Why do polls say we are going in the wrong direction and the economy isn’t doing well? Fifty-two percent of American adults say they are worse off financially than they were a year ago, according to a survey conducted for The New York Times this month by the online research platform Momentive.
A large part of the discontent is sky-high inflation, the highest in 40 years. Yet it was much higher more than 40 years ago, per the FRED graph on the Consumer Price Index. It was over 14 percent in 1980 due to the 1970’s era of stagflation that manifested slow growth and lower employment with higher inflation, as per the FRED graph.
It’s difficult to reconcile the pessimism shown in the latest consumer confidence surveys with actual economic data. The University of Michigan’s gauge of consumer sentiment, for instance, fell again to a final June reading of 50 from an initial reading of 50.2 earlier in the month and well below May’s level of 58.4.
Yet U.S. factory orders jumped 1.6 percent in May in a show of strength among manufacturers in a report out today, and the unemployment rate has remained at 3.6 percent for two months.
Maybe it’s a general fear of what’s to come—perhaps a hangover from two years of the pandemic, and now a war that has exacerbated inflation.
The increase in factory orders exceeded the 0.6 percent forecast of economists polled by The Wall Street Journal. The rise in new orders in April was also raised to 0.7 percent from 0.3 percent.
A more recent poll of senior manufacturing executives signaled a slowdown in June. An index of manufacturers slipped to a two-year low in June as orders contracted for the first time since the start of the pandemic in spring 2020.
In fact, inflation is not the real danger to growth, but the fear of rising interest rates. Is that counter-intuitive? When the Fed or inflation hawks sound off on the dangers of inflation above the Fed’s 2 percent target rate, they really mean they don’t like the higher interest rates that tend to follow; which do slow economic growth.
Whereas higher inflation is usually a sign of robust growth; until it crimps consumers’ pocketbooks. For instance, the CPI inflation rate during the record 10-year Clinton era growth range of 2.5-3.5 percent. It only dipped below that during the recent pandemic years, a once-in-a-lifetime event.
Higher interest rates do most harm. That’s because most economic growth is powered by debt. We know the federal debt is upwards of $22Trillion, or 100 percent of GDP. Whereas consumer debt, either in the form of credit card or installment debt that includes mortgages, is up $38.1B or 10.1 percent annually, as consumers continue to spend with more borrowing.
Inflation has mostly hovered around the 2 percent target rate historically, and should return to that range by next year, as the FRED graph makes clear, with spikes during extraordinary time, such as the 1970s era of stagflation, as I said.
But interest rates aren’t so flexible, and tend to become in installment loans with fixed monthly payments, in particular. So, we need to pay closer attention to interest rates, if we want to know what will happen next.
Harlan Green © 2022
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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