Is Stagflation Coming to America? .... (via Les H..)
By Paul Schulte, AsiaWise
11 Apr 2001 14:30 (GMT +08:00)
This is where it gets really weird.
Fixed investment spending growth is now in negative territory in the U.S. Real GDP
growth is hovering at about 1-1.5%. Savings rates are still in negative territory. PG&E,
California's main power utility, declared bankruptcy last week.
It is the largest utility bankruptcy in American history and the third largest of all time.
According to Moody's, the largest of any kind occurred a few weeks ago when
Finova declared bankruptcy. On the day of PG&E's bankruptcy, it was (shockingly)
rated one notch below investment grade.
Credit quality within the U.S. economy continues to worsen. A major strike in
Hollywood in four weeks threatens one of the country's largest exports -- movies! The
manufacturing sector is on its knees. The equity markets are gasping and it looks
like many indices are starting to break down.
Given these circumstances, it is bizarre that consumption is still buoyant. The
inventory of single-family homes is near a 30-year low. Oil inventories are near
multi-year lows. Oil imports are surging. Unemployment is still near record lows.
California has raised its energy prices 46% with another 30-40% in the cards. (The
state is about 11% of U.S. GDP).
Housing prices in New York and L.A. are still near record highs and rents are still very
expensive. Most important, first quarter wage growth in the U.S. was an astonishing
6.1% -- to $14.17 an hour. Total hours actually rose in March even with the biggest
job cuts since 1991.
Is this weird or what? In the midst of a serious economic slowdown, there are several
dynamics that are inflationary. I hate to say it, but this smells like stagflation -- here
and now. This is made even more contradictory when Japan and a few of its
neighbors have a persistent problem with deflation.
As we all know, there is nothing worse for a stock market than rising costs and falling
revenues. The impact on the bottom line is quick and insidious. Corporate and
government bond markets are also casualties.
There are four dynamics that seem to be creating this problem. The first is energy.
Everything I touch in L.A. has gone up in price -- at a time when a strike by both
actors and writers looms large in Southern California and when Silicon Valley in
Northern California is ground zero of the Nasdaq implosion.
The energy price hikes in California are being passed through to consumers who
appear not to mind -- for now. There is growing fear that the energy problems in
California are spreading to the Rocky Mountain states. In the East, Florida and New
York appear to be candidates for energy problems come summer. This is inflationary
as growth slows. Watch this space.
The second issue is options. They have, for millions of employees, become a
worthless currency. Companies who were able to control payroll costs now cannot
afford the luxury and are being forced to pay hard cash to keep good people. This is
inflationary as growth slows.
The third is rents. It usually takes four to five quarters for rents to adjust to a
downturn. As the U.S. moves from 4% growth to somewhere in the area of 1-1.5%, it
will take some time for retail, commercial and residential rents to adjust. This is
inflationary as growth slows.
The fourth dynamic is the strange resilience of the service sector to an outright
recession in the manufacturing sector. Labor conditions in services remain tight and
wage pressures continue even as the U.S. moves into a lower growth trajectory
largely due to a collapse in investment growth.
As base money growth in the U.S. remains in double-digit territory and credit quality
in corporate America deteriorates, there is a deep unspoken anxiety that a fall in the
dollar will turn mild stagflation into a major problem. The dollar's strength, for the
moment, imports deflation. If it reverses, the problem will likely get out of hand and
seriously damage the equity and bond markets. The problem is that it appears that
Germany and Japan are forcing down the euro and the yen to trade their way out of
their problems. Competitive devaluations among developed nations are squeezing the
dollar higher -- for now. Let's hope it stays that way.
People who have seen my writing over the years will be surprised by these
comments, as I have been an inveterate believer in dis-inflation. The dynamic
described above may or may not be a passing trend. I welcome comments -- this
debate needs to get started.
No one is talking about the possibility of stagflation, the worst of all possible worlds.
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