• 287 days Will The ECB Continue To Hike Rates?
  • 288 days Forbes: Aramco Remains Largest Company In The Middle East
  • 289 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 689 days Could Crypto Overtake Traditional Investment?
  • 694 days Americans Still Quitting Jobs At Record Pace
  • 696 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 699 days Is The Dollar Too Strong?
  • 699 days Big Tech Disappoints Investors on Earnings Calls
  • 700 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 702 days China Is Quietly Trying To Distance Itself From Russia
  • 702 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 706 days Crypto Investors Won Big In 2021
  • 706 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 707 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 709 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 710 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 713 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 714 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 714 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 716 days Are NFTs About To Take Over Gaming?
  1. Home
  2. Markets
  3. Other

April And The US Economy

Something happened in April that crippled the US economy. First it was the reports from four regional Fed manufacturing surveys showing a sharp slowdown in growth. Then weekly jobless claims began printing four handles each week with today's 474,000 on top of last week's 429,000. The real kicker was Wednesday's ISM Services that registered a very sharp drop off and now sits precariously close to contraction.

I was going to show you a chart of CPI which has clearly spiked and claim that was the cause.

CPI

And then I came across this chart of national gas prices and there was the answer. Well at least part of it (couldn't find a chart of average grocery bills). Look at the spike through March and April.

Weekly US Gas prices

QE was intended to lower long term rates and inspire American's to spend more. The Fed certainly inspired us to spend more but failed to inspire real wage growth. We now spend more on groceries (food at home) and gasoline resulting in less for discretionary purchases.

In the December 60 Minutes interview Bernanke claimed he could adjust rates in "15 minutes." That may very well be true but once inflation hits the pipeline it takes far longer to control. It took some time for inflation to really hit the economy but now that it's here even if prices fell tomorrow we still have a lot of inventory that was built at those higher prices.

Now we have an interesting game on our hands. Let's assume the recent massacre of commodity prices continues, can the consumer handle the UFC style body blows until the ref steps in and stops the fight? How much inflation is in the system that needs to be worked off? Today saw a drop in productivity meaning margins are getting squeezed even further. That means more layoffs. As demand for discretionary purchases falls further that means even more layoffs.

As more consumers lose their jobs, demand falls even further. What if inflation is not "transitory?" What if commodity prices begin moving higher and inflation takes a second leg higher? The problems will only grow. Demand will only fall faster.

During the recent FOMC press conference Bernanke when asked about future QE said, "tradeoffs for QE3 are less attractive." Group think says that QE3 will begin after a brief pause in June. That is quite possible but in fact the tradeoffs have changed.

QE drives inflation which has killed demand. As the Fed tries to inflate the economy all it is really doing is deflating demand.

 

Back to homepage

Leave a comment

Leave a comment