They say hope springs eternal.
That certainly must be the case with economists and investors, because after a horrific first quarter, performance expectations are very high for a rebound later this year. According to Macroeconomic Advisors, GDP growth is expected to bounce from a -2.1% performance in Q1 to a +3.6% expansion in Q2.
Can it happen? Much depends on the performance of the American consumer who, after all, is still responsible for roughly two-thirds of the economy.
A quick look at the performance of retail stocks including Walmart (WMT) or the overall sector via the SPDR S&P Retail (XRT) suggests that retail experts aren’t so sure a turnaround is coming. The XRT has drifted lower since late November as initial euphoria over Black Friday crowds gave way to the cold realization that something was very wrong with the U.S. consumer.
Many blame the polar vortex. But I think the problem runs deeper.
4 Charts That Tell the Tale
Despite the fact we’re in the fifth year of the economic recovery and that the unemployment rate is on the way to a 5% handle, middle-class families still are feeling the pressure. You can see this in the way retail sales have been disappointing despite the spring thaw, as shown in the ho-hum trend in clothing purchases, illustrated in the chart below.
You can see this in the way the savings rate has come under pressure while credit balances are ramping up on a scale not seen since 2001.
The problem is that while inflation has bubbled up, wage gains aren’t keeping pace. You can see this in the chart above of real disposable personal income, which accounts for the impact of higher taxes and higher inflation. Growth has been modest here, hovering around a 2% annual increase.
And despite a rebound in stock prices and real estate values, regular middle-class consumers don’t hold enough financial wealth for the asset price gains to move the needle on consumption. Plus, what they do own isn’t enough (for the most part) to fund the retirements they’re planning. (If you’re interested in learning more about this, check out the Fed’s Survey of Consumer Finances.)
Just look at the rise in consumer prices. The Consumer Price Index expanded at a 2.1% annual rate last month as food prices swelled. The three-month annualized inflation rate is up to 2.8%. This is the fastest pace of price gains we’ve seen since early 2013. And if you look at core inflation less food and fuel, we experienced the worst rise in inflation since August 2011.
But it’s not just food and fuel prices that are pinching pocketbooks — higher prices are being seen in areas like shelter/rent costs, healthcare and services like airlines and hotels.
If there is a glimmer of hope, it is this: After years of healing, the job market is finally starting to tighten in a way that suggests wage gains are on the horizon. The short-term unemployment rate has dropped to levels not seen since the 1970s. The job openings rate has increased to its highest level since 2007. Business surveys point to increased hiring and wage gain expectations by business managers.
But the key will be whether these wage and job gains are enough to outpace the surge of inflation that’s pinching family budgets.
And on that front, much depends on what happens in the deserts of northern Iraq. Because the last time the country suffered a serious and painful bout of inflation was in the wake of the 1979 Iranian oil shock.
Then, like now, the Federal Reserve was holding inflation-adjusted interest rates deep in negative territory for an extended period — which provided the raw monetary fuel needed to send prices flying. It took the twin recessions of the early 1980s and 20%-plus interest rates to kill the beast.
So there you have it. If the economy is going to bounce back, we need consumers to bounce back. In order for that to happen, we need wages to rise. And while there are signs of progress, a massive known unknown threatens to undermine it all.
Learn more in my video below.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm. As of this writing, he did not hold a position in any of the aforementioned securities.