The guest commentary below was written by written by Daniel Lacalle. This piece does not necessarily reflect the opinions of Hedgeye.
United States consumer confidence has plummeted to a decade-low in November.
The University of Michigan’s consumer sentiment index fell to 66.8 in November, down sharply from the October figure of 71.7 and well below consensus forecasts of 72.4. Inflation is hurting consumers and the impact on daily purchases is more severe than what the Federal Reserve and consensus estimates may want to believe.
The Misery Index, which adds inflation and unemployment, is at 10.8%, the highest reading in a decade if we exclude the peak of Covid-19 lockdowns, when the Misery Index reached 15.13%. These are Carter-era levels for the Misery Index and stagflation alert signs.
The so-called “recovery” has exchanged unemployment for inflation, leaving consumers fighting to make ends meet despite job growth.
Interventionists say that inflation is not a problem because it is a function of high growth and point to higher wages as a mitigating factor. To them, people are earning more so they can afford the same and continue to consume.
The problem is that it is a lie.
According to St Louis Fed data compiled by FRED, real median weekly wages for full-time employed citizens are not rising, they are falling dramatically.
Median real wages are down, unemployment is falling but is still significantly above the pre-pandemic level and 35 million workers have quit their jobs because they either expect more government cheques or simply cannot afford day-care, transport and other costs. That is why the labor participation rate remains stagnant for eleven months at a poor 61.6%.
A recovery where citizens cannot take a job because they cannot afford the costs and where businesses are struggling to get workers but cannot raise wages as margins weaken due to rising input prices.
Inflation is hurting businesses, eroding their margins in an allegedly strong economy, and consumers that cannot make ends meet with falling real median wages. This is not a strong economy, it is a disaster waiting to happen as inflation remains elevated. Even the Federal reserve now admits inflationary pressures are “persistent”.
The United States economy is living on borrowed time. In a recent JP Morgan Special Report (“The 2022 US economic outlook: Help wanted”), the investment bank estimates a robust growth in consumer spending for 2022 predicated on the reduction of what they call “excess savings” -ask any hard-working family if they save too much- and reduction of unemployment.
However, what the current economic slowdown is showing is that this so-called “recovery” has many elements of a crisis. Erosion of purchasing power, rising misery index and general loss of welfare while savings are depleted.
Consumer confidence would be even worse if the level of savings had fallen faster. But that savings rate is now close to pre-pandemic levels. Consumers have been using their savings to make ends meet and now find a dangerously weak labor market, rising inflation and poor prospects of improvement.
Furthermore, small businesses are suffocated by input prices as their sales rise but margins and profits plummet. Small businesses are seeing a recovery where sales improve but the financial situation worsens. And businesses are consuming their savings and credit availability fast.
Meanwhile, the United States government, advised by theorists that believe that a unit of deficit is a unit of revenue for the private sector, something that is simply false, continues to spend and increase debt, almost fully monetized by the Federal Reserve, perpetuating inflation and bottlenecks with unnecessary spending after a supply shock.
No serious government launches a massive demand-side spending spree to address a supply shock.
The United States consumer has been able to endure this period thanks to prudent saving and moderating their consumption levels, but the cushions that have allowed them to get through these months are vanishing.
Time to stop the spending, deficit and printing lunacy, or the stagflation of the 70s will not be a risk, but a reality.
This is a Hedgeye Guest Contributor note by economist Daniel Lacalle. He previously worked at PIMCO and was a portfolio manager at Ecofin Global Oil & Gas Fund and Citadel. Lacalle is CIO of Tressis Gestion and author of Life In The Financial Markets, The Energy World Is Flat and the most recent Escape from the Central Bank Trap. This piece does not necessarily reflect the opinions of Hedgeye.