The ability of humans to believe whatever lie they want to believe never comes in lower than I expect, but it sometimes manages to come in even higher. Nowhere has that been more transparently true than in economics where everyday I read people in the financial media who must surely have IQs somewhere above a hundred but who write as if their brain were a rotten peanut inside a hollow shell. I call it economic denial, and this week provided some glaring examples around the hypersonic inflation data that came out and the sickly retail data. Yes, I said “sickly,” but you wouldn’t have guessed how negative it was by what you read.
by David Haggith on Dollar Collapse:
Retail slump sends off fireworks in the press
Let’s start with Friday’s retail report where the people who write financial news are apparently clever enough to type, which makes them theoretically brighter than the proverbial apes who, given infinite time, will eventually manage to bang out Hamlet. Many are even treated by their colleagues as if they are “analysts” or “economist.” Yet, the most basic concept of economics went right through their heads without hitting a single synapse like a neutrino through a thin layer of jello.
I confess that I have, over the years, come to the conclusion that economists, by and in large, know less about the real economy or basic math than anyone. Thus they are the one group of people least likely of all professionals to see a recession coming, even when it is already chewing the flesh off their toes like a school or piranhas. They will look down and marvel at the reddish color of the water around their feet and the pretty flashing fishies in the froth and tell us there is no trouble in site. By the time they predict a recession, the bones are already picked clean. They are like weather forecasters who tell us tomorrow what today’s weather will be after the picnic has already been rained out.
And, so, within the dingy atmosphere of the dismal science, I read this week, the following celebration of retail sales reports:
Retail sales rose more than expected in June as consumers remain resilient despite inflationCNBC
All I can say is “Wow!” to a headline like that, which stares into the sun so intently, the writer became blind to what he was writing about. To read that headline, you’d think sales actually improved in the face of inflation!
The article starts off almost tripping into an understanding of what is really happening here when the introductory synopsis says,
Retail sales rose 1% in June, slightly better than the 0.9% estimate. The numbers are not adjusted for inflation, which rose 1.3% on a monthly basis, indicating that real sales still were slightly negative.
But then it goes immediately off the rails to say…
Consumer spending held up during June’s inflation surge, with retail sales rising slightly more than expected for the month amid rising prices across most categories, the Commerce Department reported Friday.
No, consumer spending did not hold up. The numbers clearly show a picture of consumers buying LESS STUFF. They CUT BACK on how much they bought. That is not “holding up.” It’s just that prices went up so much that they still had to shell out more money to get LESS stuff.
The math here is elementary. Retail sales are measured in dollars, not units sold, and the article just told us that the price of goods went up by 1.3% in the course of a month, but sales, as measured in the prices of those goods, went up only 1.0%, month over month. If people bought exactly the same goods in the same quantity they bought last month, then sales (measured by prices paid) would have gone up 1.3%. So, people bought essentially 0.3 points less stuff to try to keep their costs from rising. And it looks a lot worse than that in many retail categories measured.
If you look at this graph of the growth in sales of non-durable goods, for example, it appears sales have been on a run for the sun in the last couple of years and are still reaching for the stars:
As it turns out, that is really just a graph of inflation — so remarkable has inflation been — even though it is a graph of consumer spending on nondurable goods. Factor the inflation out of the picture (even using the Fed’s grossly understated measure of inflation) and that graph looks like this:
Oops. Retail expenditures on nondurable goods appear to have put in a turn at the start of the year when someone around here was saying the recession was beginning, and they have been on a markedly downhill trend all year.
Durable goods look good, too, until you factor inflation out, then they look like this:
On a downhill trend since March of last year.
That is not a positive for the economy, as it means less stuff down the road will be produced because people are buying fewer items, which means less stuff will be transported and retailed, so more people will be fired than hired in production, transportation and retail because consumers are being forced to cut back due to high prices. We call that the formation of a recession. And that is a clear, straightforward read of the REAL data (and what other kind of date really matters?).
Now keep the rather dismal real picture in mind as you read the coverage in the financial press that those in the dismal sciences are giving, instead of what they should be giving. For example, notice the calisthenics involved in trying to brush this situation up nice and shiny with some positive spin here:
Advance retail sales increased 1% for the month, better than the Dow Jones estimate of a 0.9% rise. That marked a big jump from the 0.1% decline in May, a number that was revised higher from the initial report of a 0.3% drop.
” Better than” and “a big jump” and “revised higher” all sounds so good, but nothing actually improved here. The ONLY thing that happened was prices went through the roof; so, even after consumers cut back on how much merchandise they bought, their bank accounts (or, more likely, credit cards) took a bigger hit. You can only run so long down either path there as a consumer (diminishing bank account or bloating debt) before you have to cut purchases back even more. So, that also means less buying power for the future, even as prices continue to rise in the future, which I assure you they will for a long time, even IF they rise a little slower (which I doubt we’ll see for awhile). Continuing price rises will mean continuing cut backs in how much stuff people buy. Eventually, yes, that will destroy demand, as some are writing about, but not until it destroys the economy! Because that is generally what destroys demand during bouts of banshee-screaming inflation.
The article allows that the increase in sales was due to inflation, but glosses over the fact that it was SOLELY due to inflation and not, even in the slightest, due to increased economic activity:
Rising costs for food and gasoline in particular helped propel the increase, which was nonetheless broad-based against the various metrics in the report.
NO, they didn’t “HELP PROPEL….” That, too, sounds positive for sales. They were the ENTIRE BASIS for the purported increase in retail sales. It was 100% due to an increase in prices! That is ALL that is being shown here. There was no propelling of sales. There was just a rise in how much things cost but an actual CUT in sales in terms of the quantity and/or quality of items purchased. Things just got a heck of a lot more expensive, and consumers tried to maintain their former purchasing levels but were not able to! So, they cut back. They took a hit by buying less but paying more. The best one could say is they tried to be resilient but even then couldn’t quite keep up their former standard of living.
Excluding autos, the monthly rise also was 1%, topping the 0.7% estimate.
Again, it sounds as if the economy is popping along nicely, topping the rises economists have estimated. By extrapolation, one might believe those economists who have been telling us the economy is strong knew what they were talking about. But it is all the smoke and mirrors of inflation. The telling downfall here will show up in the GDP report for the past quarter because the GDP numbers that everyone goes by ARE adjusted for inflation. So, when “real GDP” hits the headlines, retail will be a negative component. Adjusted for inflation, since “production” is measure in dollars whose value is eroding under inflation, real domestic product will have gone down. That is not the measure of a strong economy.
This is almost like a snow job by conspiracy because that is how I saw the story being told almost everywhere. Here is how the resident economist in this one article dons his rosy glasses and glosses over the truth:
“The 1.0% [month-over-month] rise in retail sales in June isn’t as good as it looks, as it mainly reflects the boost to nominal sales values from surging prices,” wrote Andrew Hunter, senior U.S. economist at Capital Economics. “Accounting for the surge in prices, however, real consumption looks to have been broadly stagnant in June.”
NO! NO! NO! It does not “mainly reflect.” It was ENTIRELY due to surging prices. Not “mainly due.” Entirely. It’s also not that it is “not as good as it looks.” It’s that, if you understand the math, IT IS NOT GOOD AT ALL! It is BAD. Neither does “consumption” appear to have been “broadly stagnant” in June. Actual consumption appears to have stumbled down a hill. People consumed less but still paid more for what they did consume. Moreover, that has been a trend for the entire year so far!
It’s not easy to cut back on consumption because we consume because we need to at some level and because we like to above that level. So, what we see is that people cut back a little less than they needed to if they wanted to keep their budget stagnant; but they still cut back … and likely made up the difference with credit.
Where the economic denial really hit lunatic levels on Friday was in the stock market as investors readily lapped up this milky slop:
Markets nevertheless rallied following the morning’s economic news, with the Dow Jones Industrial Average up more than 470 points in the first half-hour of trading. Government bond yields moved lower.
By the end of the day, it was up more than 600 points “on good economic data” the reports said. This was bad data regarding recession and regarding what the Fed is going to do, BUT investors saw only what they wanted to see, so testosterone-driven sentiment carried the market up for the day (but reality will, as it has been doing all year, slam that back into the dust of the earth because reality will not ultimately be denied):
The numbers actually mean 1) the Fed has not even begun to get a handle on inflation. So, 2) the Fed will continue to tighten hard and may even have to tighten harder. But 3) consumers are cutting back actual consumption, though they are shelling out more for what they consume. 4) That is why consumer sentiment is at an all-time record low. At the same time, consumer buying power will be less because wages are not keeping up with inflation, and bank accounts are going down, even as debt is rising. So, the outlook for company sales gets worse. All of which means 5) recession!
If there were any economists who were not asleep at the switch — say the rare David Stockman kind — they would have pointed out that all this adds up to one mammoth stagflationary recession. At some point, we may see deflation if people pull back hard enough (heavy demand destruction), but that is far from certain because available supplies are pulling back even harder due to war and sanctions and past Covid lockdowns and new Covid lockdowns and more that I will get to below. So, it is inflation and a falling economy as far as the eyes can see right now!
The numbers also really mean, as is being seen in corporate reports this week, that, while sales are going up because they are measured in deflating dollar value (inflated prices), companies are making less profit because their costs are also up and not all being passed along. They are lowering earnings expectations. Thus we saw JPMorgan and Morgan Stanley and Wells Fargo report massively diminished earnings this week and saw JPM terminate all stock buybacks. That means additional bad news for investors because buybacks were the main driver of stock valuations. But the gimbals have apparently fallen off investors’ compasses, so they bid the market up over 600 points, having no concept of where all of this is so clearly headed if you just take off your sunglasses and look.
Stocks went up because, “Hey, the news said retail was up. Maybe there won’t be a recession!” but at the same time (incongruently) inflation is scorching hot so the Fed will have to tighten harder. Only they just conveniently ignored that recent news since “sales were up” (Not.)
These people must have their brains steeping in a pickle vat because that IS recession. It’s called stagflation. Prices went up, so consumption went down, and when that is calculated for the retail component of GDP it will mean (before all bogus adjustments) that GDP went down by that 0.3% differential. There was 0.3 percentage points less consumed.
On that inflation score, the news elsewhere noted that Producer Price Increases are actually running over 11% annualized , showing how much retailers are seeing profits decline as they have only raised prices on the consumer side an average of 9.1% annualized. That clearly indicates a lot of pressure for more price rises coming to consumers as retailers are not likely going to keep absorbing the difference for long.
Botton line: There was NO good news in today’s news:
- Sales down (adjusted for inflation).
- Therefore, consumption down.
- Therefore, production will be going down.
- Profits/earnings down.
- Interest rates soaring.
- But prices keep rising anyway.
- That means Fed needs to tighten harder.
- So, consumer sentiment at record lows.
- Reality of recession already baked into retail sales.
- Therefore, likelihood of deep recession because Fed is tightening into a recession that is already happening and doesn’t even know it because of all these brilliant economists, doling out their sugar-frosted deceits.
“Rally on Wall Street gains momentum, with the Dow surging nearly 600 points.”
Am I surprised that the market is so foolish? Not in the least. I’ve come to expect that kind of denial. I am merely commenting on how truly ignorant that is, and noting that it means the market will still be forced to face punishing reality that it is currently denying (as it has been pressed back to square up with all year) because the reality I just described in those bullet points is not going to let up for a long time!
But the glossy summary as to why the market rallied:
Stocks rallied on Friday as traders digested a fresh batch of bank earnings and strong economic data, which alleviated some worries that the Federal Reserve may hike by 100 basis points to subdue rising inflation.
First, why would strong economic data in the face of even higher inflation alleviate worries that the Fed may have to hike harder? That doesn’t even make a shred of sense! Talk about denial. With inflation hotter than ever (and reportedly strong economic data) there is ZERO chance the Fed will back off in hiking (because the Fed seems to believe the data is strong, too, for it keeps telling us “the economy is fundamentally strong). Even if the Fed stays at the expected 75-basis-point hike, the market is far from having actually priced in the outfall from continuing down that hiking path. We would have to hit ZERO inflation for months just to get annual inflation down to a hot 5%.
Still, “strong economic data?” Where?
The proof is already in the GDPudding
Now let’s look at that last of those points to see how deep the denial really is because the recession data is already so clear it is almost impossible to miss unless you really are asleep.
While I’ve maintained all year that we’ve been in recession since the first quarter, these retail sales numbers are certainly showing recession by falling in real terms (as GDP is measured), though brave economists are still only saying we may have … oh, a 50% chance of recession later in the year:
That is in the face of glaring data projections by the Fed’s data that clearly say we are in a recession now. Here is an update of the Fed’s GDPNow estimate for the second quarter:
After a negative first quarter that has twice been revised even more negative by the government, the Fed has been predicting a negative second quarter for almost a month now. In fact, they just revised it slightly back down based on the above retail data.
Yet, here is what economists are saying:
Odds are now close to even that the US economy will slip into a recession within the next year as persistent and rapid inflation emboldens the Federal Reserve to pursue larger interest-rate hikes … according to the latest Bloomberg monthly survey of economists … with 34 economists responding about the chances of recession.Yahoo!
Really? That’s as bold as they can get? Sometime “within the next YEAR” we MIGHT SLIP into recession. Again, Wow! These guys will do as they often have and predict we are heading into recession just as it is ending. They are as useless to all of us as the cavalry arriving at the fort a week after the enemy has left and finding everyone already dead. Thanks, guys for your bold and timely service. In fact, these clowns will probably come riding in, backward in their saddles with the enemy have blown right past them on their way in.
Here are the obvious signs of recession now:
- We’ve already had one full quarter of negative GDP.
- The Fed is already predicting another quarter just as low as the last one.
- Retail sales are falling.
- Housing sales are now starting to fall.
- Stocks are long and deep into bear markets.
- The yield curve has already inverted twice and looks especially peculiar right now and would obviously arrive late to the show anyway because it was under total Fed yield-curve control for two years, and everyone should be easily aware of that.
- We still have numerous supply-line problems due to past Covid lockdowns.
- Covid is on the rise again, threatening new government mandated lockdowns, with new supply problems especially in China.
- We already have numerous added supply-chain problems due to the Ukraine war and its sanctions.
- Major banks are reporting MASSIVE reductions in profitability.
- Other corporations are downgrading earnings.
- We have a global major energy crisis, self-made but every bit as bad as in the 70s, if not worse, so that we are back to begging the Arabs for some reprieve.
- We have a severe shortage of labor, impacting production and transport.
- And the Fed is finally rapidly tightening.
- In spite of that, inflation increased again to 9.1% annually while
- Producer inflation is screaming in at double-digit levels now, pressing consumer prices to rise a lot more.
- And consumer sentiment is already at an all-time low.
… but all economists can say is “MAYBE within a year — MAYBE — we might SLIP into a recession.”
Wow! There must have been a sale on lobotomies this year!
As for that consumer sentiment, if you click on the link provided in the last line of that list, you’ll see that article, too, completely buried the lead, putting the most salient fact deep down in the story — in the final three paragraphs. (So typical of distorted financial news these days.) I would have opened with that and made it my headline … since it IS an all-time record low. What did they choose for the headline? “Inflation expectations ease slightly.”
Their sharpest warning was merely,
“In this environment, we see the clear risks of retrenchment in consumer spending while falling corporate profitability means businesses start to hunker down,” Knightley said. [Chief international economist at ING]
Gee, ya think? He must be an advisor to the US treasurer, who believed QT would be as boring as watching paint dry; there would never be another financial crisis in her (apparently much overextended) lifetime; inflation was transitory; and the economy is fundamentally strong. Just a little denial in all of that, too?
Economists slashed estimates for second-quarter growth to a 0.8% annualized rate from a 3% median forecast in last month’s survey. Growth is estimated to be less than 2% in the back half of the year.
So, with all of the above, economists are still predicting economic growth of almost 1%. I guess the nice thing about being an economist is that you can know nothing about your field of endeavor (why they call it an “endeavor,” I suppose), so be wrong every single time a recession comes around, and still go on to higher pay in academics or in corporate economic analysis. These guys have mastered the science of predicting earthquakes months after the buildings have been leveled.
Now, Jamie Dimon, whose absolutely dismal corporate bank report just came out, summarizes the economy in these stark terms (having proclaimed brilliantly at the start of the year that this was the “strongest economy” he had ever seen):
Geopolitical tension, high inflation, waning consumer confidence, the uncertainty about how high rates have to go and the never-before-seen quantitative tightening and their effects on global liquidity, combined with the war in Ukraine and its harmful effect on global energy and food prices are very likely to have negative consequences on the global economy sometime down the road.CNBC
Why wouldn’t they have those consequences today … and yesterday? With all of that duly noted all around him, Dimon went on to claim,
The economy continues to grow and both the job market and consumer spending, and their ability to spend, remain healthy.
Based on what?
But the coup de grâce:
For the moment, there aren’t any signs the U.S. economy is entering a recession, according to comments JPMorgan executives made on their earnings call.
Nada thing, huh? No signs at all? None of those things I just listed are signs?
As Dimon said, the labor market seems to be in solid footing.
Ahh, there it is again, that old jobs canard that economists and the Fed and Dimon all keep leaning on. None of these people seem to have the mental elasticity to stretch their brains around the outside of normal parameters at a time when we are clearly not inside of any normal parameters. We left Normal World years ago. Everything I listed above is abnormal — some of it highly abnormal.
But, first, the financial writer above throws out the following as it was a positive:
Meanwhile, average hourly wages grew last month at 5.1% year-over-year pace.
OK. So, the way I would have written that because I like to keep a light on the truth is, “Meanwhile, average hourly wages have, again, fallen behind inflation year-over-year by 4%.” That is an additional recessionary factor I didn’t include in my list, so let’s consider it added now. Wages are trailing about 50% behind inflation. That means you are 4% poorer than you were last year, even if you got the average hourly wage increase over the past year.
Now let’s revisit the very thing the Fed and Jamie Dimon are relying on as being the surest sign of “a strong economy” — the jobs market.
Again, we have a situation where people are not stretching their brains around abnormality to understand that the very thing they think is a sign of economic strength is in this abnormal situation actually a sign of very deep and chronic malaise.
NORMALLY, I say “NORMALLY!” (think Foghorn Leghorn) low unemployment and a lot of unfilled jobs happen because the economy is booming along so fast that employers just cannot find enough employees to keep up with demands on production.
That is NOT, I say “NOT!” the case. Since our big giant heads are unable to grasp the present situation with their supposedly big brains, let me explain it for them.
Today’s job situation has nothing at all to do with a booming economy. All those jobs are sitting there open because NO ONE WANTS THEM. The people who once filled jobs like that don’t want to work. That is not the sign of a strong labor market. It is the sign of a very sick labor market. What it means is that the labor market is no longer able or willing to supply labor. That’s called “broken.” It means production cannot increase, except by expensive automation, which takes time. If production cannot increase because labor does not fill the roles needed to make production increase, then gross domestic product cannot increase. If GDP doesn’t increase but actually goes down due to a labor shortage, we have a word for that: “recession.” Alternatively, pay a lot more to entice people back to work and then raise prices a lot more.
What you are really seeing is deep signs of stagflation. Production is down because labor supply is way down. Besides not being able to get parts and materials due to Covid- and sanction-related supply chain breakage, manufacturers also cannot get workers. That means gross domestic production HAS to fall. That means prices are likely to rise more due to scarcity and in order to entice workers back into the labor market. That is a stagflation recession by definition.
The bottom line there is that, if workers don’t return to work, the ratio of producers to consumers will remain seriously deficient, which means there will not be enough goods or services for all of us who want to consume them, forcing prices to remain high, even as the economy shrinks because things are NOT getting produced so not getting bought and services are not being provided as abundantly.
What we are really seeing in those labor numbers is a badly broken labor market that is not able to deliver the one thing it is supposed to deliver. When demand keeps growing until labor supply can’t meet it, that’s a tight labor market from a hot economy. When the labor pool keeps shrinking until it cannot keep up with lower demand, that is a thin labor market that is not up to the job … literally. Economists need to wrap their lazy brains around what is actually happening here. It is not a “strong jobs market.” It is a broken jobs market. It is not a shortage of labor because the economy is hot. It is a shortage because people don’t want to produce.
To top all of this off right now, China’s economy, which helped pull the world out of the Great Recession, appears to be sliding toward recession, too, and China is having major problems in its banking sector that could easily be as bad as those that started the Great Recession in the US.
So, believe half of what you read and nothing of what you read from modern economists because they are certainly not the brightest knives in the lightbulb drawer.
David Haggith is the author of DOWNTIME: Why We Fail to Recover from Rinse and Repeat Recession Cycles.
THIS ARTICLE ORIGINALLY POSTED HERE.