Mid-year economic update: mixed signals
This week is a recap of mid-year progress and challenges on several fronts: the economy, Covid-19 and the markets. Let’s start with the Consumer Price Index (CPI) report that was released on July 13. As Investopedia defines it:
“The CPI is what is used to measure these average changes in prices over time that consumers pay for goods and services. Essentially the index attempts to quantify the aggregate price level in an economy and thus measure the purchasing power of a country's unit of currency. The weighted average of the prices of goods and services that approximates an individual's consumption patterns is used to calculate CPI.”
In other words, it’s a marker of inflation/deflation and reflects correlated changes in purchasing power.
For everyday Americans, there’s not a lot of good news the report:
“The index for all items less food and energy rose 4.5 percent over the last 12-months, the largest 12-month increase since the period ending November 1991.”
“The energy index rose 24.5 percent over the last 12-months, and the food index increased 2.4 percent.”
“The all items index rose 5.4 percent for the 12 months ending June; it has been trending up every month since January, when the 12-month change was 1.4 percent.”
And according to Robinhood Snacks, here’s how that translates in the real world:
“A few gems from prices compared to a year ago:
Women’s dresses were 16% pricier. Men's pants and shorts: +11%
Indoor plants and flowers were up a succulent 5%
Hotel prices jumped 17%. Car and truck rentals: +88%
Candy and gum: +3%. Liquor at restaurants: a hard +5%
Pet services: +5%. Your dog walker isn't complaining.”
Graphic by Maddy Price, Investopedia, 2019
As Investopedia also points out, “In June 2021, the Consumer Price Index increased 0.9% from May to June, faster than the 0.6% month-over-month increase from April. When compared to the year prior, the full index increased 5.4%, making it the largest 12-month increase since September 2008.”
A longer period of inflation, too
In past posts, I had moved my inflation prediction upward, meaning that I thought we’d exceed federal targets. In fact, after an early-and-optimistic notion that we’d only slightly pass the goal of 2-3%, I soon revised my thinking to an annualized rate of 5-6%—and now it looks like most economists agree with that prediction.
It also looks like we’ll see higher rates for longer than anyone thought (yes, even me).
Here’s what’s behind my thinking: At the start of this year, we were on the brink of rolling out Covid vaccines and everyone was feeling optimistic about getting the pandemic under control. Given that -- and as people got back to work and supplies of goods and services eased -- inflation would bounce up but settle back soon enough, without doing too much damage to our economic recovery.
As we’re learning, though, progress on this front is stymied by enormous challenges. They include:
1. Producing and effectively distributing and administering enough vaccines to people around the world to slow global spread.
2. Getting everyone in the U.S. who is eligible and able to get vaccinated. What about people who can but refuse? Not only are they risking their own lives (their prerogative), but they’re petri dishes for virus variants, which makes it harder to stop for everyone. (It will mutate, as viruses do, but if it nearly always came upon vaccinated hosts, then it would have little chance of survival through community spread).
From the British Society for Immunology
3. Regaining our supply-and-demand equilibrium, which is proving difficult due, in part, to labor shortages at huge numbers of businesses, small and large.
For a myriad of reasons that range from childcare challenges and relocation away from previous employers to general burnout and a longing for entrepreneurial freedoms, millions of people in the U.S. aren’t heading back to their jobs in offices, stores, restaurants, gyms. Small businesses that survived outright closures and capacity limitations are struggling now because they don’t have enough staff to meet customer demand.
Maybe this will push more businesses to adopt living wages and reasonable hours for their employees. Maybe this will result in enormous entrepreneurial and innovation gains as people test their ideas in the market. All of these would be amazing longer-term benefits.
But for now, it means that supplies of just about everything remain tight, further driving inflation—both its rate and its duration—and making our economic recovery feel that much more precarious.
Even for the people who did relatively well during the pandemic—those who stayed and played at home while collecting and investing paychecks and stimulus funds—will begin to feel inflation’s pinch if they aren’t, in fact, the actual producers of goods and services that are so highly in demand.
A time-tested counter to this is to increase interest rates to potentially regain control. This has worked before, because it may instigate investment in bonds as well as it is counter to inflation and make the dollar more valuable to invest in. Still, while there’s long-term potential benefit, it’s typically a controversial move because it potentially places too much of a damper on economic activity.
And as The Wall Street Journal recently pointed out, there are other long-term challenges that may have been exacerbated by the pandemic, but certainly existed before it hit -- primarily among them, demographic shifts in the world’s leading economic countries and continents, globalization (or a pullback thereof) and the continued rise in ecommerce.
Stocks are still way overheated, housing prices are still overvalued
The stock market is still the same, reaching new highs just about every week. An interesting thing to watch are the FANG stocks (aka, FAANG, when Apple was added in 2017, but still commonly referred to as FANG). These are major techs: Facebook, Amazon, Apple, Netflix and Alphabet/Google.
This venerable group did well in the throes of the pandemic and, generally, cooled (very) slightly as we headed out of our houses in the spring. So, the question is this: If there’s another uptick in the FANG, is that an indication that analysts and investors have real concerns about a possible new wave of Covid challenges on the horizon?
How about residential real estate? Housing is so volatile right now that, for example, new comps—comparable-sale information, which real estate agents and others use when pricing homes for sale, scouting prospective homes for buyers or valuing homes for appraisals—are coming out daily (every few months had been pretty standard, prior to the pandemic).
By Drew Sheneman, The Star-Ledger
And gross domestic product (GDP) figures point to the strongest growth in years—so strong, in fact, that the kinds of gains we’ve seen the last several years and the last 12 months in particular simply aren’t sustainable.
As they say, what goes up must come down, so perhaps the scariest question of all is this: What will be the determining factor, the major event, that cools things off?
Significant economic risks
Where, then, are we today, compared to six months ago?
Certainly, the vaccines have helped many of us regain some sense of normalcy, with far fewer people getting sick or worse. We’re spending time with family, friends and colleagues again and previously postponed milestone events like weddings (and, sadly, memorial services) are underway. We’re traveling again, too (for fun, at least, although business travel is still seriously lagging behind pre-pandemic levels). The U.S. economy is flush with cash (too much so, in fact).
With the economy vastly overheated and, I believe, unrealistically rosey stories of wealth accumulation that are likely underpinned by tremendous “hidden” debt, things could be as shaky as they were at the start of 2021.
And in my opinion, if we don’t get more people vaccinated, that’s our biggest risk.
If you thought it was hard the first time around, can you imagine the despair that we’ll feel if Covid gets ahead of us, again? And on an economic front, can you imagine what will happen if businesses shut down, again? The federal government has already pumped trillions of dollars into the economy—it can’t do more now or in the near future without potentially damaging our long-term recovery.
We’re seeing it in other parts of the world: cities and countries that are shutting down again due to new spikes caused by the variants -- but because many of their residents didn’t have opportunities to get vaccinated, they’re not at fault.
Please, get vaccinated!
Without a doubt, the biggest change by far from January until now is that we have a vaccine for a virus that has killed more than 600,000 of our friends, family members, coworkers and caregivers here in the U.S. alone—and millions more around the world.
My concern now isn’t the people who can’t get vaccinated, due to age, health conditions or other factors. It’s with the people who can, but won’t.
Every bit of progress that we’ve made—and all the sacrifices that we endured—could unwind if people don’t step up.
It’s simple: We’re still in this—and taking it on together is the only way we can win.
