its ugly head, he will unleash the helicopters.

XRAYD's picture

This is precisely what was confirmed last week:

The NFIB Index of Small Business Optimism is based on a random survey of 733 businesses in the federation's membership.

Attempts to boost small businesses through tax cuts and other federal measures have not addressed overall economic concerns that fuel the insecurity, said NFIB chief economist Bill Dunkelberg.

Only 5 percent of owners surveyed thought this was a good time to expand their business, and 71 percent of those blamed the weak economy for their hesitance. The net percentage of owners expecting better conditions in six months dropped to negative 5 percent, 15 percent lower than in January.

"Washington is throwing misdirected policies at the problem, offering tax breaks for hiring and equipment investment but acting surprised when they don't bear any fruit," Mr. Dunkelberg said. "The failure to understand why small business owners are not hiring or investing has resulted in a set of policies that have not been very effective, and Main Street is suffering."

A quarter of the business owners surveyed cited weak sales as their biggest problem, with 36 percent reporting lower sales. One in 10 said inflation was the most significant issue, and 31 percent of owners said they had raised their average selling prices.

Despite taking the lead in hiring for May, the average small business has not seen much of an increase, adding the equivalent of just 0.01 employees per firm over the past three months, or "virtually no improvement," according to the index.

Read more:

jo6pac's picture

It never went a away



CompassionateFascist's picture

And >40% of the new jobs created since '08 were in one (1) state: Texas.  

sun tzu's picture

The Obama administration is doing its best to put an end to that. They're trying to shut down energy drilling and the EPA is filing lawsuits all over Texas to hurt businesses

Djirk's picture

overlay the fed balance sheet over those first few charts and I bet there is a strong correlation....oops the debt is still there and the growth is not......OK lets try that again, it will be different this time

falak pema's picture

There is another way of saying it : tipping point!

williambanzai7's picture

We need to follow Jeff Coremelts fascinating ideas, issue more Visas to Chinese tourists, cut red tape for construction so we can build shopping malls where Chinese tourists can buy Chinese goods.