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    Growing Risk of Recession as Bread and Circuses Distract the Plebeians

    One of the first signals that indicate a recession may be on the horizon is consumer sentiment. It’s worth repeating that roughly 70% of U.S. gross domestic product (GDP) is determined by personal consumption, and that factor dominates its performance. Today’s GDPNow estimate for 1Q22 is 0.9%, and it has been trending downward since the 1960s. The four primary components that influence GDP are business investment, fiscal spending, net exports, and most importantly, personal consumption. When combined, they provide a window to total economic output and the economy’s performance on a quarterly and annual basis.

    David Rosenberg Twitter - Don't need Yield Curve for Recession

    U.S. Private Consumption Mar. 1947 - Dec. 2021

    Chart Courtesy of the CEIC

     

    Real GDP via Atlanta Fed GDPNow Mar. 24, 2022 (Next Update Mar. 31)

     

    GDP trend 1950 to 4Q21 – Trading EconomicsU.S. GDP 1950 - 4Q21

    With current U.S. inflation (cost-push) raging at a 40-year high (Jan-Feb 1982) and the Fed’s latest Taper Caper punting interest rates higher in the near-term, how willing consumers are to spend (demand-pull inflation) disposable income or risk capital in stock markets has become a low priority in a majority of household’s. Fitch Ratings expects inflation to peak at 9% and average 7% this year. Moody’s Analytics estimates that inflation is costing households nearly $300 more a month. The Case-Shiller National Index for housing prices spiked a whopping 19.2% year-over-year in Jan. 2022. Consumers have stomached the inflation spike that’s lifting prices far and wide from gasoline to the dollar store that’s now at $1.25. Their ability to absorb the rising cost of necessities or indulge in discretionary spending is heading toward an abrupt end. One customer at a Dollar Tree said they were sick to their stomach and another referred to the higher prices as a “calamity.”

    Business is business, every company must sustain its profit margin, and every household has to maintain a budget. The University of Michigan’s surveys of consumers is the most reliable dataset around to help forecast near-term economic activity. Consumer sentiment and related data points have been steadily deteriorating since the pandemic’s initial lockdown in 2020 that launched a deflationary mini-recession. The datasets are plunging to levels not seen since the Great Financial Crisis, and consumers are experiencing a severe bout of  stagflation that combines high inflation with a decline in GDP. Shaded bars in the following charts indicate recessionary periods between 1962 and March 2022.

    Consumer Sentiment…

    Consumer Sentiment Index 1962 to Mar. 2022

    Economic Conditions…

    Economic Conditions Index 1962 to Mar. 2022

    Consumer Expectations…

    Consumer Expectations Index 1962 to Mar. 2022

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    Real Hourly Earnings / Wages YoY…

    Real Hourly Earnings / Wages YoY 2016 to Mar. 2022

    Chart Courtesy of ZH

     

    As of 4Q21, the Velocity of Money (VoM) data from the St. Louis Fed does not show that spending increased (note the velocity blip in late-2020) as the Total federal/public debt skyrocketed (see the National Debt Clock). As of Jan. 2022, Joe Biden grew the national debt by more than $2 trillion during the first 12 months of his administration. The U.S. House just passed a new $1.5 trillion federal spending bill this month that’s 2,741 pages long. It was not made public for 22 hours, and your elected representative was impeded from reviewing it before the vote.  Monetary and fiscal policy does not help create sustainable economic conditions or growth without concurrent velocity.

    FRED M2 VoM vs National Debt as of 4Q21

     

    “Give them bread and circuses and they will never revolt.” – Decimus Iunius Iuvenalis

    The cash that the Fed and Capitol Hill printed for delivery to plebeians and disguised as “stimulus” went primarily into savings accounts and paid down personal debts that were incurred before the pandemic lockdown. Those savings have already vanished to a lower level than they were pre-pandemic, and revolving debt on high-interest credit cards has set new records as of 4Q21.

    Personal Savings 2000 to Collapse Post-Pandemic as of Mar. 2022

    “The total US household debt hit $15.8 trillion in the fourth quarter of 2021, the New York Fed reported (chart book) this week, seeing an increase of $333 billion from the previous quarter. Credit card balances alone hit $860 billion, up $52 billion in that same timeframe. That’s the largest quarterly increase the Fed has seen in the 22 years it’s been collecting data, the researchers say, adding that the surge in debt overall was driven by home and car purchases” – Feb.2022

    Total Consumer Debt Balance and Composition as of 4Q21

    1Q03-4Q21 Consumer Debt Chart Courtesy of the NY Fed

     

    Fed’s Dudley: The Fed Has Made a U.S. Recession Inevitable… “Jerome Powell is far too optimistic about the chances of a soft landing. The Fed’s application of its framework has left it behind the curve in controlling inflation. This, in turn, has made a hard landing virtually inevitable.” – Bloomberg, Mar. 2

    The data points above are only a small sample of the socioeconomic malaise that does not take into account the enormous impact that will develop due to sanctions levied against Russia over the war (late Feb. 2022) in Ukraine, the supply chain crisis and inflation that was already afoot and worsening, or famine and food insecurity that will further deteriorate global living standards as inflated costs and shortages of fertilizer to grow high-yielding food crops leave you poorer and maybe hungry. Buy food.

    Brian Dean Wright Twitter on Family Farm Inflation Impacts

    “The evil was not in bread and circuses, per se, but the willingness of the people to sell their rights as free men for full bellies and the excitement of the games which would serve to distract them from the other human hungers which bread and circuses can never appease.” – Marcus Tullius Cicero

     

    U.S. House Rep. Madison Cawthorn says DC is orgy-filled, cocaine-fueled ‘House of Cards’“‘The sexual perversion that goes on in Washington. I mean, being kind of a young guy in Washington, where the average age is probably 60 or 70 — [you] look at all these people, a lot of them that I’ve looked up to through my life, I’ve always paid attention to politics,’ said Cawthorn, who was elected in 2020. ‘Then all of a sudden you get invited: We’re going to have a sexual get-together at one of our homes, you should come. What did you just ask me to come to? And then you realize they’re asking you to come to an orgy’” – NY Post, Mar. 28

    Oxbow Advisors interview Lacy Hunt on interest rates and inflation – Feb. 16

     

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    Growing Risk of Recession as Bread and Circuses Distract the Plebeians

    Growing Risk of Recession as Bread and Circuses Distract the Plebeians