"Hard times hiding in plain sight"

 

That's the headline for the latest Global Macro Update newsletter from Mauldin Economics.  I'll include an excerpt from the transcript of a video interview with Dr. Lacy Hunt, and embed the entire thing after that.  It's worth reading the full transcript and/or watching the full video.

They're hard times, not only domestically, but for the global economy as well. I think that the national accounts do suggest the economy is growing well, but the national accounts have a major disconnect in the United States, and there's good reason for why they shouldn't be doing well. We've recently constructed a weighted and detrended money supply aggregate for the United States, China, Japan, the EU, and the United Kingdom. This aggregate over the last four years is declining very, very sharply.

So, when you look at actual M2 growth for the last four years versus detrended, we're substantially in negative territory. What that means is that the economy is far below what we would call the stationary growth rate, the STR, and it is very substantially negative. It suggests that the economy is going to experience a sustained period of subpar economic growth and declining inflation. That's the condition. Now, normally, when you have a severe monetary contraction, the sequence is that first of all, the money growth comes down and then you get a deceleration in economic activity and then you get a deceleration in inflation. That's the pattern. There's virtually hardly any exceptions to that rule.

Money leads, GDP is coincident, and the inflation rate is lagging. That, by the way, is the case in the four major foreign economies. Money growth has collapsed. It's brought down economic activity in Japan, China, the EU, and the UK. In the United States, we've had a collapse in monetary growth on the terms in the way in which I measure it. We've had a dramatic deceleration in inflation, what I would call a contra-normal cyclical development. You've had the inflation rate come down without the GDP declining, and that doesn't usually work that way. Now, in economics, quantity effects and price effects both convey knowledge. When economic conditions are weakening, you expect to see the broad volumetric measures to deteriorate.

But when economic activity is weakening, you experience a sharp decline in the inflation rate. Well, the inflation rate has dropped more than it typically does during a recession and immediately after with the GDP still rising. I think that what we're witnessing is a very broad and very basic disconnect between the national accounts and many measures of the economy.

Take for example, one of the things that we've always been able to do for this economy is we've had affordable homes and cars for the vast majority of our people. Yet if you look at the vehicle sales, the new home sales, existing home sales, they're all down very substantially from their peaks of the last five years. Vehicle sales in the teens. Existing and new home sales down in the 35% to 40% range. Very, very broad disconnect.

. . .

The inflation rate is dropping, but the inflation rate that ensued from the pandemic, the extraordinary and unwise coordination of monetary and fiscal policy has left us with a very serious overhang of high prices in the automotive and housing sectors. So, if you look at the real weekly earnings of 120 million salaried and full-time employees, you'll see that in the 16 months of this expansion, those folks have experienced a 2% rate of decline.

At the same time, as a consequence of the inflation, you are left with these inordinately high prices for new cars and homes. They're roughly 20% higher than they were prior to the pandemic, and you've left them unaffordable for the vast majority of our people. So, when you say the inflation rate is coming down, it's true, but that's the marginal effect. We're still hung with these inordinately high prices that arose during the pandemic response. As a matter of fact, although the national income figures have been revised to reflect a much stronger position, if consumers were really in good shape, they would be able to afford the higher cars and the higher home. They're not.

In addition, we're seeing a very sharp increase in the delinquency rate on consumer installment loans and on automobile loans. The critical 90-day rate has just risen to new peak levels. We're back where we were in 2010, 2011. We've seen a substantial increase in bankruptcy rates. The only category that has not experienced rising delinquency rates is the student loans where they were in some type of deferment or folks were in some sort of view that they were going to be forgiven the loans, but the Supreme Court has choked all of that off. Now here we are in October and the deferments that were granted during the pandemic have expired.

So, the consumer has been spared that burden. But, by not having to pay their student loans, it lent a degree of strength to some of the consumer spending areas that would not have occurred, but that stimulus is no longer behind us. So, the consumer is in far worse shape than it is generally.

. . .

Small business is saying the same thing that the consumers are. One final point, if you look at the latest surveys from the Business Roundtable, which are corporate CEOs, they showed a very sharp decline in sales, hiring, and CapEx plans for the fourth quarter. So, the GDP, the national accounts look strong. They've been revised upward, but the fact of the matter is there are a great many components of the economy which are experiencing very hard times. The only country in the world that can make claim to a degree of prosperity is the United States. That is primarily centered in the national accounts, not in other objective measures, important and objective measures of wellbeing.

There's more at the link.  Here's the video, if you'd prefer to listen rather than read the transcript.

If you aren't already subscribed to Ed D'Agostino's "Global Macro Update" newsletter, and are interested in what's happening to the economies of the world as well as the USA, I highly recommend doing so.  It's free.  What have you got to lose?

Peter