Stagflationary Recession underway in US
The 2005 to 2007 inflationary recession has moved well beyond stagflation. Circumstances deteriorated markedly in the last month, and market perceptions of same have begun to surface, as exhibited by strong gold and a weak dollar. Moreover, the trouble is not confined to a weak economy and higher inflation. It also includes a foundering administration and increasing odds of a shift of power coming out of November's election.
"Signs that the economy is not doing too well abound. Housing starts appear ready to signal recession, and the housing sector has been one of very few bright spots in economic activity over the last six years or so. Aside from politically-gimmicked GDP reporting, most numbers, net of inflation, have been soft to down over the last month, including retail sales, purchasing managers new orders, help wanted advertising, narrow money growth, real earnings, consumer sentiment and even the employment report. Exceptions have included strong industrial production, volatile new orders for durable goods and an improved but still staggering trade deficit.
"Although purposely suppressed in the 'official' data (PPI and CPI), there is an inflation problem. It is driven by oil, and increasingly, it also is being driven by dollar woes. These are factors separate from strong economic activity that commonly is viewed as the source of inflation.
"In like manner, Fed tightening -- designed in theory to slow the economy in order to slow inflation -- will do little to cool the current problem, shy of Volckerish rate hikes aimed at triggering such a severe downturn that prices are pulled down along with business activity into a depression. Quite to the contrary, current Fed activity has been the reverse of the jawboned inflation fighting, aimed at stimulating liquidity, not killing it. While short-term interest rates have been increased, broad money growth also has been soaring, at least prior to its reporting cut-off. Excessive money growth tends to be an inflation stimulant, not a retardant.
"In general, the broad economic outlook has not changed. The 2005 to 2007 inflationary recession continues to deepen. Recession, inflation and risks of heavy dollar selling are upon us, gaining greater market credence, and they continue to offer a nightmarish environment for somewhat less Pollyannaish financial markets than were in place last month.
"The Shadow Government Statistics' Early Warning System (EWS) was activated in May 2005 and signaled the onset of a formal recession in July 2005. The EWS looks at historical growth patterns of key leading economic indicators in advance of major economic booms and busts and sets growth trigger points that generate warnings of major upturns or downturns when predetermined growth limits are breached. Since the beginning of 2005 a number of key indicators have been nearing or at their fail-safe points, with four indicators moving beyond those levels, signaling a recession. Once beyond their fail-safe points, these indicators have never sent out false alarms, either for an economic boom or bust. Housing starts appears ready to generate such a signal in the next month or so.
"With a resumed economic boom massaged into first-quarter GDP reporting, negative GDP growth is not likely to surface in regular government reporting until after the November 2006 election, given the rampant political manipulation of most key numbers. The National Bureau of Economic Research (NBER) should time the downturn to mid-2005 and announce same also sometime after the election, so as not to be deemed politically motivated in its timing.
"Whether or not there is a recession will be a hot topic in the popular financial media, with politics helping to fuel the debate as the election nears. Those Wall Street economists who act as shills for the market will keep up their 'strong growth is just around the corner' hype regardless of any and all evidence to the contrary."