Inflation Rolls On

Inflation continues to worry us. As usual, the press contributes to misinformation and paranoia. I guess you can't sell newspapers unless there is a crisis. One misleading practice is for the press to write lists of price changes. How could that be misleading? The reason is that they produce a very long list of things rising whose prices are rising fast. Food is a good example. Food is just one part of the price index. But if you list 20 different food items it is going to look like "everything" is rising. Yes, food prices are rising and that is impacting people. But as I wrote last week, the price of Medical Care was rising much slower. Why doesn't the press identify all the parts of Medical Care too? Not so much fun for them. 

I love the way the politicians are talking about this now. Geez -- Biden and his buddies have finally discovered inflation. As they walked and whistled and raised spending by amounts that would certainly cause much higher inflation, now they are riveted on solving the inflation problem. Of course, they still won't accept blame for causing it, finding it much easier to blame a guy named Covid. 

Yes, mom I was drinking and driving at an unsafe speed but Joey turned on the radio and that's why I drove into that Safeway fruit department. I am kinda bummed now that I can't buy bananas. Damn Safeway. They never have enough bananas. 

What is so ludicrous is that Biden and Buddies claim they are now focused on how to reduce inflation. Now they are riveted! They are going to save they day. He will ride in on his turtle and slay the inflation dragon. The last article I read said that he is going to resolve all those supply issues. That Covid thing caused a bunch of supply issues so he is going after Covid and Calvin or somebody. 

What does he or his band of budgetary bandits know about resolving supply issues? I recall so well when Ricardo Nixon was similarly befuddled by inflation and he created something called the Nixon Wage and Price Controls. As you might remember, his policies neither controlled wages nor prices but he did get into the history books through his folly. Recall that thanks to his brilliant leadership we endured several recessions in the 1970s. Go team Nixon. 

The government cannot even select a proper amount of money and spending for the economy -- and now we are supposed to believe they can use their unlimited powers to micro manage each sector of the economy? Only Bill Murray could be funnier than this. Biden is turning our country into a rerun of Caddy Shack! Biden has no control over Covid and he definitely cannot control individual prices and outputs. He does seem to be pretty good at staring into the camera with his mask on giving a moving if not tearful sermon. Maybe he should try preaching. 

Is there a lesson in this? Do I have any better ideas? I do. It's called learn from your mistakes. Don't play Superman if you don't have a cape. Don't replace common sense with wishful thinking. Elect politicians who don't smile so much and who don't wear perfect ties. That's a start. Do you have any good ideas? 

Happy Thanksgiving!

 Hope you enjoy your week off! 

Inflation on the Rise?

We seem preoccupied with inflation again. I am not convinced we should be. 

Maybe you remember or heard about the 1960s and 1970s. Inflation built from just about zero in 1960 to 5.7% is 1970. And then in the 1970s it jumped even more -- to 11.3% in 1979 and then rising to 13.5% in 1980. If you take two decades, we went from near zero to almost 14% per year. 

That's quite a change. No wonder we worry. From October of 2020 to October of 2021 inflation rose by 6.2%. When you compare that to the near 14% of 1980, the 6.2% looks small in comparison. But that's not the best comparison.

If you calculate the average inflation rate between 2011 and 2020 -- a ten year period -- the average rate was 1.8% per year. During those 10 years the inflation rate never got higher than 3.2%. It came in at 0.1% in 2015. 

If you compare the rate of 6.2% over the past year to any of the 10 years before it, the 6.2% looks pretty high. How did we get from 10 years of 1.8% per year to 6.2%? The highest rate in the past 5 years was the 2.4% in 2018. It was 1.2% in 2020.

What is going on here? Are we headed back to the 1970s? Or is the 6.2% over the last year going to go out as quickly as it came in. 

If you read the newspapers, you know there are several reasons why the inflation rate might have increased in the past year. The economy has strengthened and the unemployment rate is lower. Covid induced supply shortages could be the culprit. Or maybe it is the result of the Fed's excessive monetary stimulus or the government's incredibly large deficits. 

Or maybe it is none of those things. I took a look at the last year and wondered if the inflation was general or specific. I found some strange changes. Prices of energy services rose by 59%. Prices of energy commodities rose by 30%. Used cars were going for 26% more. Yet medical care rose by only 1.7% and transportation services were up 5%. Food prices up 5% and shelter up only 4%. 

To me that sounds less like general inflation and much more like specific pockets of shortages. If we were suffering through a typical macroeconomic or demand induced  inflation, wouldn't the prices of transportation, food, and shelter be rising faster? 

Putting 2 and 2 together -- this seems like a strange time. The abrupt transition from many years of low inflation to one year of higher inflation plus the absence of real inflation coming from basic needs seems to argue for something both unusual and not structural or lasting. 

Nevertheless, caution might suggest that the Fed and the government rethink their massive stimulus programs as we wait and watch to see how specific sectors recover from what ought to be short-term supply bottlenecks.  Over-regulation in energy and transportation might also be re-thought. 

Unemployment and Government Deficits

 In October of this year the unemployment rate got down to 4.6%. It had been below 6% since 2015 until Covid helped cause the rate to go back up to 8.1% for the year. So I started thinking about the unemployment rate. 

Before I start blabbing about the numbers let's admit one thing. The unemployment rate is a wild and crazy animal. I printed out the average annual unemployment rate for each year between 1961 and 2020. Those of you counting on your fingers and toes, that's close to 60 years. 

It is a wild and crazy number because its construction brings a lot into factors into the number. It is a rate because it takes the number for the labor force (employed people and those looking for work), subtracts the number of people who are employed, and then expresses that number of unemployed people as a percent of the labor force. Lots of things can cause that number to move around and it does. 

For example, the unemployment rate was 4.6% in 2006 and then by 2010 it had risen to to 9.6%. By 2017 it was back to 4.4%. Bouncy bouncy. 

Falling asleep yet? 

The unemployment rate catches a lot of attention. Perhaps it is the bad-boy (or girl) of the Bureau of Labor Statistics. When it rises, we get anxious or downright unhappy. A higher unemployment rate is taken to be a sign of weakness in the economy. When the unemployment rate rises enough, our government ears perk up and we wonder when and by how much we should stimulate the economy. The government often wants to spend more and tax less as a way to goose the economy along. Get it rolling. Thus we find that unemployment changes trigger changes in the government budget deficit. 

We see causality in the way of unemployment increases causing increases in government deficits. Of course, it isn't that simple because sometimes the causality is the opposite. For example there are times when a rise in government deficits are successful -- a rise in the government deficit causes a reduction in the unemployment rate. So we are left with two possibilities when we look at the data. 

A. Increases (decreases) in the unemployment rate cause increases (decreases) in the government deficit

B. Increases (decreases) in government deficits cause decreases in the unemployment rate.

Which is it? Do the two variables move together or do they move opposite to one another? 

The answer is -- BOTH are true. 

That's why I wanted to look at the numbers. 

From 1961 to 1969 the unemployment rate fell from 6.7% to 3.5%. How low can you go? The government deficit* bounced around but showed no real trend during those years. 

The unemployment rate did not stay at 3.5% for long. It kept rising from 3.5% in 1969,  peaking at 9.7% in 1982. You would think that the government would call in the fire trucks and they did. The government deficit which had been at less than $3 billion per year rose to $48 billion by 1983. The government was clearly using its financial tools to bring down the unemployment rate. 

It took a while to percolate. From 1983 to 2000 the unemployment rate behaved and kept falling until it bottomed at 4% in 2000. By around 1997 the government deficits began to fall as the government perceived less of a need to stimulate an economy that was doing better.** In 1998 we had a government surplus and that continued until 2002 when the government went back into the red. 

In 2002 the unemployment rate jumped to 5.8%, stayed high, peaked at 9.6% in 2010 until it returned to about 5.3% by 2015. As the unemployment rate was rising, the government jumped into action again. From a surplus of $24 billion in 2000, they moved us to a $100 billion deficit in in 2004 and by 2011 they had the deficit up to $313 billion. The deficit stayed in the hundreds of billions.

All that stimulus worked for a while -- the unemployment rate declined to 3.7% by 2019. 

Where are we now? Covid and resulting economic imbalances left us with an unemployment rate of 8.1% in 2020 but as of October of 2021 it had fallen to 4.6%. Records show that the government deficit was $837 billion in 2020.The largest previous deficit was $318 billion in 2010.  The government seems quite willing to continue the stimulus despite the dramatic improvement in the unemployment rate in 2021. 

The history of unemployment and government deficits suggests that the government is probably not finished yet. There is also the unpredictability of Covid and its impacts. I am guessing they are not done with large deficits. Large deficits with falling unemployment could spell higher inflation.

Perhaps I will try to being inflation into this discussion next week. 

*The government budget numbers quoted here are from the Bureau of Labor Statistics. They are nominal figures meaning that the effects of inflation have not been purged. There is some worry that relating nominal deficit figures with real unemployment figures is not the optimal approach. But I am not sure that deflating the government budget figures would produce a different result. 

** As the unemployment rate rises it may cause a policy response. As the unemployment rate rises, it may affect the deficit without legislation since it means less employment, less income, and less tax revenue. In either case a rise in the unemployment rate causes an increased government deficit. I don't split this hair in the text. 

 

The Sky is Falling

Judging from the trillions our leaders want to spend to revive our national economy, one would think that the sky has fallen. Covid was no slouch but a brief look at some data might suggest a different result. 

In 2018 and 2019 the economy* grew at a rate of about 2.3% per year. In 2020 the annual rate of change was -3.4%. Clearly Covid had a major effect. We don’t have full year data for 2021. But we do have three quarters and in those quarters the economy grew at an average of 5%.

Looking at those yearly figures makes one wonder why government is so worried about the economy.

Let’s look a little further. The downturn in 2020 was much more extreme than the annual figures show. In the first two quarters of 2020 the quarterly growth rates were -5.1% and -31.2%. That -31.2% figure is eye popping. It would worry anyone. But guess what? 2020 wasn’t over in the second quarter. The growth rate in the third quarter was 33.8%. What goes down must come up. Right? I don’t know but we had a two quarter swing downward and then a reversal the next two quarters. 2020 ended with growth at 4.5% in the fourth quarter. And so far in 2021 we are averaging 5% growth.

The patterns I discussed above for national output are also prevalent in the subcategories of output. The four columns in the table below are for the four quarters of 2020. Notice how we get similar down/up patterns in the outputs as the year progresses.

                                                 Table Real GDP

                                                        2020

                                              Q1       Q2    Q3    Q4

Consumer durables            -12.0     -1.5    89.0    1.1

Consumer services             -10.0  -42.4    37.5    5.3

Business equipment            -21.3  -36.2   55.9  26.4

Exports                                -16.3  -59.9   54.5  22.5

Residential Construction        3.8  -10.6     8.1   10.2

The exception to these down/up patterns was found in Business Structures. Business Structures did not return to growth in 2020 and remained in negative territory in 2021. 

                                            -0.9    -46.8   -15.3   -8.2

Joe and his government friends are today trying to decide how much stimulus to add to the economy. The amounts of stimulus are unprecedented.  Why? The figures I quoted above do not support the idea that the economy is struggling. The figures show a dip and then a return.

Or maybe the trillions of additional government spending being proposed represent an opportunity to install programs Biden and friends have been lusting after for decades. Nothing like an apparent emergency to sneak in lots of change. The nice thing is that it won't cost us a penny. I think I read that somewhere. 

*When I speak of the economy I am using figures for real Gross Domestic Product. Real means that inflation has been removed from the numbers – so changes represent changes in the underlying quantities of goods and services produced. These are official figures that come from bea.gov